Planning to maximize the s. 2013 credit.

• Author: Stommel, Robert J.
• Position: Tax on prior transfers

Those of us who toil in the areas of estate planning and estate administration learned early on in our practice about the credit for tax on prior transfers (TPT credit) allowed by [Section]2013 of the Internal Revenue Code.(1) We encounter the credit on the checklists we review when preparing or reviewing a federal estate tax return, and we are mindful of the credit when advising (tactfully) the surviving spouse that we may wish to extend the filing of the federal estate tax return for the estate of the first spouse to die in the event that the surviving spouse may not survive the six-month extension period. However, as more articles appear by commentators extolling the benefits of paying tax in the estate of the first spouse to die,(2) increased attention is being focused on the credit, and deservedly so.

The purpose of this article is to raise the level of consciousness of the TPT credit by reviewing how it works and how practitioners can plan to maximize its potential benefit. An in-depth analysis of the TPT credit is beyond the scope of this article. Our intent is to discuss the credit in enough detail to hopefully spark in the reader/practitioner/planner some ideas for planning (not only in the "post-mortem" administration phase, but in the "pre-mortem" estate planning phase) to use the credit in its usual application.

Overview of the Credit

The TPT credit was once characterized as "the most complex and confusing provision of the estate tax law."(3) Simply put, the purpose of the TPT credit is to prevent property from being diminished by estate taxes imposed on the property in successive estates within a relatively short period of time. For discussion purposes, the person from whom property is transferred is termed the "transferor" and the transferee of the property is termed the "decedent."(4) The TPT credit is the amount of the federal estate tax paid on property transferred to the decedent from the transferor who died within 10 years before, or within two years after, the decedent's death and is allowed as a credit against the federal estate tax imposed on the decedent's estate. If the transferor died within two years of the decedent's death, the full amount of the TPT credit is available to the decedent's estate. If the transferor predeceased the decedent's death by more than two years, the credit is reduced by 20 percent for every two years or portions thereof that the decedent survived the transferor so that the available credit is fully extinguished if the decedent survives the transferor by more than 10 years.

To reiterate, the TPT credit is a credit applied to the federal (and not the state) estate tax liability of the decedent's estate equal to the amount of the federal estate tax deemed paid on property transferred to the decedent from the transferor. To determine the amount of the TPT credit, you must first determine if there is a "transfer" of "property" that can be valued. The regulations broadly define a "transfer" as any passing of property or an interest in property from a transferor that was included in the transferor's gross estate. For instance, the examples cited in the regulations include interests in property held by or devolving upon the decedent: 1) as spouse under dower or curtesy; 2) as surviving tenant of a joint tenancy with survivorship rights; 3) as beneficiary of the proceeds of life insurance; 4) as survivor under an annuity contract; 5) as donee of a general power of appointment; 6) as appointee under the exercise of a general power of appointment; and 7) as remainderman under the release or nonexercise of a power of appointment by reason of which the property is included in the gross estate of the donee of the power.(5) These examples, however, are by no means exhaustive.

The regulations also broadly define "property" as any beneficial interest in property including a general power of appointment and includes annuities, life estates, term interests, vested or contingent remainders, and other future interests. The term does not include an interest in property consisting of bare legal title, such as that of a trustee. Nor does the term include a power of appointment that is not a general power as defined in [Section]2041.(6) Two important aspects of the transfer and property requirements should be noted. First, the property interest need not be included in the decedent's gross estate for it to constitute property. For example, a life estate interest received from a transferor is "property" for purposes of the credit even though it is not includable in the decedent's estate. Second, there is no tracing requirement, that is, there is no requirement that the transferred property be identified in the decedent's estate or even be in existence at the time of the decedent's death. These aspects are what gives the TPT credit significant value. This is important in planning to effectively use the TPT credit, as discussed below.

Valuation Problems

Once you have a transfer of property from the transferor to the decedent, you must determine the value of the property interest. For the purpose of computing the TPT credit, the transferred property must be valued in the decedent's estate at the same amount that the property was valued in the transferor's gross estate. Moreover, that value must be reduced by three important items: 1) death taxes payable out of the property interest transferred to the decedent or which were payable by the decedent as a result of the transfer to him; 2) the amount of any liability on the property or any obligation imposed by the transferor with respect to the property; and, 3) any marital...