Estate Tax Trust Agreement Gift Tax GST Exemption Basic Exclusion Amount BEA New York

Published: Jan 18, 2019
By: Karen L. Goldberg; Marie Arrigo
Topics: Trust & Estate Services

Heckerling
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The Heckerling Institute held its annual discussion of prior year recent developments, which was presented by Steve R. Akers of Bessemer Trust, Samuel A. Donaldson of Georgia State University, College of Law and Amy K. Kanyuk of McDonald & Kanyuk, PLLC. Below is a summary of some of the highlights of that presentation.

Mr. Akers started off the discussion with a couple of important points. First, he mentioned that the new doubled GST exemption as of January 1, 2018 can be allocated to pre-2018 trust transfers based on a footnote in the Bluebook. Second, proposed regulations were issued in 2018 which prevent the clawback of the increased basic exclusion amount (“BEA”) with respect to taxable gifts made before 2026. Specifically, these regulations provide that if a donor makes a large gift, let’s say in 2019, that is entirely or partly exempt from gift tax because of the doubled BEA and then dies in 2026 when the BEA has returned to half that amount, those gifts made using the larger BEA will be not be taxable (clawed back) in the donor’s estate. Further, if portability is elected upon the death of a spouse and the surviving spouse later dies when the BEA is less than the BEA available at the predeceased spouse’s death, the surviving spouse’s deceased spousal unused exclusion won’t be reduced.

The panelists also discussed the 2018-2019 Treasury-IRS Priority Guidance Plan as it relates to trusts and estates. The Plan includes issuing (1) guidance on the basis of grantor trust assets at the grantor’s death, (2) final regulations under IRC Sec. 2032(a) regarding imposing restrictions on estate assets during the alternate value period, (3) regulations under IRC Sec. 2053 regarding personal guarantees and the application of present value concepts in determining the deductible amount of estate administration expenses (e.g., interest on Graegin notes), and (4) regulations under IRC Sec. 7520 which will revise the current mortality tables to reflect the 2010 census data. The Plan also mentions addressing the basis consistency rules, perhaps to address the zero basis rule and the 30-day filing requirement for reporting the relevant information to the IRS and the estate beneficiaries.

The panelists next discussed two recent intergenerational split-dollar cases: Cahill and Morrissette. In Cahill, the IRS prevailed in a summary judgment motion regarding the value of split-dollar arrangements in a decedent’s gross estate and two months later, the estate settled the audit with the IRS by conceding all of the issues related to the intergenerational split-dollar arrangements. In Morrissette, the Tax Court denied the taxpayer’s summary judgment motion seeking to avoid the application of IRC Sec. 2703 to split-dollar arrangements. In light of these unfavorable results, clients should be wary of entering into such an arrangement.

During the course of the presentation, the panelists mentioned a couple of other interesting rulings. One was CCA 201747005, which provided that even though a trust agreement was amended to permit payments to charity with the approval of a state court, the trust would not be entitled to an income tax deduction for those payments. Pursuant to IRC Sec. 642(c), in order for such a contribution to be deductible it must be permitted pursuant to the terms of the trust agreement; the IRS asserted that a distribution made pursuant to a court order modifying the trust agreement didn’t qualify.

The other rulings of interest were PLRs 201811002 and 201811003, in which a couple’s accountant incorrectly prepared their gift tax returns. The spouses elected gift splitting and their accountant reported their gifts to a trust as made 75% by the husband and 25% by the wife, instead of 50% by each. Furthermore, neither spouse’s GST exemption was allocated to the gifts. Several years later, the husband made a late allocation of GST exemption to the trust which his accountants reported as an allocation to the entire value of the trust, not just his share. The IRS ruled that because the gift tax statute of limitations had expired, the incorrect allocation of the gift between the husband and wife would be respected. The IRS further ruled, however, that pursuant to Treas. Reg. Sec. 26.2652-1(a)(4), the husband is treated as being the transferor of only one-half of the property for generation-skipping purposes. Therefore, the husband’s late allocation of GST exemption to the trust was effective as to only one-half of the trust property.

The panelists next tackled recent state law developments. They mentioned that beginning in 2019, Maryland joins Hawaii in permitting portability of its state estate tax exclusion. The panelists also discussed Seiden, where a New York court held that a QTIP trust of a New York decedent who died in 2010 was not subject to New York estate tax upon the surviving spouse’s death. A state-only QTIP election was made for the predeceased spouse because a federal estate tax return was not required. The QTIP trust wasn’t subject to New York estate tax in the surviving spouse’s estate because a decedent’s New York gross estate equals the decedent’s federal gross estate which in this case did not include the QTIP trust.

In addition, the panelists spent some time discussing two state cases, Kaestner and Fielding, in which taxpayers challenged the North Carolina statute that imposes income tax on trusts with resident beneficiaries and the Minnesota statute that imposes income tax on trusts with a resident grantor. In both cases, the taxpayers asserted that the state statute was unconstitutional and the court agreed. The U.S. Supreme Court has agreed to review the Kaestner case.

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