Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Tuesday, February 9, 2016

Art And Collectibles Trendy New Way To Avoid Estate Taxes

ScissorsThe taxman is the mortal foe of any family that is facing a stiff estate tax as generational wealth moves it's way down through the family tree. But for some, a novel new way has been found that can lessen the tax impact; portfolios heavy in art and other collectibles that have fungible valuations. Due to the booming market for high end collectibles it is easy to place a valuation on items that, while comparable to the market at the time, will be undervalued down the line as prices rapidly rise. Combined with the fact that appraisals are highly subjective, it allows an estate to undervalue assets, or overvalue when donating to charity, without violating tax laws. However, tax authorities are now paying closer attention to this work around with the IRS creating a team that is dedicated to contesting low valuations. But even with the increased scrutiny, it is unlikely that the practice will decline in popularity due to the relative ease with which taxes can be avoided in many circumstances.

See Robert Frank, Revaluing Family Treasures for the Taxman, The New York Times, February 6, 2016.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.

February 9, 2016 in Estate Planning - Generally, Estate Tax, Gift Tax | Permalink | Comments (0)

Saturday, February 6, 2016

Form 8971 and Instructions Released but many ??? Remain

BwolfThe following post is supplied through the courtesy of Bob Wolf (Tener, Van Kirk, Wolf & Moore, P.C., Pittsburgh, PA):

 The final form 8971 and the instructions to the form have now been released.

 This is a form that is required to be filed for all estates where a Federal Estate Tax return is required to be filed on or after August 1, 2015. The point of it is to inform both the beneficiaries and the IRS of the estate tax value of assets passing to beneficiaries where a Federal Estate Tax Return is required.

1. If a Federal Estate Tax Return is not “required to be filed”, this form and its accompanying schedule A which is to be sent to the individual beneficiaries is not required.

2. Where a Federal Estate Tax Return is required, even though there may be no Federal Estate Tax due because of the marital or charitable deduction, the form and accompanying Schedule A will be required.

3. Where a Federal Estate Tax Return is filed solely for the purpose of electing portability, incredibly and unfortunately it is unclear as to whether 8971 and Schedule A are required:

It is not required. Looking at the statutes and the prior Notice 2015-57 by themselves, it seems clear that the Form and Schedule should not be required. Section 6035(a)(1) and (a)(2) provide that an executor required to file a return under Section 6018(a) or a beneficiary required to file a return under Section 6018(b) shall furnish the form and provide the information to the person acquiring the interest. Section 6018(a) provides that a return is required of an executor "where the gross estate of a citizen or resident exceeds the basic exclusion amount in effect under section 2010(c)." The Notice also connects the dots the same way with 6018(a). The instructions, however, say: "The filing requirement for Form 8971 does not apply to an executor of an estate that is not required to file an estate tax return because the gross estate plus adjusted taxable gifts is less than the basic exclusion amount, but who does so for the purpose of making an allocation or election respecting the generation-skipping transfer tax." If they intended to exclude portability returns, why would they not have included them in the instructions? Just as logically, if they intended to include portability returns, why would they not have said so?

What’s the argument that we do have to file for portability only returns? Treas. Reg. 20.2010-2(a)(1) says, “An estate that elects portability will be considered, for purposes of subtitle B and subtitle F of the Internal Revenue Code (Code), to be required to file a return under section 6018(a).” Oh no! If you make a portability election and you are deemed to be required to file a return, are you forced into filing the Form 8971 and a Schedule A? Wait a minute—I thought the Portability provisions were supposed to simplify things! And what about the fact that those same regulations tell us we don’t even have to put in a value for assets which qualify for the marital or charitable deduction? How does that work? Worse yet, I understand the BNA Daily Tax Report quotes Kathy Hughes (a primary Treasury spokesman) as saying that Treasury was aware of the issue, and that this explains seemingly missing elements in the instructions. What does that mean? Well, apart from the above being something like triple hearsay, it sounds like Treasury “is thinking about it.” Great! Section 6035 and this whole idea is a train wreck

4. Where a Federal Estate Tax Return is required and the inclusion of an asset causes an increase in estate tax liability, the beneficiary receiving the property must use a value which is not LOWER than that reported on the Federal Estate's tax Return. This is what is added by Section 1014(f). That presumably means that the consistency requirement is inapplicable to property that does not increase tax because it is part of the marital or charitable deduction (or does it—what about formula bequests?)

5. The form is due to be filed with the IRS and Schedule A is due to be delivered to each beneficiary within 30 days of the filing of the form 706. There is ambiguity about when it must be filed if it is filed late, because the instructions say that it must be filed by the earlier of the date that is 30 days after the due date or 30 days after the date the Form 706 is filed. The instructions also say that if the first Form 706 is filed after July 2015 and after the forms' due date, the form and schedules are due within 30 days after the actual filing date.

6. If the date for the filing of Form 8971 and Schedule A is delayed by virtue of the fact that the form had not yet been released, the due date for the Form and Schedule is February 29, 2016. Notice 2015 – 57 indicates that February 29, 2016 is also the first day that the IRS will accept these forms. I would hope and think that you should be able to file them earlier than that if you are ready to do so. Otherwise it will be a very busy day on February 29, 2016.

7. The Form may be required before you know what assets are going to pass to what beneficiary. That is unfortunate, however, as you then have to list all of the possible assets that might be used to satisfy the beneficiary's interest in the estate. Then when you actually know what assets pass to the beneficiary, it appears that you are supposed to file a supplemental Form and Schedule.

8. If the final value of the property for Federal Estate Tax purposes turns out to be different than what was reported on the Federal Estate Tax purposes, you are supposed to file a Supplemental Form and Schedule.

9. All of this ignores the fact that that things; lots of things in fact, happen to estate assets after someone dies and after a Federal Estate's Tax value is established which may in fact affect the cost basis in the property received. But you (the executor or other responsible person who must file this form – seemingly the same person as is required to file the Form 706) are not required to report the cost basis of the asset to the beneficiary – but rather its Federal Estate Tax value as finally determined. In most cases that will be the same but not in all cases.

10. You clearly have to identify by schedule and by item number in the asset passing to the beneficiary. I believe this means that using a "see attached" for securities held in a brokerage account or trust account will probably not work for this purpose. This may well mean significantly more work for those practitioners who utilize this shortcut method.

11. The instructions go into the penalties at great length which start as low as $50 per Form 8971 to a maximum penalty of $3,193,000 per year. I guess I wouldn't worry too much about the maximum penalty since that would imply a rather large number of Federal Estate Tax returns. And you qualify for lower maximum penalties if "your" average annual gross receipts for the 3 most recent tax years ending before the calendar year in which the information returns were due are $5 million or less (what does "your" mean? you personally? the firm?).

12. With respect to the consistency requirement and whether the question "did this asset increase estate tax liability?" should be answered "yes" or "no", the instructions indicate that generally, any property that qualifies for a marital deduction or charitable deduction will not generate estate tax and "No" should be indicated. If, as is usually the case, the marital and charitable deduction may be determined by formula, it would seem to me in many cases the value of the asset may generate estate tax even if that particular asset were used to satisfy a marital or charitable formula.

13. What about cash? There seems to be no exception for cash. So is that to be reported? Or imagine this very common situation: you have a $6 Million estate that is essentially all securities--no cash--and that the executor prudently sells the securities and distributes the cash. Result? A 8971 is required listing all of the securities, and after the cash is distributed a supplemental 8971 would be required that would presumably be blank because there was no cash listed on the 706 to begin with, and hence nothing to list. Problem is that the statute doesn't ask for a report of the cost basis of distributed assets, but rather the property as it is listed on the 706.

14. There are many other questions about all of this—but you have to stop somewhere—I am stopping here, with these two additional notes.

15. This form is to be filed to a slightly different address and is to be filed separately from Form 706 or any of the other Form 706 series.

16. Steve Gorin of St. Louis, Missouri suggested that if Congress had simply added Section 1014(f) and not 6035, things would be much improved. I think Steve is right. This is an extraordinarily complicated, troublesome and expensive solution to a problem that in my opinion is hardly a problem at all. 1014(f) would have been more than enough. I think the problem was that Congress wanted to provide funding for our roads and bridges, but didn’t have the fortitude and candor to either cut some other expenditure, raise revenue (taxes), or admit that they were increasing our deficit.

There, I’m done. Unfortunately, this is complicated, it is more work, there are ambiguities and many questions. Hopefully these questions may be answered within the next year or so, but in the meantime we will have to struggle with how to interpret, prepare and file these forms and Schedule A.

February 6, 2016 in Estate Tax | Permalink | Comments (0)

Thursday, February 4, 2016

Unhappiness With Form 8971 Filing Requirements

Charitable trustThe IRS has recently issued final Form 8971 as well as instructions for a requirement that will now be placed on the executors of estates filing a Form 706. “The Form requires a schedule for each beneficiary which lists the assets received by the beneficiary and the estate tax value of those assets.” The purpose is to allow the beneficiary to be able to calculate the gain or loss on any assets they received. This new form will have to be filed within 30 days of the Form 706 filing. The process of filing a Form 8971 might be complex and difficult for practitioners. Some may argue for Congress to introduce an amendment to permit the deferment of the due date for the Form 8971 “until either actual distribution is made to the beneficiary or the assets to be distributed to the beneficiary can be precisely identified.”

See Charles Rubin, Form 8971 Filing Unhappiness, Rubin On Tax, February 3, 2016.

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.

February 4, 2016 in Estate Administration, Estate Planning - Generally, Estate Tax, New Legislation | Permalink | Comments (0)

Some Tips For Those With Gift Tax Returns

IRSGift tax returns are generally not required since the bar for having to claim a gift has steadily risen to the point where only a small number of people must file. But for those that do, a number of pitfalls exist that they need to be aware of. Below are some traps to be aware of:

  • An adequate disclosure of the gift in compliance with Treasury Regulations Section 301.6501-1 must be made or it can reevaluated by the IRS more than three years after the gift. This disclosure must include a description of the transferred and retained interest, the relationship between the transferor and transferee, as well as a detailed description of how the gift is valued.
  • Tax exemptions from a generation skipping transfer trust must be properly allocated under the Economic Growth and Tax Relief Reconciliation Act of 2001 or risk losing the exemption.
  • Improper gift splitting on transfers made to a spouse and third parties can be problematic if the gift is not ascertainable at the time of transfer and not severable from the part that went to transferors spouse. An improper allocation can lead to an increased tax liability and potential audit.
  • Gifts to a trust must follow special rules for in order to qualify for the annual gift exclusion. The gift needs to be a current interest in property that has the right to be be immediately withdrawn from the trust or be in compliance with IRS Code §2503(c).

See Michelle L. Ward, Six Traps to Avoid When Preparing Gift Tax Returns, Wealth Management, February 1, 2016.

Special thanks to Jim Hillhouse for bringing this article to my attention.

February 4, 2016 in Estate Planning - Generally, Estate Tax | Permalink | Comments (0)

Wednesday, February 3, 2016

Does A Deceased Person Have To File Taxes?

Business_expenseThis column discusses whether a deceased person is required to file a tax return. The date of death is when a decedent’s tax year ends and there is usually an executor appointed to handle legal matters that include any tax issues facing the estate. The estate might also have to file for federal and possibly state estate taxes if it meets the estate tax threshold. The executor is going to want to get a federal identification for the estate and also open accounts to handle estate’s financial affairs. “The executor will file two returns that year, an individual Form 1040 for pre-death earnings and a Form 1041, which is a fiduciary or estate rerun for the income through the end of the calendar year.” The role of an executor carries with it many fiduciary responsibilities and those who are accepting the role need to be aware any tax filing requirements.

See Edward J. Loughrey, Tax filing for the deceased, Bluffton Today, February 3, 2016.

February 3, 2016 in Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, Income Tax | Permalink | Comments (0)

AICPA Wants More IRS Estate Tax Guidance

IRSThe Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 will introduce a number of estate tax reporting changes. There is a request on the Internal Revenue Service (IRS) from the American Institute of Certified Public Accountants (AICPA) to offer more guidance on these changes that are being implemented. “To improve tax compliance and provide additional revenue for highway construction, that Act requires taxpayers to report the value of larger estates (subject to positive estate tax liability) in the year they are inherited, so that their value cannot be overstated at a later date.” There have also been changes to the 30-day information return filing requirement for estate executors. The AICPA has made a number of recommendations for the new regulations that the IRS will implement in regards to this new legislation.

See Mike Godfrey, AICPA Calls For Additional IRS Guidance On Estate Tax, Tax-News, February 3, 2016.

February 3, 2016 in Estate Planning - Generally, Estate Tax | Permalink | Comments (0)

Monday, February 1, 2016

Gift Tax Return Traps To Avoid

Tax returnWhen people with taxable estates are trying to reduce their estate tax burden by making an inter-vivos gift they will need to properly prepare a federal gift tax return (Form 709). There can be many nuances in the details when people are filling out gift tax returns and they need to be careful to avoid any of the common traps that are mentioned in this column. They need to be sure to provide an adequate disclosure of any gift that they provide. A person who is filling out a gift tax return will also need to avoid failing to properly allocate their generation skipping transfer (GST) tax exemption. It is also important to not make an inappropriate election of gift splitting to third parties and to adequately report any sales that are made. This column discusses many of the important requirements that need to be met with gift tax returns.

See Michelle L. Ward, Six Traps to Avoid When Preparing Gift Tax Returns, Wealth Management, February 1, 2016.

Special thanks to Jim Hillhouse for bringing this article to my attention.

February 1, 2016 in Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax | Permalink | Comments (0)

Saturday, January 30, 2016

Move Over Switzerland, Cayman Islands, & Co., U.S. New Tax Haven King

Piggy BankIn the popular imagination, the main tax havens of the world are in exotic locals like the Cayman Islands or the snow capped peaks of Switzerland. But an unexpected contender has become the new tax haven king for the modern day la noblesse, the United States. Lax reporting laws in the U.S. have spurred to move as the ultra wealthy seek anonymity not so much from their home country tax laws as the prying eyes of those who look to take advantage of the holders of the wealth. In addition, the United States offers a stable economy that offers unparalleled security for the assets combined with a variety of state laws that create a diverse ecosystem for those looking for specific vehicles to protect their wealth. However, some are crying foul over the shift as the U.S. has been the long time leader in bringing pressure to bear on countries that had lax reporting laws which allowed U.S. citizens to hide assets from taxation. In any event, the shift does not appear to be ending anytime soon as proposals to tighten reporting requirements have been defeated by the Republican controlled Congress which is not expected to be retaken by Democrats in the upcoming election.

See Jesse Drucker, The World’s Favorite New Tax Haven Is the United States, Bloomberg Business, January 26, 2016.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.

January 30, 2016 in Estate Planning - Generally, Estate Tax, Income Tax | Permalink | Comments (0)

Tuesday, January 26, 2016

What To Expect From New Changes To Estate Planning Laws

Estate planning changesThere are not that many major changes to estate planning laws coming in 2016, but there are a few subtle and evolving changes that clients and planners should be aware about. People need to be aware of the IRS provisions that were made permanent in the Protecting Americans from Tax Hikes (PATH) Act of 2015. One of the most important changes deals with the limitations on tax advantages for spin-off transactions involving a real estate investment trust (REIT). “The new rules say that a REIT spin-off qualifies for tax-free treatment only if, immediately after the distribution, both the distributing and controlled parties to the transaction qualified as REITs.” There have also been changes that will permit tax-payers over the age of 70 ½ to make tax-free charitable donations directly from their IRA accounts under certain conditions specified in the regulations. This article also discusses the changes to the rules dealing with annual gift tax exclusions.

See Tom Nawrocki, Changes to estate planning laws in 2016: what to expect, Life Health Pro, January 22, 2016.

Special thanks to Jim Hillhouse for bringing this article to my attention.

January 26, 2016 in Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, Income Tax, Non-Probate Assets, Trusts, Wills | Permalink | Comments (0)

Thursday, January 14, 2016

A Renewed Focus On Income Tax Basis Estate Planning

Mortgage2Income tax basis estate planning has been getting a renewed focus among estate planners. These adjustments are being made by estate planners because the gradual increase in the estate and gift tax exemption amounts has been changing consumer demand for estate planning services. High-net-worth individuals that are exempt from federal estate taxes will want the future income tax benefits of the step up in cost basis. “In fact, for some clients, the rising exemptions and decreasing transfer tax liabilities have created a situation where leaving certain assets in an estate just to get the step up at death effectively has no penalty anymore.” Estate planners will want to consider this as an option when developing their skills. Planners will need to continue to adapt to the constantly changing legal atmosphere to be able to provide their clients with quality estate planning services.

See David H. Lenok, Free-Basing for Estate Planners, Wealth Management, January 14, 2016.

January 14, 2016 in Estate Planning - Generally, Estate Tax, Income Tax | Permalink | Comments (0)