TRA 1997 now prohibits the IRS from revaluing prior adjusted taxable gifts after the expiration of the statute of limitations (see January Comment). The exemption equivalent, now the “applicable exclusion amount” will rise to $650,000 in 1999. New Code Sec. 2033A excludes from the gross estate all or part of the value of a qualified family owned business (QFOB). The QFOB exclusion equals $1.3 million less the applicable exclusion amount. Qualification for the exclusion may require advance tax planning, as limitations and restrictions are significant.
Gifts made from a revocable trust within three years of death are excluded from the decedent’s estate. This result statutorily overrules a line of cases which held that inclusion was dictated under Code Secs. 2036 and 2038. Effective for gifts made after the date of enactment, TRA 1997 repealed the requirement that a gift tax return be filed to report gifts which, but for the charitable deduction, would result in gift tax liability.
TRA 1997 also provides that the three-year statute of limitations for challenging gift tax valuations will be commenced only if the gift is adequately disclosed on the gift tax return. The Conference Report envisions full disclosure to include (a) a description of the transferred interest and its value; (b) the identification and relationship to the donor of all persons involved in the transaction; and (c) a detailed description of how the transferred interest is valued, including relevant actuarial and financial data. TRA 97 confers jurisdiction on the Tax Court (new Code Sec. 7476) to issue a declaratory judgment of the value of a gift in the case of an “actual controversy” after the taxpayer has exhausted all administrative remedies.
The Clinton Administration’s attempt to eliminate the use of “Crummey” withdrawal powers to obtain the annual $10,000 gift tax exclusion failed. After 1998, the gift tax exclusion will be indexed for inflation in $1,000 increments.
TRA 97 eliminated many distinctions between estates and revocable trusts for income tax purposes. The executor and trustee may together elect to have the revocable trust treated as part of the estate for income tax purposes. This change would allow the post-mortem trust, like the estate, to take charitable deductions for amounts permanently set aside for charitable purposes, and to qualify for a two-year waiver of the active participation requirement under the passive loss rules.
TRA 97 also permits estates to treat a distribution of income as having been made in a taxable year if the distribution is made within 65 days after the end of the taxable year. TRA 97 also amends Code Sec. 267 insofar as it now operates to disallow losses on the sale of assets between a beneficiary and an estate.
Rules governing charitable remainder trusts (CRTs) were changed by TRA 97. First, the present value of a remainder interest must now equal or exceed 10 percent of the net fair market value of property contributed to the trust; and second, in order to deter short-term, high-payout CRTs, the unitrust or annuity amount may not exceed fifty percent of the value of the trust fund. The IRS will issue proposed regulations detailing the manner in which capital gains are taxed to trust beneficiaries. Under the current ordering rules, distributions from a CRT are deemed to be made first from income taxed at the highest federal income tax rate.
TRA 1997 also provides that the taxable year of a partnership closes with respect to a partner whose interest in the partnership terminates by reason of death. Thus, a decedent’s share of partnership income, etc., will be reported on the decedent’s final income tax return.