Recent developments in estate planning.

Author:Ransome, Justin
Position:Part 1


* The IRS issued guidance on recalculating applicable exclusion amounts for estate and gift tax purposes to reflect the Supreme Court's holding in Windsor.

* The Tax Court discussed the interaction of Secs. 2036 and 2043 in the determination of the value of property that must be included in a decedent's estate.

* The Eleventh Circuit affirmed a Tax Court holding that an estate could not deduct the interest expense of a loan to pay estate taxes as an administrative expense because the loan was unnecessary.

This is the first part of a two-part article examining developments in estate, gift, and generation-skipping transfer (GST) tax and fiduciary income tax occurring between June 2016 and May 2017. Part 1 discusses gift and estate tax developments, and Part 2, in the October issue, will discuss GST tax and trust tax developments as well as tax reform proposals and inflation adjustments for 2017.

Gift tax

Adjustment of exemption amounts after Windsor

Before the Supreme Court issued its decision in Windsor, (1) same-sex marriages were not recognized for federal tax purposes, and, therefore, same-sex spouses (1) were not treated as married for gift, estate, or GST tax purposes; (2) could not claim a marital deduction for gifts or bequests to one another; and (3) were required to determine generation assignments for GST tax purposes based on age rather than on familial relationship with their spouse. Following Windsor, the IRS published Rev. Rul. 2013-17, ruling that same-sex couples who are legally married in state and foreign jurisdictions recognizing same-sex spouses would be treated as married for U.S. federal tax purposes prospectively as of Sept. 16, 2013. On Sept. 2, 2016, the Treasury Department and the IRS issued final regulations (2) amending the regulations under Sec. 7701 to reflect that same-sex marriages are recognized for federal tax purposes.

In Notice 2017-15, the IRS provides special administrative procedures for allowing certain taxpayers and the executors of certain estates to recalculate a taxpayer's remaining applicable exclusion amount and remaining GST exemption to the extent the exclusion or exemption was allocated to certain transfers made while the taxpayer was married to a person of the same sex.

Gift and estate taxes: Sec. 2501 imposes a gift tax on gratuitous transfers by U.S. citizens or residents. The donor may claim the applicable credit amount under Sec. 2505 against the gift tax imposed by Sec. 2501. 3 The applicable credit amount is defined in Sec. 2010(c) as the tentative tax on the applicable exclusion amount. Currently, the applicable exclusion amount is $5,490,000, and the applicable credit amount is S2,141,800. The applicable exclusion amount may be increased by the deceased spousal unused exclusion (DSUE) amount under Sec. 2010(c)(2). Sec. 2523 generally allows an unlimited marital deduction for gifts to spouses as long as the spouse is a U.S. citizen.

Sec. 2001(a) imposes an estate tax on the transfer of the taxable estate of every decedent who was a U.S. citizen or resident at the time of death. The estate may claim a credit under Sec. 2010(a) for an applicable credit amount against the estate tax to the extent the applicable exclusion amount has not been used against gifts made during the decedent's lifetime. Sec. 2056 generally allows an unlimited marital deduction for bequests to spouses, as long as the spouse is a U.S. citizen.

A taxpayer is generally allowed to file an amended gift tax return or a supplemental estate tax return to claim a marital deduction for a gift or bequest to the taxpayer's same-sex spouse and to restore the applicable exclusion amount allocated to the transfer, as long as the limitation period for filing a claim for credit or refund under Sec. 6511 has not expired. Notice 2017-15 provides that, if the limitation period has expired, the taxpayer may recalculate his or her remaining applicable exclusion amount as a result of recognizing his or her same-sex marriage. However, once the limitation period on assessment of tax has expired, neither the value of the transferred interest nor any position concerning a legal issue (other than the existence of the marriage) related to the transfer can be changed under Notice 2017-15, and no tax credit or refund will be paid on the marital transfer if the limitation period has expired for requesting a credit or refund.

A taxpayer must recalculate any remaining applicable exclusion amount by (1) using a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, an amended Form 709, or a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return; (2) writing at the top of the form that the return is "filed pursuant to Notice 2017-15"; and (3) attaching a statement supporting the claim and detailing the taxpayer's recalculation.

GST tax: Sec. 2601 imposes a tax on generation-skipping transfers, which are defined under Sec. 2611(a) as a taxable distribution, a taxable termination, or a direct skip, all of which are transfers to or for the benefit of one or more skip persons. (4) A skip person is defined in Sec. 2613(a) as (1) a person assigned to a generation that is two or more generations below the generation assignment of the transferor (e.g., grandchildren); or (2) a trust, if all interests in the trust are held by skip persons, or if no person holds an interest in the trust and at no time after the transfer a distribution may be made from the trust to a non-skip person. Under Sec. 2651, a person's generation is determined based on the transferee's familial relationship to the transferor or the transferor's spouse, or if there is no such relationship, then based on the difference in age between the transferor and transferee.

Prior to the Supreme Court's decision in Windsor, determinations regarding a person's generation with regard to same-sex spouses were made based on the individuals' ages, as no family relationship was recognized under federal law. In light of Windsor, determinations regarding generations with regard to same-sex spouses will be made according to familial relationship, just as these determinations are made with regard to opposite-sex spouses.

A taxpayer should recalculate (also taking into account the GST implications of any interim transfers) and report any available GST exemption (1) using a Form 709, an amended Form 709, or a Form 706; (2) writing at the top of the form that the return is "filed pursuant to Notice 2017-15"; and (3) attaching a statement indicating that the taxpayer's allocation of GST exemption in a prior year is void pursuant to Notice 2017-15, a copy of the computation of the resulting exemption allocation(s), and the amount of the exemption remaining available to that taxpayer.

The notice states that the IRS will post on its website ( worksheets and instructions to Forms 706 and 709 to be used to properly calculate and report both the recalculated applicable exclusion amount and remaining GST exemption amount.

Comment: Prior to the decision in Windsor, same-sex couples who were legally married could not take advantage of the marital deduction for gift and estate tax purposes that would have negated any gift or estate taxes resulting from gratuitous transfers between them. The transfers likewise may have been subject to GST tax because the determination of whether the transfer is to a skip person was based on the age difference between the spouses. As a result of the federal government's not respecting the marriage of same-sex couples for federal tax purposes, same-sex couples were forced to use their applicable credit amount and possibly their GST exemption amount to negate any gift, estate, and/or GST taxes that may have resulted from a transfer between them. The notice explains how the IRS will give retroactive effect to the decision in Windsor and allow same-sex couples to reclaim any applicable credit amount and possibly any GST exemption amount that they may have used regarding gratuitous transfers between them in years prior to Windsor. It makes clear, however, that if the statute of limitation has run on any gift or estate tax return that has been filed, the IRS will not refund any amounts that may have been paid with the filing of these returns. Instead, such amounts will be recognized as gift tax paid or payable for purposes of computing the estate tax. The notice also provides that it does not extend the statute of limitation on a gift tax return that has been filed to allow an individual to elect to split gifts between spouses.

Adequate disclosure

In Chief Counsel Advice 201643020, the taxpayer reported a current-year gift on a gift return but omitted several gifts made and reported in prior years. The taxpayer's omission caused an underassessment of gift tax due on the current-year gift. The IRS did not catch this error until the three-year statute of limitation for gift tax assessment had expired.

The IRS Office of Chief Counsel concluded that while unreported current-year gifts cause the statute of limitation for assessment of gift tax to remain open indefinitely under Sec. 6501(c)(9) for those unreported gifts, a taxpayer's omission of prior-year gifts on a return does not cause the statute of limitation for assessment to remain open indefinitely under Sec. 6501(c)(9) for the current-year gifts properly reported on a timely gift tax return.

Comment: The IRS got it right here. The adequate-disclosure rules under Sec. 6501(c)(9) only refer to the adequate disclosure of a gift on a tax return. They do not address the proper reporting of gifts in prior years, nor do they address the proper calculation of gift tax regarding a particular return. All that Sec. 6501(c)(9) requires for the statute of limitation to run on a gift reflected on a return is that it be disclosed "in a manner adequate to apprise the Secretary of the nature of such item."


* An IRS notice provides...

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