In TAM 9842003, the IRS rejected a 60% valuation discount claimed with respect to the transfer of $1.8 million of securities and real estate to a NY FLP created six weeks before the decedent’s death, claiming that (i) the partnership should be ignored for estate tax purposes because the transfers constituted a single testamentary transaction lacking substance; and (ii) the restrictions in the operating agreement were not the result of a bona fide business arrangement pursuant to §2703, and were more restrictive than applicable state law under §2704.
The qualified family owned business deduction (QFOB) provided by IRC §2057 is claimed on Schedule T of the Form 706. Double deductions with respect to the same decedent are prohibited by §2056(b)(9). The question arises how can an estate establish that QFOB property did not impermissibly pass to the surviving spouse or to a marital deduction trust? Estate of Reeves, 100 T.C. 427 (1993) suggests that a specific bequest of the §2057 shares into the credit shelter trust or a prohibition against the funding of the marital deduction trust with any §2057 shares would solve the problem. (Schedules M, i.e., for marital deduction, and T should not contain cumulative deductions.)
Codifying the position taken by the IRS in previous PLRs, Prop. Reg. §25.2702-3 provides that GRAT and GRUT annuity payments may not be paid with notes, since debt instruments cannot qualify as payment of the required annuity or unitrust amount. Therefore, a trust cannot qualify under §2702 unless the trust instrument prohibits the trustee from making payment by note. (It may be possible, however, for the grantor of an IDGT to take back notes after selling assets to the trust. See From Washington.)
§6501(c)(9) provides a 3-year limitation period for the IRS to challenge the value of taxable gifts “adequately disclosed” on the return. Although annual exclusion gifts do not require the filing of gift tax returns, Prop. Regs. §§20.2001-1 and 25.2504-2 provide that filing a gift tax return — even where not required — begins the limitation period. It may therefore be prudent to file for some §2503(b) gifts. Adequate disclosure (Prop. Reg. §301.6501(c)-1(f)(2)) comprehends a description of the relationship of the parties, a detailed description of the method used to determine FMV, including any relevant financial data, and any discounts claimed. Restrictions on the transferred property affecting value must also be articulated. Although failure to adequately disclose gifts empowers the IRS to challenge the value after three years, this should not (in theory) be considered probative of an unreasonable position.
1999 New York Legislation
New York repealed its gift tax with respect to transfers made after Dec. 31, 1999. On Feb. 1, 2000, New York’s unified credit for estate tax will rise to $1 million from $115,000. This change necessitates review of existing wills, since many wills allocate to the credit shelter amount the full federal AEA (§2010) plus an additional amount to account for the §2011 credit for state death taxes. Funding the credit shelter with an additional $48,485 currently results in no additional federal tax (i.e., §2011), and only $2,909 in additional NYS tax. As of Feb. 1, 2000, this analysis will change: No NYS tax will be owed on $675,000 (and no ET-90 will need to be filed). Allocating $52,174 more to the credit shelter amount will still result in no additional federal tax (§2011), but will cause the imposition of $19,304 in NYS tax (i.e., §2011). Existing wills should be revised to limit the credit shelter to the §2010 amount.
EPTL § 7-1.1 abolished the merger doctrine, which had invalidated trusts in which the sole grantor was also the sole beneficiary. This change facilitates the use of revocable living trusts, and also credit shelter trusts where the surviving spouse is the sole beneficiary. EPTL § 10-10.1, which prevents a trustee from exercising a discretionary power in his or her favor, was amended to exclude revocable trusts but not credit shelter trusts. Consequently, a surviving spouse named as sole trustee of a credit shelter trust should not be granted discretionary powers.
NY revised its LLC statute effective August 31. Since §701 governing dissolutions, now explicitly references the terms of the operating agreement, it may be possible to avoid the unwanted application of §2704(b).