2001 REGS, IRS RULINGS & PRONOUNCEMENTS

The National Office in FSA 200119013 held that where the decedent’s estate included 50% of the shares of a closely held corporation, as well as a general power of appointment over 44% of the shares pursuant to a marital deduction trust, the value of both blocks of stock must be aggregated, and will reduce, minority discounts. The IRS reasoned that a general power of appointment is equivalent to ownership for estate tax purposes. It distinguished the result from that involving a QTIP trust, where the surviving spouse lacks an unlimited power of disposition. To preserve minority discounts, a QTIP disposition may be preferable for nonmarketable assets.

FSA 200049003 explained various lines of attack which the IRS might pursue challenging FLP and FLLC discounts. Although many of the arguments advanced have been dismissed by the courts, the advisory serves as a reminder of the skepticism with which the IRS views these discounts. Accordingly, the planner would be well advised to use a professional appraisal, document nontax motives, and avoid forming these entities when the donor is seriously ill.

PLR 200120012 approved grantor trust provisions which give an independent trustee the power to pay income taxes of the trust. Planners had worried that this provision, which has been included in grantor trusts in response to IRS private rulings, could have resulted in a taxable gift to the grantor if the trust paid the grantor’s income taxes.

Rev. Proc. 2001-38 announced that the IRS will treat as void certain QTIP elections which do not benefit the estate, such as when the election was made with respect to an estate already sheltered by the exclusion. If the election was not ignored in this situation, the QTIP trust would be included in the surviving spouse’s estate.

The IRS has issued new regulations which allow an automatic six-month extension to file a Form 706, without showing reasonable cause. Payment of estimated tax must still be timely.

FSA 200122011 rejected a formula clause in a partnership agreement intended as a protective mechanism in the event of an IRS valuation dispute. The advisory held that such clauses violated public policy.

Final Regs. §§ 25.2702-3(b) et seq. prohibit the use of notes as GRAT or GRUT payments. The regs. also require that the governing instrument itself contain an express prohibition against the use of notes. Indirect loans are also barred.

Infamous “example 5” of Regs. §25.2702-3(e) was invalidated by the Tax Court in Walton v. Comr,115 T.C. 589. The decision (if not successfully appealed by the IRS) paves the way for zero-tax GRATs. Note that if the grantor dies during the term of this GRAT, the entire trust will be part of the decedent’s estate, even though the trust will continue. Therefore, trust assets will be unavailable to pay estate taxes.

In response to new state unitrust statutes, the IRS issued proposed regs. with a new definition of trust income. Amounts allocated between income and principal pursuant to applicable state law will be respected if state law allows apportionment between income and remainder beneficiaries of the total return of the trust, taking into account ordinary income, capital gains, and unrealized appreciation.

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