2002 Regs., IRS Rulings & Pronouncements

EGTRRA now permits a retroactive allocation of GST exemption. For example, assume parent creates a trust for child which provides for outright distribution to child at age 30. Normally, parent would not allocate GST exemption to such a transfer, because child is not a “skip” person. However, if child dies at age 28, survived by issue, this would be a “taxable termination” subject to GST tax. IRC § 2632(d) resolves this quandary by permitting a retroactive allocation of GST exemption on a timely filed gift tax return in the year of the non-skip person’s death.

The federal credit for state death taxes will be eliminated in 2005, and will be replaced by a deduction under new IRC § 2058. The unified credit will increase to $1.5 million in 2004. Many states, including New York, have not increased their maximum excludible amount past $1 million. Therefore, the estate of a New York resident whose death occurs in 2005 will owe no federal tax on a federal taxable estate of $1.5 million, but will incur a New York estate tax of $64,400. The New York tax could be avoided by limiting the size of the bypass trust to the maximum excludible amount. Of course, the cost of this would be the failure to utilize the maximum federal exclusion.

With the maximum federal excludible amount scheduled to increase to $1.5 million in 2004, it may be prudent to review existing wills to determine whether the typical provision which maximizes the amount funding the credit shelter trust actually accords with the testator’s wishes. For example, if the testator’s estate is worth $1.75 million, he may wish to leave more than $0.25 million to his spouse. To accomplish this, the formula provisions would need to be changed.

FSA 200207007 opined that the statute of limitations under IRC § 6501(a) is triggered on the filing of an income tax return of the grantor, rather than the filing of the informational return of the grantor trust.

A testamentary general power of appointment results in gross estate inclusion under IRC  § 2041(a)(2) since the power holder is considered to own the property. A planning technique involves the use of a joint spousal revocable trust, which grants a general power of appointment to the first spouse to die. At the first spouse’s death, an income tax basis in all trust property was thought to occur. However, PLR 200210051 stated that any such basis increase is barred by IRC § 1014(e).

Life insurance trusts continue to be a versatile estate planning tool. PLR 200147039 held that a trust provision authorizing a trustee to utilize life insurance proceeds to pay estate taxes of the insured does not result in inclusion under IRC § 2042.

Rev. Proc. 2001-38 stated that an estate may seek an extension of time to make a QTIP election. However, PLR 2002219003 held that an extension of time may not be requested to partially revoke a QTIP election to correct an overfunding of a marital trust. In another development, PLR 200234017 held that property will not qualify for the marital deduction under IRC § 2056(b)(7) where the surviving spouse has a power to appoint trust property during life.

Mary Lou Edelstein, IRS FLP coordinator for Appeals recently stated at a meeting of the trust and estate group of AICPA that the Service has been settling FLP cases at discounts of (i) 25 percent for marketable securities and cash; (ii) 25-40 percent for real estate; and (iii) higher levels where active businesses are involved.

IRS Chief Counsel, in Advice Memorandum 200205027, stated that one spouse’s fraud in valuing a gift cannot be asserted as a basis for extending the statute of limitations for the other spouse’s gift tax return.

An advisory opinion (TSB-A-02(1)(R)) of the New York Commissioner of Taxation and Finance stated that the transfer of an interest in an entity that owns real property to a GRAT would be subject to the Real Estate Transfer tax.

IRC § 2201, as amended, provides estate tax relief for the estate of a “qualified decedent,” who is U.S. citizen or residence killed in action while serving in a “combat zone,” or who is a 9/11 or Oklahoma terrorist victim. The applicable rate schedule eliminates federal estate tax for taxable estates of up to $8.5 million.

PLR 200245053 held that the use of a valuation adjustment clause in connection with the funding of a family limited partnership whose raison d’etre was “primarily, if not solely, to generate valuation discounts” did not serve a legitimate purpose, and was invalid under Com’r v. Proctor, 142 F.2d 824 (4th Cir. 1944).  The ruling distinguished these prohibited formula clauses from legitimate ones used to “implement Congressionally sanctioned tax benefits,” such as marital deduction formula clauses pursuant to which the amount of the marital bequest (and the amount of the marital deduction under IRC § 2056) fluctuates depending upon the value of the gross estate as finally determined for estate tax purposes.

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