Form 706 Compliance Issues for Estates Anticipating Challenges With - - PowerPoint PPT Presentation

Form 706 Compliance Issues for Estates

Anticipating Challenges With Includable Property, Tax Calculations, Valuation Elections and More

TUESDAY, MAY 7, 2013, 1:00-2:50 pm Eastern

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Form 706 Compliance Issues for Estates Seminar

Jerome Deener, Fox Rothschild jdeener@foxrothschild.com

May 7, 2013

Yahne Miorini, Miorini Law yahne.miorini@miorinilaw.com

Today’s Program

Overview Of Federal Estate Tax Concepts [Yahne Miorini] Determining Includable Property [Jerome Deener] Deductions And Credits [Yahne Miorini] Portability Elections [Jerome Deener] Impacts Of State Laws And Death Taxes, Wills And Trusts [Yahne Miorini] Frequent Estate Tax Audit Red Flags [Jerome Deener] Non-Resident/Non-Citizen, And Non-Citizen 706 Issues [Yahne Miorini] Slide 8 – Slide 18 Slide 130 – Slide 145 Slide 19 – Slide 39 Slide 40 – Slide 66 Slide 67 – Slide 120 Slide 121 – Slide 127 Slide 128 – Slide 129

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

6

OVERVIEW OF FEDERAL ESTATE TAX CONCEPTS

Yahne Miorini, Miorini Law

The American Taxpayer Relief Act Of 2012

The American Taxpayer Relief Act of 2012 (the Cliff Bill) ends the worries of clawback risk. The American Taxpayer Relief Act avoids draconian automatic sunset provisions that were scheduled to take effect after 2012 under the Bush-era tax cuts in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) (both as extended by subsequent legislation, including the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act).

8

The American Taxpayer Relief Act of 2012 (Cont.)

• Permanent
• Unification of the estate and gift tax
• Portability
• Tax rate is increased from 35% to 40%.
• Repeal of the surcharge on estates larger than $10

million

• Exclusion is made at $5 million in 2011, indexed with inflation
• 2013: $5.25 million
• Same exclusion for GST tax

9

The American Taxpayer Relief Act of 2012 (Cont.)

• Deduction for state death taxes remains the same = a deduction
• Before 2005, a credit was allowed against the federal estate

tax for state estate, inheritance, legacy, or succession taxes. EGTRRA repealed the state death tax credit for decedents dying after 2004 and replaced the credit with a deduction.

• Extensions of provisions for:
• Qualified conservation easements: The modifications to the

exclusion for qualified conservation easements are permanently extended.

• Qualified

family

• wned

business interests (QFOBIs): Permanent repeal of the estate tax deduction

• Installment payment of estate tax for closely held businesses

10

Qualified Conservation Easements

• Exclusion is available to any otherwise qualifying real property

without regard to the distance requirement IRC Sect. 2031(c)(8)(A)).

• The date to be used for determining the values to calculate the

exclusion is the date of contribution. IRC Sect. 2031(c)(2)

11

QFOBI

• A qualified family owned business interest is an interest in

trade or business with a principal place of business in the U.S., the ownership of which is held: (1) At least 50% by one family, (2) 70% by two families, or (3) 90% by three families.

• If the interest was held by more than one family, the

decedent’s family must have owned at least 30% of the trade or business.

12

QFOBI (Cont.)

Recapture events (IRC Sect. 2057(f)(2) – Watch out!

• Recapture tax provisions are still applicable if a specified recapture

event occurs within the 10-year period following the decedent’s death and before the death of the qualified heir.

• Last day of entitlement to elect QFOBI as 12/31/2004 (DOD).
• Recapture tax means that an additional tax is imposed if there is a

recapture event.

• Recapture events are that the qualified heir:
• Ceases to meet the material participation requirements
• Disposes of any portion of his or her interest in the family-
• wned business outside of family members
• Loses citizenship
• Moves the principal place of business outside of the U.S.

13

Installment Payments

• Deferred payment of estate tax for closely held business is

made permanent.

• Closely

held business: Number

• f

partners

• r

shareholders does not exceed 45 (prior to EGTRRA, the maximum number was 15). ― IRC Sect 6166(b)(1)(B)(ii); 6166(b)(1)(C)(ii); 6166(b)(9)(B)(iii)(I);

• Entity must be engaged in an active trade or business.
• Election is not available for passive assets.
• If decedent has several closely held businesses, it will

be treated as one if 20% or more of the total value of each one is included in the decedent’s gross estate.

14

Installment Payments (Cont.)

• Stocks of the holding company must be non-readily tradable to

qualify for purposes of the installment payment rules has been made permanent.

• Installment payments:
• Five years
• 2% interest

15

The American Taxpayer Relief Act of 2012 (Cont.)

• GST tax: Extension of number of GST tax–related provisions scheduled

to expire after 2012

• GST deemed allocation and retroactive allocation provisions
• Clarification of valuation rules with respect to the

determination of the inclusion ratio for GST tax purposes

• Provisions allowing for a qualified severance of a trust for

purposes of the GST tax

• Relief from late GST allocations and elections

(See http://www.plantemoran.com/perspectives/articles/2012/Page s/congress-approves-eleventh-hour-agreement-to-avert-fiscal- cliff.aspx)

16

New Tax Rates For 2013

• 2013 annual exclusion: $14,000
• 2013 non-citizen spousal exclusion: $143,000
• 2013 foreign gifts reporting obligation: $15,102
• Gifts of a value exceeding $15,102 in 2013 received from

foreign corporations or foreign partnerships must be reported on IRS Form 3520.

17

DETERMINING INCLUDABLE PROPERTY

Jerome Deener, Fox Rothschild

19

Gross Estate

• Sect. 2031 generally defines the “gross estate” to include the value of

all property, real or personal, tangible or intangible, to the extent provided by sections 2033 et. seq.

20

• Sect. 2033: Property In Which The

Decedent Had An Interest

• Decedent’s beneficial interest in property
• Beneficial interest in life insurance on others’ lives is included.

Slide Intentionally Left Blank

22

• Sect. 2035: Adjustments For Certain

Gifts Made Within Three Years Of Death

• 2035(a): Interest transferred by the decedent that, if it had been

retained by the decedent as of his/her death, would have been includible in the decedent’s gross estate under sections 2036, 2037, 2038 or 2042. Sect. 2035(a)(2) – Excluded: Bona fide sale for an adequate and full consideration in money or money's worth

23

• Sect. 2035: Adjustments Fr Certain Gifts

Made Within Three Years Of Death (Cont.)

• 2035(b): Requires the federal gift tax paid by the decedent or the

decedent's estate on any transfers made after 1976 by the decedent or the decedent’s spouse within three years of the decedent’s death to be included in the decedent’s gross estate.

24

• Sect. 2036: Transfers With

Retained Interests

• 2036(a)(1): Decedent retains “the possession or enjoyment of” or

“the right to the income from” the transferred property or property interest.

• Excluded: Bona fide sale for an adequate and full

consideration in money or money's worth

25

• Sect. 2036: Transfers With

Retained Interests (Cont.)

• 2036(a)(2): Decedent retains the right for life (or for any similarly

prescribed period) to say who may enjoy transferred property or the income therefrom, even if the decedent has put it beyond the power to claim enjoyment or income for the decedent’s own benefit.

26

• Sect. 2036: Transfers With

Retained Interests (Cont.)

• 2036(b): Decedent directly or indirectly retains voting rights in a

“controlled corporation”; deemed a retention of the “enjoyment” of transferred property so as to trigger Sect. 2036(a)(1). – “Controlled corporation” is defined as a corporation in which the decedent owns, directly or by attribution under Sect. 318, stock possessing at least 20% of the combined voting power of all classes of stock of the corporation; or if the decedent has a right to vote (either alone or in conjunction with any other person) at least 20% percent of the combined voting power.

27

• Sect. 2036: Transfers With

Retained Interests (Cont.)

• Transfer can be made directly by the decedent, or indirectly as in a

deemed transfer under the reciprocal trust doctrine.

• Amount includible in gross estate is the value of the transferred

property upon death (not the value of the retained interest).

28

• Sect. 2037: Transfers Taking

Effect At Death

• Sect. 2037 includes property in a decedent’s taxable estate if the

decedent has made a transfer of the property to take effect only at or after the decedent’s death, and has retained a reversionary interest in such property (perhaps expressly) that has a value just before the decedent’s death in excess of 5% of the value of the property transferred.

• Excluded: Bona fide sale for an adequate and full

consideration in money or money's worth

29

• Sect. 2038: Revocable Transfers
• Sect. 2038 applies to include the value of an interest in property

when the decedent has transferred such property, but “enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished during the 3-year period ending on the date of the decedent’s death.” – Excluded: Bona fide sale for an adequate and full consideration in money or money’s worth

30

Sect: 2038: Revocable Transfers (Cont.)

• Unlike Sect. 2036, which taxes the entire property transferred by the

decedent, Sect. 2038 only taxes the value of the interest over which the decedent maintains the power to alter, amend, revoke, terminate, etc. …

31

• Sect. 2039: Annuities (With

Survivorship Proceeds)

• Sect. 2039 generally includes the value of annuities that are payable

to the decedent during lifetime and continue after the death of the decedent, or that provide for proceeds to be paid to beneficiaries. – Excluded: Life insurance contracts (covered by Sect. 2042)

32

• Sect. 2039: Annuities (With

Survivorship Proceeds), Cont.

• Sect. 2039(b) restricts the inclusion of an annuity in a decedent’s

estate to the proportionate value of the annuity paid for by the decedent.

33

• Sect. 2040: Joint Interests
• Sect. 2040(b): As to spousal joint property interests (with right of

survivorship) created after 1977, Sect. 2040 includes one-half (1/2)

• f the value of such property in the decedent’s estate.

– Inapplicable when the surviving spouse is not a U.S. citizen

34

• Sect. 2040: Joint Interests (Cont.)
• Sect. 2040(a): Other joint property is fully includible in the

decedent’s taxable estate, except to the extent that the surviving tenant or tenants contributed to the cost of the acquisition of the property.

35

• Sect. 2041: Power Of Appointment
• Sect. 2041 includes property over which the decedent holds a

general power of appointment.

• Excluded:
• 1. Powers subject to ascertainable standards
• 2. Pre-1942 powers
• 3. Powers held with adverse party or creator

36

• Sect. 2042: Proceeds Of Life Insurance
• Sect. 2042 includes life insurance proceeds in the decedent’s

taxable estate if: 1. Proceeds are receivable by the decedent’s executor, or 2. Proceeds are receivable by other beneficiaries and the decedent has any incidents of ownership in the policy at death.

37

• Sect. 2043: Transfers For

Insufficient Consideration

• Sect. 2043(a) applies to a transfer under sections 2035, 2036, 2037,

2038 or 2041 for some consideration; but not a bona fide sale for adequate and full consideration. – Includible amount is “the excess of the fair market value at the time of death of the property otherwise to be included on account

• f such transaction, over the value of the consideration received

therefor by the decedent.”

38

• Sect. 2043: Transfers For

Insufficient Consideration (Cont.)

• 2043(b) states that the relinquishment of marital rights is generally

not consideration.

DEDUCTIONS AND CREDITS

Yahne Miorini, Miorini Law

Introduction

There are five parts to Form 706, nine schedules to determine the gross estate and seven schedules to determine the applicable deductions.

• Schedules A through I are used to determine the gross estate.
• Schedules J through O plus Schedule U are used to determine

applicable deductions.

• Schedules P and Q are used to determine applicable tax credits.

It is good practice to include all of the schedules and mark “0” on those schedules that do not show any assets, exclusions or deductions.

40

Schedule J

• Schedule J – Funeral and administrative expenses

― Funeral: Allowable "reasonable expenses" ― Tombstone, burial lot, cost of body transportation ― “Reasonable expenses” based on the decedent’s wealth and standard

• f living

― Administrative expenses can be allocated as the fiduciary’s discretion between Form 706 and the estate’s income tax return. ― No double deductions allowed ― Interest: Federal estate tax deficiency interest is includable ― Executor’s commission, attorney and accountant fees closely monitored by IRS ― Actually paid or reasonable expected to be paid ― Do not include attorney fees incidental to litigation incurred by a beneficary

41

Schedule K

• Schedule K – Debts, mortgages and liens

― Part 1: Decedent’s debts, tax liabilities, obligations to spouse at time of death ― In case of difficulty, a computation can be requested to the IRS. ― Part 2: Mortgage for which the decedent is liable and contingent liabilities

42

Schedule L

• Schedule L – Net losses during administration and expenses

incurred in administering property not subject to claims ― Casualty losses incurred during the settlement of the estate ― Theft, fire, storm, shipwreck

43

Schedule M: Unlimited Marital Deduction

• The Economic Recovery Tax Act (ERTA) of 1976 has created an unlimited

marital deduction. The assets bequeathed to the spouse are treated as deductions and are reported under Schedule M of the federal estate tax return.

• One of the objectives of the act was to correct the discrepancy in tax

treatment between the community states and the non-community state.

• Community states are Arizona, California, Idaho, Louisiana, Nevada, New

Mexico, Texas, Washington and Wisconsin.

• A homemaker surviving spouse in a community state would always keep half
• f the assets of the community, and it’s only the other half of the community

assets that would be reported in the decedent gross estate.

• ERTA was to help unify the IRS treatment of husband and wife. The IRS

already treated the husband and wife as “one economic unit,” for income tax

• purposes. ERTA expanded this concept for estate and gift taxes.

44

Schedule M (Cont.)

• Schedule M – Unlimited marital deduction

― Property interests passing to a surviving U.S. citizen spouse may qualify for the marital deduction under IRC

• Sect. 2056.

― A QTIP election can be made either for the entire value of the trust or for a portion of it. ― The portion not reported on Schedule M should be included in the gross estate. ― Deduction available to non-U.S. citizens through a QDT (qualified domestic trust) ― Funding of marital deduction should be carefully reviewed (audits).

45

Schedule M (Cont.)

• Property interests that you may not list on Schedule M

― The full value of a property interest that passes to the surviving spouse subject of a mortgage, or other encumbrance or an obligation of the surviving spouse ― Non-deductible terminable interest: Interest that will terminate or fail after the passage of time, or on the

• ccurrence or nonoccurrence of a designated event. IRS

e.g.: file estate, annuities, estate for terms of years, and patents ― Any property interest disclaimed by the surviving spouse

46

Schedule M (Cont.)

• IRS example of description:
• One-half the value of a house and lot, 256 South West

Street, held by decedent and surviving spouse as joint tenants with right of survivorship under deed dated July 15, 1975 (Schedule E. Part I. item 1) …

• Proceeds of Metropolitan Life insurance Company policy
• No. xxx, payable in one sum to surviving spouse (Schedule
• D. item 3) …
• Cash bequest under Paragraph Six of Will …

47

Schedule M: QTIP Election

• Election needs to be made by the executor.
• Election can be partial. If in a trust, you need a defined

fraction or percentage of the entire trust. The fraction or percentage may be defined by means of a formula.

• The election is irrevocable. If you don’t make the election in

your filed Form 706, you cannot file an amended return to make the election unless the amended return is filed on or before the due date for filing the original Form 706.

• Election makes the property/interest as passing to the

surviving spouse as deductible interest.

• Presumption

that you made the election when the property/interest is listed on Schedule M.

48

Schedule M: QTIP Election (Cont.)

• Requirement of IRC Sect. 2056(b)(7)

― Surviving spouse is entitled to all of the income from the property, payable annually or at more frequent intervals. ― During the life of the surviving spouse, nobody has a power to appoint any part of the property to any person

• ther than the surviving spouse.

49

Schedule O

• Schedule O – Charitable deductions

― All interests qualifying for charitable deductions under IRC

• Sect. 2066:

― Outright transfers to charitable organizations ― Qualified split interest charitable remainder trusts ― Property passing to charities by court decree ― Qualified conservation easements ― Outstanding charity pledge, if enforceable, is reported on Schedule K, not on Schedule O. ― No limit on the amount of charitable deductions

50

Schedule U

• Schedule U – Qualified conservation easement exclusion

― Maximum amount: $500,000 ― Enable fiduciary to exclude a portion of the value of the land subject to a qualified conservation easement ― Criteria to be met: ― Three-year ownership ending on the date of decedent’s death ― No later than the date of the election, a QCE has been made. ― The land is situated in the U.S. or one of its possessions. ― Conservation purposes are: ― Preservation of land for outdoor recreation, education or the public ― Protection of a relatively natural habitat/ecosystem ― Preservation of open space for scenic enjoyment or yielding significant public benefit as determined by the government

51

Schedule P: Credits

• Schedule P – Credit for foreign death tax

― Applicable if decedent owned property overseas ― If the decedent is a non-resident U.S. citizen, the following documents are required: ― Copy of property inventory ― Including schedule of liabilities claims against the estate ― Copy of the return filed under the foreign inheritance, estate legacy, succession tax or other death tax act

52

Slide Intentionally Left Blank

Schedule Q

• Schedule Q – Credit for tax on prior transfers

― Applicable when transferee receives property from a transferor who died within the previous 10 years or died two years after the transferee ― Property: Any interest which the transferee received the beneficial ownership ― A credit may be allowed for property received as the result of the exercise or non-exercise of a power of appointment, when the property is included in the gross estate of the donee of the power

54

Schedule Q (Cont.)

• Spouses don’t qualify unless the spouse was not a citizen of

the property passed outright to the spouse or to a qualified domestic trust.

55

Schedule Q (Cont.)

Period Of Time Exceeding Not Exceeding Percent Allowable ……. 2 years 100 2 years 4 years 80 4 years 6 years 60 6 years 8 years 40 8 years 10 years 20 10 years ….. None

56

Schedules R And R-1

• Generation-skipping transfer tax history:

The first generation-skipping transfer tax was enacted by the 1976 Act. This tax was created in order to prevent the avoidance

• f transfer taxes over a period of successive generation. The tax

was tremendously complex. The 1986 act repealed it and replaced with a new transfer tax applicable to all generation- skipping transfers whether by way of a trust, trust equivalent, or direct transfer. The generation-skipping transfer (GST) tax applied to estate tax and gift tax. This tax was created for people dying after Oct. 22, 1986. The tax is imposed only on the value of the interests in property that actually pass to certain transferees, who are referred as “skip persons.”

57

GST: Generation-Skipping Transfers

The GST tax brings new concepts such as “transferor” and “generation.” Under IRC Sect. 2652(a), the transferor is the donor or the decedent. The generation is defined among the family lines. There is the generation of the transferor, which includes the transferor, the transferor’s spouse and the transferor’s siblings. The children are part of the next generation; the grandchildren are part of the generation following. If the transfer is made outside the family, generations are determined by ages. A person who was born not more than 12½ years after the decedent is in the same generation of the decedent. A person born more than 12½ years, but not more than 37½ years, after the decedent is in the first generation younger than the decedent. A similar rule applies for a new generation every 25 years. Therefore, a skip person is a natural person who was born more than 37 ½ years after the decedent.

58

GST Skipping Transfers (Cont.)

• There are three types of generation-skipping transfers:

― taxable terminations, ― taxable distributions, and ― direct skips.

59

GST Skipping Transfers (Cont.)

• A taxable termination occurs upon the termination of an interest in

a trust. After the termination event, the skip person holds all interest in the trusts. For instance, dad created a trust, giving the income for life of his daughter and the remainder to his granddaughter.

• A taxable distribution exists when there is a distribution of principal
• r income from the trust to a skip person. For instance, mom created

a trust providing payment of income and principal to her children and

• grandchildren. What is collected by the grandchildren is subject to

GST tax.

• A direct skip is when property is transferred without compensation

to a skip person. Among family members, a skip person would be a

• grandchild. For a non-family member, a skip person is a person of two
• r more generations below the transferor.

60

GST (Cont.)

• A married couple may elect to treat generation-skipping

transfers as being made one-half by each spouse. The QTIP election used for estate tax purpose is separate and ignored for GST tax. The fiduciary may allocate part or all of the decedent’s GST exemption to the property. Because each person is entitled to a GST exemption, indexed for inflation, the GST election on a QTIP trust allows using two times the GST exemption. This is a reverse QTIP election. See IRC Sect. 2652(a)(3)

61

GST: Tax Allocation

• The amount of tax imposed on any generation-skipping

transfer is determined by multiplying the “taxable amount” by the “applicable rate.”

• See IRC

2602

62

GST: Taxable Amount

• The taxable amount varies depending on the transfer.
• For a taxable distribution transfer, the taxable amount is the transfer

received by the transferee, reduced by the expenses incurred in the determination, collection or refund that Chap. 13 tax imposed.

• For a taxable termination transfer, the taxable amount is the value of

property received at the termination reduced by deductions similar to Sect. 2053.

• For a direct skip transfer, the taxable amount is the amount
• received. The taxable distribution transfer and the taxable

termination transfer are tax-inclusive transfers, while the direct skip transfer is a tax-exclusive transfer. In a tax-inclusive transfer, the tax is calculated on the amount of the transfer.

63

GST: Applicable Tax Rate

• The applicable rate of tax is defined as the maximum transfer

tax rate then in effect, multiplied by the inclusion ratio.

• See IRS

264(1a)

64

Inclusion Of Prior Gift Tax

• On Line 4 of IRS Form 706, you need to lists the cumulative

amount of adjusted taxable gifts (IRC Sect. 2503). The computation of gift tax payable uses the IRC Sect. 2001(c) rate schedule in effect as of the date of death, rather than the actual amount of gift taxes paid with respect to the gifts. ― PB: Top bracket tax rates decreased from 55 % (2001) to 35% (2010). There are situations in which the gift tax paid was greater than the tax calculated using the rate in effect at the date of death. ― IRS Web site warns about software used by practitioners that will require manual input of the gift tax payable line, and errors resulting in underpayment of estate tax due.

65

PORTABILITY ELECTIONS

Jerome Deener, Fox Rothschild

Portability

• What is portability?

– The Sect. 2056 estate tax marital deduction allows spouses to deduct unlimited amounts for property that passes from a decedent to his or her surviving spouse.

67

Portability (Cont.)

• Made permanent by ATRA, a surviving spouse is entitled to a total

estate tax exemption (“applicable exclusion amount,” or “AEA”) consisting of two components:

• The “basic exclusion amount” (BEA), currently $5.25 million, as

indexed for inflation; and

68

Portability (Cont.)

• The “eeceased wpouse’s unused exclusion amount” (DSUE), which

is defined as: – The lesser of (a) the BEA and (b) the “Applicable Exclusion Amount” (AEA) of the surviving spouse’s last deceased spouse over the combined amount of the last deceased spouse’s taxable estate plus adjusted taxable

• gifts. Code §2010(c)(4), as amended by ATRA, and
• Treas. Reg. §20.2010-2T(c)(1)(ii)(A).

69

Portability (Cont.)

• Example:

– First spouse dies with $2 million, $1 million outright, to surviving spouse and $1 million in a credit shelter trust (CST). – First spouse has used $1 million of $5.25 million exemption, leaving $4.25 million unused exemption. – Surviving spouse dies with $9 million and the credit shelter trust

• f $1 million.
• Surviving spouse’s estate pays no federal tax.

70

Portability (Cont.)

Gross estate: $ 9M Less: BEA of surviving spouse (5.25M) unused exemption of first spouse (DSUE) (4.25M) Total Plus: Credit shelter trust Not included

71

Portability (Cont.)

• Variation: If first spouse has $5.25 million, and surviving spouse

has $5.25 million, and first spouse leaves his $5.25 million to surviving spouse outright: – No estate tax in first estate and no exemption used – Surviving spouse has a taxable estate of $10.5 million but has her own $5.25 million BEA and a $5.25 million DSUE, so the surviving spouse’s estate pays no federal estate tax.

72

Portability (Cont.)

– In all, a husband and wife together have $10.5 million of

• exemption. This is accomplished without shifting assets during

spouses’ lives, without credit shelter trust and no matter which spouse predeceases the other. – Portability also applies for purposes of the lifetime gift

• exemption. The applicable credit for gift tax purposes under
• Sect. 2505(a) refers to the estate tax credit amount under Sect.

2010(c), “which would apply if the donor died as of the end of the calendar year.” The 2010(c) credit includes the DSUE, so the gift tax exemption also includes the DSUE.

73

Portability (Cont.)

• Example, H-1 used $2,000,000 of exemption by leaving it

in a credit shelter trust. Wife has $3,250,000 DSUE plus $5,250,000 basic exclusion amount. If she makes lifetime gifts of $3,250,000, do they come from DSUE or basic exclusion amount, or pro rata? – From the DSUE. Treas. Reg. §25.2505-2T(b) – If W-1 remarries and she predeceases second spouse, she has her full exemption of $5,250,000 to give H-2.

74

Portability (Cont.)

• In order to utilize portability, a specific election must be made on

the federal estate tax return (Form 706) of the deceased spouse. Further, despite the running of the statute of limitation on the decedent’s estate tax return or gift tax return(s) with respect to the computation of the DSUE, the IRS may examine the returns of the deceased spouse to determine the amount of the DSUE for purposes of computing the surviving spouse’s applicable exclusion

• amount. See explanation of Treasury regulations later

75

Portability (Cont.)

• Portability does not apply to the GST exemption.
• However, this does not necessarily preclude the concurrent use of

portability and both spouses’ GST exemptions.

• In the case of a bequest to the surviving spouse in a trust that is

eligible for the QTIP election, the executor can make both (i) the QTIP election (making the trust qualify for portability) and (ii) the Code Sect. 2652(a)(3) “reverse QTIP election” (permitting GST exemption of the deceased spouse to be allocated to the trust).

76

Portability (Cont.)

• Upon the death of the surviving spouse, the surviving spouse will be

able to apply his/her DSUE against the value of the QTIP trust, and the QTIP trust will be partially or fully exempt from generation- skipping transfer tax (depending upon whether the first deceased spouse’s GST exemption was sufficient to attain a zero GST inclusion ratio).

• Election of portability can have adverse New Jersey and New York

estate taxes in the estate of the first spouse to die.

77

Tax And Non-Tax Reasons Not To Rely Upon Portability In Lieu Of Trust Planning

• If the surviving spouse remarries, the DSUE can potentially

disappear.

• Reason: The DSUE is only available from the last deceased

spouse.

• If a surviving spouse remarries and then outlives the second

spouse, the DSUE from the first deceased spouse is gone.

78

Tax And Non-Tax Reasons Not To Rely Upon Portability In Lieu Of Trust Planning (Cont.)

• Example: H1 dies with a taxable estate of $1 million, leaving a $4.25

million DSUE for W. W marries H2, who has a taxable estate of $5.25 million and leaves it all to H2’s children, thus using his entire $5.25 million exemption and leaving W with no DSUE. W’s $4.25 million DSUE from H1 is gone.

79

Tax And Non-Tax Reasons Not To Rely Upon Portability In Lieu Of Trust Planning (Cont.)

• Appreciation on property placed in a CST is excluded from the

estate of the surviving spouse, but appreciation is not sheltered if instead assets pass outright and portability is relied upon.

• Portability does not apply to the GST exemption. Therefore, in order

to take advantage of the GST exemption of the first spouse to die, it is advantageous to continue to fund a CST. If a deceased spouse leaves everything to the surviving spouse outright, the family will lose $5.25 million of $10,500,000 potential GST exemption.

80

Tax And Non-Tax Reasons Not To Rely Upon Portability In Lieu Of Trust Planning (Cont.)

• Hard-to-value assets held in a CST (LLC, FLP or closely held

stock) will not be subject to estate tax in survivor’s estate. However, if DSUE is elected, such hard-to-value assets can be subject to the IRS scrutiny in the estate of the surviving spouse.

81

Tax And Non-Tax Reasons Not To Rely Upon Portability In Lieu Of Trust Planning (Cont.)

• Portability does not apply to state estate taxes.

– States like New York and New Jersey have decoupled from the Federal $5,250,000 exemption. New York: $1,000,000 exemption and New Jersey: $675,000 – Both states take the position that if a federal 706 is filed for any reason, and a QTIP election is made on the federal return, then the state QTIP election must be consistent with the federal QTIP election. – This has an impact if portability is considered.

82

Tax And Non-Tax Reasons Not To Rely Upon Portability In Lieu Of Trust Planning (Cont.)

– H and W are New Jersey residents. H has $3,250,000 and W has $3,250,000. H’s will provides that all of his estate passes to W, and H’s estate elects portability. – W gets $5,250,000 DSUE from H. – On W’s death, she has her own $5,250,000 exemption, plus DSUE from H to shelter her $6,500,000 from federal tax. No New Jersey tax is imposed in first spouse’s estate. No QTIP election is made, and nothing

• n New Jersey return is inconsistent with the federal

return.

83

Tax And Non-Tax Reasons Not To Rely Upon Portability In Lieu Of Trust Planning (Cont.)

– On survivor’s death, the New Jersey tax on the $6,500,000 taxable estate = $574,000 (New Jersey will not recognize DSUE from first spouse’s estate). – In the alternative, if H’s assets consist of $3,250,000 in his name and instead pass into a CST, H’s DSUE is $2,000,000. Even though estate is under the $5,250,000 federal filing limit, H’s executor files a 706 to elect DSUE. No QTIP election is made on the federal 706, since QTIP is not necessary. New Jersey (and New York) positions are that QTIP for state purposes only may not be made, because that election is inconsistent with the federal return filed. herefore, on death of H, the estate owes state estate tax on a taxable estate of $3,250,000 = $205,200.

84

Tax And Non-Tax Reasons Not To Rely Upon Portability In Lieu Of Trust Planning (Cont.)

– If H’s estate did not elect DSUE, H’s estate would not file a federal 706, and New Jersey and New York positions are that his estate can make a state-only QTIP election to bring the state tax to zero.

85

Tax And Non-Tax Reasons Not To Rely Upon Portability In Lieu Of Trust Planning (Cont.)

– Executor’s conundrum:

• Elect DSUE and pay $205,200 to protect $3,250,000 (plus

appreciation) from future federal tax?

• Or, don’t elect DSUE, forego state tax in H’s estate and

hold onto $205,200, but without protection against federal estate tax on future appreciation

86

Tax And Non-Tax Reasons Not To Rely Upon Portability In Lieu Of Trust Planning (Cont.)

• Alternative:

– Consider leaving an amount equal to the state exemption (for New Jersey, $675,000) in a credit shelter trust (thereby using the deceased spouse’s state exemption), with the remainder of the federal exemption amount (for New Jersey, $4,575,000 in 2013) in a “QTIP-able” trust for the surviving spouse’s benefit. The trust would provide all income is payable to surviving spouse for life, plus principal for surviving spouse’s needs of health, maintenance and support. No state estate tax upon the death of the first spouse, and the surviving spouse can elect QTIP and therefore take advantage of portability (in the case of New Jersey, the surviving spouse’s DSUE would be $4,575,000).

87

Tax And Non-Tax Reasons Not To Rely Upon Portability In Lieu Of Trust Planning (Cont.)

• The surviving spouse can then gift away his/her income interest in

the QTIP trust, which is subject to the ascertainable standard, retaining his/her interest in the principal of the QTIP trust. Under Code Sect. 2519, this is considered a gift of the surviving spouse’s entire interest in the trust ($4,575,000, if no appreciation). Surviving spouse may apply his/her $4,575,000 DSUE against this $4,575,000 gift, making it tax-free and removing the QTIP trust assets from his/her New Jersey taxable estate. In all, no state estate tax will have been paid on the first deceased spouse’s $5,250,000. At the same time, the surviving spouse still has some access to the QTIP trust assets via his/her beneficial interest in the QTIP trust principal.

88

Tax And Non-Tax Reasons Not To Rely Upon Portability In Lieu Of Trust Planning (Cont.)

• An outright disposition to the surviving spouse in lieu of a CST

forgoes many non-tax benefits such as creditor protection, asset management, the ability for the deceased spouse to control the ultimate disposition of the assets upon the death of the surviving spouse, and the ability for the surviving spouse surviving spouse to control disposition if beneficial interests to family members during surviving spouse’s lifetime.

89

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Best Situations To Utilize Portability – Income Tax Benefits

• Retirement assets

– Prior to DSUE, if a married taxpayer had a large IRA but insufficient non-retirement assets to fully fund a CST, a decision had to be made as to whether:

91

Best Situations To Utilize Portability – Income Tax Benefits (Cont.)

– To take advantage of: the income tax benefits of leaving an IRA to a surviving spouse (i.e., the spouse’s ability to roll the IRA into his/her own IRA using favorable required distribution rules, convert to a Roth IRA, etc. …), at the risk of potentially wasting estate tax exemption; or – To maximize the estate tax benefits of fully funding a credit shelter trust, but accelerate payout to the surviving spouse

92

Best Situations To Utilize Portability – Income Tax Benefits (Cont.)

• Now, with portability, the taxpayer may name the spouse as the

IRA beneficiary without wasting any of the deceased spouse’s estate tax exemption. The surviving spouse may take the IRA, roll it over, name new beneficiaries to get a longer stretch-out and/or convert to a Roth IRA, either all at once or over a number of years. » Example: Taxpayer has a $3 million IRA and $2 million of other assets. Taxpayer names spouse as the IRA beneficiary and leaves the rest of his assets in a CST. Upon death, spouse receives the $3 million IRA, $2 million is placed in the credit shelter trust, and taxpayer’s estate elects to transfer taxpayer’s unused exemption ($3.25 million) to spouse.

93

Best Situations To Utilize Portability – Income Tax Benefits (Cont.)

• Note: While the $3.25 million estate tax exemption is not wasted,

the income and growth of the IRA will not excluded from the spouse’s taxable estate.

• Paying IRA proceeds to a CRT for New Jersey/New York

exemption purposes may still be considered, in some cases.

94

Best Situations To Utilize Portability – Income Tax Benefits (Cont.)

• Asset basis step-up

– Assets passing pursuant to portability will receive an income tax basis step-up in the estate of the surviving spouse, whereas assets held in a CST would not be entitled to such a basis adjustment. – Now that income tax rates are increasing as expected, the income tax value of a basis step-up will increase relative to the transfer tax value of removing assets’ appreciation from the taxable estate of the surviving spouse.

95

Portability Regulations

• On June 15, 2012, the Treasury Department issued temporary and

proposed regulations aimed at resolving some of the issues left

• pen by the portability statute.
• Timely filed return

96

Portability Regulations (Cont.)

• Code Sect. 2010(c)(5)(A) provides that the portability election must

be made on the deceased spouse’s timely filed estate tax return, within the “time prescribed by law (including extensions) for filing such return.” – Under the regulations, the last return filed by the due date (including extensions) will supersede any previously filed return. Therefore, an executor can supersede a previously filed portability election. Once the due date has passed, the election is irrevocable. Treas. Reg. §20.2010-2T(a)(4)

97

Portability Regulations (Cont.)

– Issue: If an estate is under the federal threshold (and so technically is not required to file a federal 706), is the estate subject to the same election deadline as a taxable estate? – Regs: Yes; Treas. Reg. §20.2010-2T(a)(1) states that any estate making the portability election is required to file a timely Form 706 under Code Sect. 6018(a).

98

Portability Regulations (Cont.)

• “Complete” estate tax return

– Notice 2011-82 states that by filing a “properly prepared and complete” Form 706, an estate is considered to have made the portability election. – Issue: For an estate under the federal threshold, what is considered “properly-prepared and complete?” – Regs:

99

Portability Regulations (Cont.)

• Treas. Reg. §20.2010-(a)(7)(i) provides that an estate tax return

prepared in accordance with all applicable requirements is considered complete and properly prepared.

• However, Treas. Reg. §20.2010-(a)(7)(ii) provides a break for

smaller estates, stating that executors of estates that are not

• therwise required to file an estate tax return do not have to report

the value of certain property that qualifies for the marital or charitable deduction.

100

Portability Regulations (Cont.)

– If this special rule is used, then the executor must estimate the total value of the gross estate and report the estimate as a range on Line 1, Part 2 of the Form 706. The new form is not available yet, so until it is, the executor must round the estimate to the nearest $250,000 and attach to the Form 706. – All other information regarding the marital/charitable deduction property (description, ownership, beneficiary, etc. …)

101

Portability Regulations (Cont.)

• The special rule is not available if:

– The value of the property relates to, affects or is needed to determine the value passing from the decedent to another recipient; – The value is needed to determine the estate’s eligibility for Code

• Sect. 2032 , 2032A, 6166 or other provision;

102

Portability Regulations (Cont.)

– Less than the entire value of the property is eligible for the martial or charitable deduction; or – A partial disclaimer or partial QTIP election is made with respect to the property.

103

Portability Regulations (Cont.)

– The rule will also generally not apply in states where a separate estate or inheritance tax return is required (i.e., New Jersey and New York).

• Opting out of portability

– To opt out, Treas. Reg. §20.2010-2T(a)(3) requires an executor to make an affirmative statement on the estate tax return signifying the decision to have the portability election not apply. – Or, just don’t file a timely return

104

Portability Regulations (Cont.)

• Executor responsible for making the election
• Issue: A commenter to Notice 2011-82 noted that while

existing regulations allow a surviving spouse to file a Form 706 in certain cases, Code Sect. 2010(c)(5) permits only the executor to file the estate tax return and to make the portability election.

• Regs: Treas. Reg. §20.2010-2T(a)(6)(i) provides that an

appointed, qualified and acting executor or administrator is the party to file the Form 706 and make the portability election.

105

Portability Regulations (Cont.)

– In the case of an estate without an appointed executor, any person in actual or constructive possession of any property of the decedent may file the return to elect portability or to opt out. Treas. Reg. §20.2010- 2T(a)(6)(ii) – A portability election made by such a “non-qualified executor” cannot be superseded by another “non- qualified executor” of the same decedent’s estate.

106

Portability Regulations (Cont.)

• Computation of portability election
• Treas. Reg. § 20.2010-2T(b)(1) requires that an executor

include a computation of the deceased spouse’s unused exclusion amount (DSUE) on the estate tax return.

• The current 706 does not include a section for computation of the

DSUE.

• Therefore, Treas. Reg. §20.2010-2T(b)(2) provides a transition

rule which permits, prior to a new 706 being released, the preparation of a complete and properly prepared 706 to be deemed as the computation of the DSUE.

107

Portability Regulations (Cont.)

• Method of calculating the DSUE

– Code Sect. 2010(c)(4) defines the DSUE as the lesser of the (i) basic exclusion amount or (ii) the excess of (A) the basic exclusion amount of the last deceased spouse over (B) the amount with respect to which the tentative tax is determined under Code Sect. 2001(b)(1) on the estate of the deceased spouse.

108

Portability Regulations (Cont.)

– Example 3 of the JCT explanation of TRA 2010 contained a calculation of the DSUE that effectively used the applicable exclusion amount rather than the basic exclusion amount, confusing practitioners. – Treas. Reg. §20.2010-2T(c)(1)(ii)(A) states that Code Sect. 2010(c)(4)’s reference to “basic exclusion amount” should be read “as if” it stated “applicable exclusion amount” instead.

109

Portability Regulations (Cont.)

• Effect of gift taxes paid and payable on the DSUE
• Treas. Reg. §20.2010-2T(c)(2) provides that amounts on which

gift taxes were paid by a decedent are excluded from adjusted taxable gifts, for the purpose of computing the DSUE. » Example: Married decedent made a $2,000,000 gift in 2009 and paid gift tax on the excess over $1,000,000. Decedent dies in 2012, when the federal exemption is $5,120,000. Surviving spouse’s DSUE is $5,120,000 - $1,000,000 (not $2,000,000) = $4,120,000.

110

Portability Regulations (Cont.)

• When the DSUE is available to the surviving spouse
• Treas. Reg. §§

§§20.2010-3T(c)(1) and 25.2505-2T(d)(1) provide that the DSUE is available to the surviving spouse immediately after the death of the deceased spouse.

• If the portability election is made but then revised/superseded, it

could present an issue as to who makes a large gift immediately following the deceased spouse’s death.

111

Portability Regulations (Cont.)

• Last deceased spouse limitation
• Treas. Reg. §§

§§20.2010-3T(a)(3) clarifies that remarriage alone does not affect who will be considered the last surviving spouse and does not prevent the surviving spouse from including in the surviving spouse’s applicable exclusion amount the DSUE of the deceased spouse who most recently preceded the surviving spouse in death.

• While the applicable credit amount for gift tax purposes

under Code Sect. 2505(a)(1) is the credit in effect under

• Sect. 2010(c) that would apply if the donor died as of the

end of the calendar year, the identity of the “last deceased spouse” is determined upon the date of the gift (not as of the end of such year). Treas. Reg. §25.2505-2T(a) (see also § 20.2010-3T(a) for a comparable rule for estate tax purposes)

112

Portability Regulations (Cont.)

• Ordering rule for gifts
• Treas. Reg. §25.2505-2T(b) provides that when a surviving spouse

makes a taxable gift, the DSUE of the last deceased spouse is first used up before any of the surviving spouse’s basic exclusion amount is used.

113

Portability Regulations (Cont.)

• Multiple spouses

– Treas. Reg. §25.2505-2T(c) permits a surviving spouse to use DSUEs from successive deceased spouses. – In other words, no “portability recapture”; a surviving spouse cannot “hoard” DSUEs from multiple spouses for estate tax purposes, but can use successive DSUEs for gifting (after the death of each spouse) » Example: Husband 1 dies married to Wife 1, with a $1,000,000 DSUE. Wife 1 makes a $1,000,000 taxable gift, using the entire DSUE amount. Wife 1 then marries Husband 2, who dies the next day with a $5,000,000 DSUE. Wife 2 may make a gift of up to $10,000,000 tax free (she is not limited to $10,000,000 total).

114

Portability Regulations (Cont.)

• Examination of the deceased spouse’s Form 706 upon the death of the

surviving spouse

• Issue: Code Sect. 2010(c)(5)(B) allows the IRS to examine the

returns of the deceased spouse to determine the proper DSUE available to the surviving spouse. Commentators were concerned

• ver the scope and effect of such an examination.
• Regs: Treas. Regs. §§

§§20.2001-2T(a), 20.2010-2T(d), 20.2010- 3T(d), 2505-2T(e) provide that the IRS’ examination of a deceased spouse’s return (i) may result in the adjustment of the surviving spouse’s DSUE at any time but (ii) may only result in an assessment of additional tax with respect to the deceased spouse’s return within the deceased spouse’s period of limitations under Code Sect. 6501 (generally three years).

115

Portability Regulations (Cont.)

• The ability of the IRS to examine returns of a deceased

spouse applies to each transfer by the surviving spouse to which a DSUE is or has been applied. So, the IRS may examine upon the filing of a Form 709 by the surviving spouse or Form 706 by the surviving spouse’s estate.

• The Code Sect. 6501 statute of limitations for assessment
• f a tax on the surviving spouse’s return is not extended by

virtue of the IRS’ ability to examine the returns of deceased spouses.

116

Portability Regulations (Cont.)

• Non-residents who are not citizens
• Treas. Regs. §§

§§ 0.2010-3T(e) and 25.2505-2T(f) provide that a non-resident surviving spouse who was not a citizen of the U.S. at the time of such surviving spouse’s death may not take into account the DSUE of any deceased spouse of such surviving spouse, except to the extent allowed under a treaty obligation of the U.S.

117

Portability Regulations (Cont.)

• Portability and property passing into a QDOT
• Treas. Reg. §§

§§20.2010-2T(c)(4) provide that the executor

• f a decedent’s estate claiming a marital deduction for

property passing to a QDOT shall calculate the decedent’s DSUE on a preliminary basis for purposes of electing

• portability. However, this amount will decrease as

distributions are made from the QDOT, and additional estate tax is payable by the decedent’s estate under Code

• Sect. 2056A.
• Treas. Reg. §§

§§20.2010-3T(c)(2) provide that the earliest date that a DSUE may be included in determining a surviving spouse’s applicable exclusion amount is the date

• f the event that triggers the final estate tax liability of the

decedent under Code Sect. 2056A.

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Portability Regulations (Cont.)

• As such, the decedent’s DSUE will generally be available for

transfers occurring by reason of the surviving spouse’s death, but not available to the surviving spouse during his/her lifetime (unless the QDOT is terminated during the surviving spouse’s lifetime).

119

IMPACTS OF STATE LAWS AND DEATH TAXES, WILLS AND TRUSTS

Yahne Miorini, Miorini Law

State Estate Tax History

I. Before the EGTRRA, states were following the federal estate tax, and they had a death tax credit carved out of the federal estate tax reported on Line 15 of the Form 706. However, their due dates and filing requirements may have been different.

• II. The death tax credit has been replaced with a deduction that

is reported on Line 3b of the Form 706.

• III. The American Taxpayer Relief Act of 2012 made the deduction

permanent.

121

Decoupling States

Some states have refused to see their income reduce and have decoupled from the federal estate tax. I. Separate estate tax for three states:

• A. Connecticut ($2 M)
• B. Oregon ($1 M)
• C. Washington ($2M)

122

Decoupling States (Cont.)

• II. Pick-up tax for 10 jurisdictions:
• II. $5 million: Delaware, North Carolina
• III. $2 Million: Maine
• IV. $1 million: District of Columbia, Maryland, Massachusetts,

Minnesota, New York

• V. Other: New Jersey ($675,000), Rhode Island ($910,725)
• III. Modified pick-up tax for: Hawaii ($5 M), Illinois ($4 M),

Vermont ($2.75 M)

123

Decoupling States (Cont.)

• IV. Inheritance tax: Indiana, Iowa, Kentucky, Maryland, Nebraska

(county), New Jersey, Tennessee

124

Impacts Of Decoupling

• Old tax clauses may result in state estate tax due.
• QDT may not be available.
• Maryland state system

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FREQUENT ESTATE TAX AUDIT RED FLAGS

Jerome Deener, Fox Rothschild

Audit Red Flags

• Real estate valuation issues
• Family limited partnership discount issues
• Limited liability company discount Issues
• Closely held corporation discount issues
• Terminating notes on death of decedents

(self-canceling installment notes)

• Lifetime gifts and transfers
• Expenses of administration

128

NON-RESIDENT/NON- CITIZEN, AND NON-CITIZEN 706 ISSUES

Yahne Miorini, Miorini Law

Non-Citizen Residents

• General rule

― Estate tax applies on all U.S. situs assets. ― Exemption of $5M

130

Non-Citizen Spouse

• Joint property

― ERTA does not apply. ― The Economic Recovery Tax Act (ERTA) of 1976 created a presumption for couples that joint property or properties held as tenant by the entirety are owned 50% by each spouse. This is an irrefutable presumption but for properties acquired before the ERTA. See IRC Sect. 2040 (b) ― IRS assumption that deceased owns 100% of the joint property ― Non-citizen spouse has to prove his/her contribution.

131

Non-Citizen Spouse (Cont.)

• The Economic Recovery Tax Act (ERTA) of 1976 has created an

unlimited marital deduction.

• This presumption does not apply to non-U.S. citizen spouse.

The underlying purpose of this exception for a non-U.S. citizen spouse was the concerns that a non-U.S. citizen spouse may transfer the assets overseas prior to her/his death and/or move permanently to her/his country of origin. Therefore, the IRS could not collect the tax on the death of the surviving spouse.

132

Non-Citizen Residents

• Unlimited marital deduction

― Does not apply to the non-U.S. citizen spouse ― Non-U.S. citizen spouse can qualify if he/she becomes citizen before filing the tax return and/or if the assets are held in a QDOT trust.

133

QDT Trust

• Even when the decedent’s spouse estate planning does not

provide for the creation of a QDT trust, the surviving spouse can request to the IRS the creation of such a trust.

• Minimum requirements:

― All income to be paid to the surviving spouse for life ― No principal distributions to anyone other than the surviving spouse during his/her life ― At least one U.S. trustee, and the trustee(s) must have the power to withhold estate tax on any such distribution

134

QDT (Cont.)

• For trusts over $2M, a U.S. institutional trustee or a bond or a

letter of credit ― $600K of real property exemption to determine the bond/LoC amount

• For trusts under $2M, if over 65% of assets in offshore real

property, a U.S. institutional trustee, posting of a bond or LoC equal to 65% of the initial value of the trust assets

135

QDT (Cont.)

• Consequences of the QDT

― Distribution of principal during the life of the surviving spouse ― Except for distribution of hardship, subject to estate tax at the top bracket of the deceased spouse ― Postponement of estate tax only ― The remaining principal in the trust on the death of the second spouse will also be subject to estate tax in the estate of the first spouse. ― On the death of the second spouse, the estate tax return of the first spouse needs to be reopened. ― The trust assets will be taxed at the rate in existence at the time of the first spouse’s death.

136

QDT (Cont.)

• Termination of the QDT:

― Becoming a US citizen ― Watch to distributions of principal ― At the death of the surviving spouse

137

Citizen Non-Residents

• Transfer certificate requirements

― Not required for U.S. assets administered by a U.S. executor ― Part A: If the value of the taxable assets in the U.S. exceeds $60,000, you need to file IRS Form 706-NA (Special rules for 2010 see IRS notice2011-66): ― List on Schedule A only the assets located in the U.S. ― Documents to be sent to Department of the Treasury, Internal Revenue Service Center, Cincinnati, OH 45999 ― Part B: If the value of the taxable assets in the US is equal or less than $60,000: ― Documents to be sent to Department of the Treasury, Internal Revenue Service, STOP 824G, Cincinnati, OH 45999 ― Do not use From 706-NA

138

Citizen Non-Residents (Cont.)

Part B documents required:

• Copies of the decedent's last will and testament along with any

codicils; please include English translations if in another language

• One copy of each death tax or inheritance tax return and any

corrective statements filed with taxing authorities other than the U.S.; please include English translations if in another language

• One copy of the decedent's death certificate; pease include English

translation if in another language

• An affidavit, which is a written declaration made under oath before a

notary public or other comparable local official. The affidavit may be in the form of a letter.It must be signed by the executor, administrator, or other personal representative of the estate and include all of the following items:

139

Citizen Non-Residents (Cont.)

― The decedent's date and country of birth ― The date of the decedent's naturalization as a U.S. citizen, or a statement that the decedent had never become a naturalized U.S. citizen ― A list of all the decedent's U.S. assets in which the decedent had any interest at the date of death (whatever may be their legal situs for U.S. estate tax purposes) and their values at the decedent's date of death; for any U.S. bank or investment account, please include the account number ― The decedent's citizenship and residence at the date of death ― Whether any of the decedent's U.S. bank accounts were used in connection with a trade or business in the U.S.

140

U.S. Expatriates

• Definition: Person who within 10 years before the date of

death lost U.S. citizenship or ended long-term US residency, with the principal purpose of avoiding U.S. taxes

• Look at the dates: If after June 17, 2008, they are not

considered U.S. expatriate for the purpose of 706-NA

141

Non-Citizen Non-Resident

• General rule

― Estate tax applies on all U.S. situs assets ― Exemption of $60,000 ― Estate tax assessed at the same rate as for U.S. citizens ― Unlimited marital deduction available under conditions ― Charitable deduction available only for bequests to U.S. charities

142

Non-Citizen Non-Resident (Cont.)

• U.S. situs assets Include:

― Real estate property situated in the U.S., including houses and condominiums ― Tangible personal property situated in the U.S. (jewelry, antiques, artworks, cars) ― Shares of stock of U.S. corporations ― Cash deposits with U.S. brokers, money markets in U.S. mutual funds, and cash in deposit boxes

143

Non-Citizen Non-Resident Filing Requirements

• Must file Form 706-NA with tax return

― Form 706-NA: U.S. estate (and generation-skipping transfer) tax return

• Form 706-NA

― “Foreigner” designation

• If there is a bilateral fiscal treaty, file IRS Form 8833 with tax

return ― Form 8833: Treaty-based return position fisclosure Under sections 6114 or 7701(b) ― Explain briefly treaty based return position taken

144