Federal Estate Tax Law 2015 Law Offices of Robert E. Danielson - PowerPoint PPT Presentation

Federal Estate Tax Law 2015 Law Offices of Robert E. Danielson Robert E. Danielson, Esq. 65 West Commercial Street, Suite 106 Portland, Maine 04101 www.danielsonlawoffice.com

Overview • Current State of the Law • Final Portability Regulations • Estate Closing Letters • New “Consistency of Basis” Legislation • Obergefell v. Hodges & Same-Sex Marriage • IRS Guidance Plan • Maine State Estate Tax Changes

Transfer Tax Exemption and Rates Estate Tax Rates and Exemptions under ATRA Comparison of Transfer Tax Exemption and Rates Federal Transfer Taxes 2014 2015 2016* Federal estate tax exemption $5.34 million $5.43 million $5.45 million Federal gift tax exemption $5.34 million $5.43 million $5.45 million Federal GST exemption $5.34 million $5.43 million $5.45 million Estate, gift and GST top tax rate 40% 40% 40% *Estimated

Portability • Portability is now a permanent fixture in the tax system. • Increases the surviving spouse’s exclusion amount for estate and gift tax purposes by the portion of the deceased spouse’s unused exclusion. • The “Deceased Spousal Unused Exclusion Amount,” or “DSUE amount,” can be transferred or “ported” to the surviving spouse. • The surviving spouse’s exclusion is the sum of (i) his/her own exclusion (as such amount is inflation adjusted), plus (ii) the first-to- die’s ported DSUE amount.

Portability Election • Portability must be elected by the executor of the estate (as defined by the IRS). • It must be made by filing a timely and correct estate tax return.

Final Regulations • IRS published federal regulations for portability in June 2015. • Final Regulations Apply to decedents dying after June 12, 2015. • Temporary regulations will continue to apply to those decedents who died between January 1, 2011 and June 11, 2015.

Issues Clarified by Final Regulations • Which exclusion – Deceased Spousal Unused Exclusion Amount (DSUE) or Surviving Spouse’s Basic Exclusion Amount (BEA) - will be applied first against the estate of the surviving spouse upon their death. • Multiple Deceased Spouse Rule • Late Election Relief for “Smaller Estates” • Unknown DSUE Amount • Good Faith Estimate for 706 Form • Surviving Spouse vs. Executor – Who can make the election?

Estate Closing Letter • Estate administrators must now request a closing letter from the IRS. • Request must be made 4 months after filing. • What do these changes mean for administrators?

New Legislation Requiring “Consistency of Basis” • Effective July 31, 2015 as part of the “Highway Bill” • Executors will be required to furnish “information statements” to the IRS and to the estate’s beneficiaries about the values of estate assets • The beneficiaries must use that same value for the purposes of reporting gain or loss on the beneficiary's income tax return.

“Consistency of Basis” Background • General rule: • The basis of property acquired from a decedent is the fair market value of such property at the date of the decedent’s death, or, if the decedent’s executor so elects, at the alternate valuation date. • Generally: • § 1014(a) provides for a step up in basis which has appreciated in value since its original acquisition • A step down in basis may be allowed if the property depreciates or declines in value after it is acquired.

“Consistency of Basis” Changes • New Section 1014(f), requires that a beneficiary's basis in property received from a decedent must be consistent with the value reported on the estate tax return (the "Estate Tax Return Value"). • The Estate Tax Return Value is the "value" as "finally determined" for Federal estate tax purposes (the "Finally Determined Value"), or, if there is no Finally Determined Value, it will be deemed the value which is reported on the statement now required to be submitted to the IRS and beneficiaries. (“Statement Value”).

“Consistency of Basis” Effective Dates • The new rules apply generally to property to which an estate tax return is filed after July 31, 2015, regardless of the date of death of the decedent. • This can include returns filed timely, on an extended date or late-filed returns. • The IRS has delayed the start date of the “statement” requirement to February 29, 2016.

“Consistency of Basis” Statement Requirements NOTIFICATION TO IRS Secretary of Treasury Department of the Treasury 1500 Pennsylvania Avenue, NW Washington, D.C. 20220 Dear Secretary: The undersigned [executor of the Will of DECEDENT] [statutory executor of the estate of DECEDENT in his capacity as Trustee of DECEDENT's Trust] hereby provides you with this statement as required by Internal Revenue Code Section 6035(a). The following beneficiaries were mailed the statements attached in accordance with Internal Revenue Code Section 6035(a): Beneficiary Name and Address Beneficiary TIN Please acknowledge receipt of this statement by stamping the enclosed copy "received" and returning same to me in the envelope enclosed. Sincerely, EXECUTOR

“Consistency of Basis” Statement Requirements NOTIFICATION TO BENEFICIARY Dear [Beneficiary]: The undersigned [executor of the Will of DECEDENT] [statutory executor of the estate of DECEDENT in his capacity as Trustee of DECEDENT's Trust] hereby provides you with this statement as required by Internal Revenue Code Section 6035(a). Set forth below are the interests in property included in the DECEDENT's gross estate for Federal estate tax purposes that you receive and the value of each such interest in property reported on the DECEDENT's estate tax return (Form 706): Item of Property Form 706 Value Internal Revenue Code Section 1014(f) requires that you use the value set forth in this statement as your basis for purposes of computing your income taxes. Inconsistent reporting can result in the imposition of penalties. You should provide a copy of this statement to your tax advisor and/or return preparer and consult with him or her regarding the import of this information. Sincerely, EXECUTOR

“Consistency of Basis” Other Matters • Penalties • Unresolved Issues • Format of “statement” and notices to IRS and beneficiaries • Identification of Assets • Exceptions • Inconsistencies

Same-Sex Marriage Tax Law Changes • In Windsor, the U.S. Supreme Court held that the Constitution does not provide authority for the Federal Government to regulate the definition of marriage. • In Obergefell v. Hodges, the Court held that marriage is a fundamental right embodied in the rights of due process and equal protection. • Same-sex marriage must be recognized at the state level – in all 50 states - regardless of whether the residents married in that state or in another state. • These concepts are likely to have a significant future impact for the 250,000 plus couples affected by both Windsor and Obergefell. • This means that some estate planning changes are necessary to account for these changes. In many states, where same-sex marriage was not previously recognized, couples will enjoy, among other rights: • The tax benefits of marriage on state and federal levels • State recognition of divorce proceedings • Spousal priority, in an incapacitated spouse’s care, or guardianship or conservatorship proceedings • Spousal survivorship rights through intestacy, or retirement or pension benefits • Adoption rights and child custody rights

IRS Guidance Plan 2015-2016 • Guidance on qualified contingencies of charitable remainder annuity trusts under §664. • Final regulations under §1014 regarding uniform basis of charitable remainder trusts. Guidance on basis of grantor trust assets at death under §1014. • Revenue procedure under §2010(c) regarding the validity of a QTIP election on an estate tax return filed only to elect portability. • Guidance on the valuation of promissory notes for transfer tax purposes under §§2031, 2033, 2512, and 7872. • Final regulations under §2032(a) regarding imposition of restrictions on estate assets during the six month alternate valuation period. • Guidance under §2053 regarding personal guarantees and the application of present value concepts in determining the deductible amount of expenses and claims against the estate.

IRS Guidance Plan 2015-2016 • Guidance on the gift tax effect of defined value formula clauses under §§2512 and 2511. • Regulations under §2642 regarding available GST exemption and the allocation of GST exemption to a pour-over trust at the end of an ETIP. • Final regulations under §2642(g) regarding extensions of time to make allocations of the generation-skipping transfer tax exemption. • Regulations under §2704 regarding restrictions on the liquidation of an interest in certain corporations and partnerships. • Guidance under §2801 regarding the tax imposed on U.S. citizens and residents who receive gifts or bequests from certain expatriates.

State of Maine Estate Tax Changes • The Maine estate tax exemption effective January 1, 2016, is now equal the federal estate tax exemption. • $5.43 million for 2015 • Anticipated $5.45 m. for 2016 • More than double the current Maine exemption of $ 2 m.