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What You Don’t Know Can Hurt You – A Review of Recent Developments in Estate and Gift Taxation and Administration

Charles D. Fox IV

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We virtually ended the estate tax or death tax, as it is often called, on small businesses, for ranches, and also for family farms. Donald J. Trump State of the Union Address February 5, 2019

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Current Proposed Legislation

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Ø H.R. 218 (Rep. Jason Smith, R-MO, Jan. 3, 2019) S. 215 (Sen. John Thune, R-SD,

• Jan. 24, 2019)

More Death Tax Repeal Acts

Death Tax Repeal Acts

Ø Estate and GST taxes repealed. Ø Treatment of qualified domestic trusts (QDOTs): Distributions during surviving spouse’s life taxed for 10 years. Tax on value remaining at spouse’s death eliminated. Ø Gift tax rate of 35% with a $10 million (indexed) exemption. Ø In S. 215 only, section 2511(c) (from 2001 Tax Act) restored: “A transfer in trust shall be treated as a taxable gift under section 2503, unless the trust is treated as wholly owned by the donor or the donor’s spouse under subpart E of part I of subchapter J of chapter 1.”

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For the 99.8 Percent Act Ø S. 309 (Sen. Bernie Sanders, I-VT, Jan. 31, 2019)

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• 1. Revenue Procedure 2018-57

(November 15, 2018)

Ø IRS announces inflation adjustments for 2019

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• 2. 2018-2019 Priority Guidance Plan

(November 8, 2018)

Ø Treasury Department and Internal Revenue Service release their 2018-2019 Priority Guidance Plan

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• 3. Proposed Treasury Regulations §

20.2010-1(c) (November 20, 2018)

Ø Treasury Department issues proposed anti- clawback regulations

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• 4. IRS Issues Final Regulations on Section

199A (January 18, 2019)

Ø IRS proposes new regulations on passthrough deduction under new Section 199A

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• 5. Notice 2018-54, 2018-24 IRB 750

(May 23, 2018)

Ø IRS provides guidance on certain payments made in exchange for state and local tax credits

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• 6. Press Release: Treasury Issues Proposed

Rule on Charitable Contributions and State and Local Tax Credits (August 23, 2018)

Ø Department of Treasury issues proposed rule

• n federal income tax treatment of payments

and property transfers under state and local tax credit programs

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• 7. Letter Rulings on Extension of Time to

Make Portability Election

Ø Extension of time to make portability election permitted

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• 8. Letter Ruling 201751005 (Issued September

18, 2017; Released December 22, 2017)

Ø IRS grants extension of time to make QTIP election

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• 9. Karen S. True v. Commissioner, Tax Court

Docket No. 21896-16 and H. A. True III v. Commissioner, Tax Court Docket No. 21897-16 (Petitions filed October 11, 2016)

Ø IRS attacks use of Wandry clause in gift and sale of interests in a family business

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• 10. Letter Ruling 201803003 (Issued

October 6, 2017; Released January 9, 2018

Ø Proposed trust modifications will not trigger gift or generation-skipping tax

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• 11. Letter Ruling 201808002 (Issued

November 16, 2017; Released February 23, 2018)

Ø Service rules on gift tax consequences of gift

• f life estate interest in pre-October 9, 1990

transaction

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• 12. Letter Ruling 201825003 (Issued

March 9, 2018; Released June 22, 2018)

Ø Transfer of the legal title, naked ownership, and remainder interest in and to artwork as defined by the deed of transfer is a completed gift for gift tax purposes

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• 13. Letter Ruling 201836006 (Issued

May 30, 2018; Released September 7, 2018)

Ø Service rules on consequences of incomplete non-grantor trust

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• 14. CCA 201745012 (Issued August 4,

2017; Released November 9, 2017)

Ø Purchase of remainder interest in transferred property in which donor retained annuity, which purchase occurred on donor’s deathbed during the term of the annuity, failed to replenish donor’s taxable estate, and failed to constitute adequate and full consideration for gift tax purposes

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• 15. Badgley v. United States, _____

F.Supp.3d _____ (N.D. Cal 2018)

Ø The assets of a GRAT are included in the settlor’s estate

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• 16. Letter Ruling 201819010 (Issued

February 8, 2018; Released May 11, 2018)

Ø IRS grants extension of time to make Section 754 election

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• 17. Letter Ruling 201814004 (Issued

December 11, 2017; Released April 6, 2018)

Ø IRS allows extension of time to make special use valuation election for farmland

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• 18. Letter Ruling 201820010 (Issued

February 13, 2018; Released May 18, 2018)

Ø IRS allows extension of time for estate to elect alternate valuation date

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• 19. Letter Ruling 201815001 (Issued

December 11, 2017; Released April 13, 2018)

Ø IRS allows extension to elect alternate valuation date

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• 20. Letter Ruling 201825013 (Issued March

19, 2018; Released June 22, 2018)

Ø IRS grants an extension of time to make the alternate valuation election

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• 21. Estate of Clara M. Morrissette v. Commissioner,

Tax Court Order, Docket No. 4414-14 (June 21, 2018)

Ø Court denies partial summary judgment motion of estate that Section 2703 does not apply to split-dollar arrangement

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• 22. Cahill v. Commissioner, T.C. Memo 2018-84

Ø Taxpayer’s motion for summary judgment with respect to split-dollar arrangement is denied

• 23. Streightoff v. Commissioner, T.C.

Memo 2018 - 178

Ø Court accepts government’s valuation of limited partnership interests in decedent’s estate

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• 24. Estate of Turner v. Commissioner, 151

T.C. No. 10 (2018) (Turner III)

Ø Tax Court addresses tax issue arising from inclusion of family limited partnership interests in estate and first spouse to die

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• 25. Letter Ruling 201845014 (Issued August 9,

2018; Released November 9, 2018)

Ø IRS issues favorable letter ruling with respect to two charitable remainder unitrusts

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• 26. Wendell Falls Development, LLC v.

Commissioner, T.C. Memo 2018-45; motion for reconsideration denied, T.C. Memo 2018-193

Ø No charitable contribution deduction is allowed for the donation of a conservation easement and no penalty is applicable

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• 27. Champions Retreat Golf Founders, LLC v.

Commissioner, T.C. Memo 2018-146

Ø Golf club development was not entitled to charitable deduction for donation to land trust

• f conservation easement operating across

golf course

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• 28. Belair Woods, LLC v. Commissioner,

T.C. Memo 2018-159

Ø On cross motions for partial summary judgment, court concludes that Belair did not comply, either strictly or substantially, with the requirements of the regulations with respect to obtaining an income tax charitable deduction; however, disputes of material fact existed as to whether Belair had reasonable cause for failure to supply a fully completed appraisal summary

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• 29. Notice 2017-73, 2017-51 IRB 562

(December 4, 2017)

Ø IRS describes approaches being considered to address certain issues regarding Donor Advised Funds

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• 30. Letter Rulings 201820007 and

201820008 (Issued February 5, 2018; Released May 18, 2018)

Ø Proposed distribution from one generation- skipping tax exempt trust to another exempt trust will not cause either trust to lose their exempt status

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• 31. Letter Ruling 201815012 (Issued

November 14, 2017; Released April 13, 2018)

Ø Extension of time granted to allocate spouse’s available GST exemption

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• 32. Letter Ruling 201801001 (Issued

September 20, 2017; Released January 5, 2018)

Ø Estate granted an extension of time to allocate GST exemption

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• 33. Letter Rulings 201803001 and 201803002

(Issued September 18, 2017; Released January 19, 2018)

Ø Extension of time to allocate GST exemption granted

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• 34. Letter Rulings 201840002 (Issued July

2, 2018; Released October 5, 2018)

Ø Grantor granted extension of time to allocate GST exemption to trust

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• 35. Letter Ruling 201839001 (Issued June

18, 2018; Released September 28, 2018)

Ø Extension of time to allocate GST exemption granted

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• 36. Letter Ruling 201849007 and 201849008

(Issued July 31, 2018; Released December 7, 2018)

Ø IRS grants an extension of time to allocate GST exemption granted

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• 37. Letter Ruling 201850010 (Issued

September 17, 2018; Released December 14, 2018)

Ø IRS grants an extension of time to sever QTIP trust into exempt and non-exempt QTIP trusts and to make a “reverse” QTIP election for the exempt QTIP trust and to apply the GST automatic allocation rules to allocate GST exemption to the exempt QTIP trust

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• 38. Letter Rulings 201839003 (Issued June

18, 2018; Released September 28, 2018), and 201839012, and 201839014 (Issued June 21, 2018; Released September 28, 2018)

Ø Extension of time granted to opt out of automatic allocation rules

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• 39. Letter Rulings 201836004 and 201836007

(Issued June 5, 2018; Released September 7, 2018)

Ø Spouse’s allocation of GST exemption to three trusts was void under Treas. Reg. § 26.2632-1(b) (4)(i) because trusts had no GST potential with respect to spouse

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• 40. Letter Rulings 201811002 and 201811003

(Issued November 27, 2017; Released March 16, 2018)

Ø Service rules on application of split-gift rules to the allocation of GST exemption

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• 41. Letter Rulings 201814001 and

201814002 (Issued December 11, 2017; Released April 6, 2018)

Ø Construction of ambiguous terms of grandfathered GST trust will have no adverse generation-skipping tax, gift tax, or income tax consequences

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• 42. Letter Ruling 201818005 (Issued January

16, 2018; Released May 4, 2018)

Ø Partition of trust in accordance with terms of partition order will have no adverse income, gift,

• r generation-skipping tax consequences

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• 43. Letter Ruling 201825007 (Issued March

15, 2018; Released June 22, 2018)

Ø Modification of GST grandfathered trust will not affect exempt status

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• 44. Letter Ruling 201825023 (Issued March 9,

2018; Released June 22, 2018)

Ø IRS grants decedent’s estate an extension of time to sever a residuary trust into an exempt and non-exempt residuary trust

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• 45. Letter Ruling 201807001 (Issued

November 13, 2017; Released February 16, 2018)

Ø IRS recognizes reformation of trust to qualify as a grantor trust for income tax purposes

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• 46. Letter Ruling 201803004 (Issued

September 28, 2017; Released January 19, 2018)

Ø IRS grants extension to trust for charitable contribution election

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• 47. Green v. United States, 880 F.3d 519

(10th Cir. 2018)

Ø Income tax charitable deduction for non-grantor trust limited to trust’s adjusted basis in properties donated to charity

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• 48. Kimberly Rice Kaestner 1992 Family Trust v. North Carolina

Department of Revenue, ____ N.C. ____ (2018)

Ø N.C. Supreme Court holds that income taxation of out-of-state trust is unconstitutional

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• 49. Fielding v. Commissioner, ____ Minn. ___ (July 18, 2018)

Ø Attempt of Minnesota to tax irrevocable non-grantor trusts as resident trusts for state income tax purposes is unconstitutional under the due process clauses of United States and Minnesota Constitutions

• 50. South Dakota v. Wayfair, Inc., ___ U.S. ____ (2018)

Ø Supreme Court overrules Quill Corp. v. North Dakota

• 51. Notice 2018-61, 2018-31 I.R.B. (July 13,

2018)

Ø IRS to issue regulations on effect of Section 67(g) on certain deductions for estates and nongrantor trusts

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• 52. Georgia House Bill 441 (2018)

Ø Georgia Governor vetoes domestic asset protection trust legislation

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• 53. Toni 1 Trust v. Wacker, 413 P.2d 1199

AK 2018)

Ø Alaska Supreme Court determines that Alaska state courts do not have exclusive jurisdiction

• ver fraudulent transfer actions under

AS 34.40.110(k)

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• 54. Olson v. Marshack, ___ F. Supp. 3d ___

(C.D. Cal 2018)

Ø U.S. District Court declines to approve settlement

• f bankruptcy trustee with respect to offshore

trust

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• 55. Ajemian v. Yahoo!, Inc., 84 N.E. 3d 766

(Mass. 2017), petition for cert. docketed sub nom. Oath Holdings, Inc. v. Ajemian (U.S. Jan. 19, 2018) (No. 17-1005)

Ø The Stored Communications Act (the “SCA”) does not prevent Yahoo!, Inc. (“Yahoo”) from voluntarily disclosing emails from a decedent’s account to the decedent’s personal representatives at the request of the personal representatives; it remains to be settled whether the SCA compels Yahoo to do the same

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• 56. Laborers’ Pension Fund v. Miscevic,
• No. 17-2022 (7th Cir. Jan. 29, 2018)

Ø ERISA does not preempt the Illinois slayer statute, and the Illinois slayer statute applies where the deceased was killed by an individual found not guilty by reason of insanity

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• 57. Lynch v. Barba, 2018 WL 1613834, C.A.
• No. 12083-MG (Del. Ch. Ct. 2018)

Ø Trustee is entitled to summary judgment when beneficiary cannot substantiate his breach of fiduciary duty allegations and has waited too long to file his lawsuit against the trustee

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• 58. Bullard v. Hoffman (In re Mayette E.

Hoffman Living Trust U/A dated August 4, 1997), 812 S.E.2d 401 (N.C. Ct. App. 2018)

Ø A trustee’s egregious conduct is not a prerequisite to awarding attorney’s fees under the UTC in a judicial proceeding involving the administration of a trust

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• 59. In re Estate of Forgey, 298 Neb. 865

(2018)

Ø Nebraska Supreme Court awards damages and legal fees for trustee’s failure to inform and report

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• 60. Morgan v. Superior Court of Orange

County, 23 Cal. Rptr. 3d 647 (Cal. App. 2018)

Ø California court holds that predecessor trustee cannot assert the attorney-client privilege against a successor trustee and that any provision of a trust instrument seeking to do so violates public policy

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• 61. Carberry v. Kaltschmid, 2018 WL

2731898 (Cal. 2018)

Ø Trust protectors do not have a general right to information allowing them to compel trust accountings

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• 62. Doermer v. Oxford Fin. Grp., Ltd., 884

F.3d 643, 647 (7th Cir. 2018)

Ø When there are multiple co-trustees, a single trustee does not have capacity to bring an action on behalf of a trust, and a beneficiary cannot sue on behalf of the trust

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• 63. Estate of Lee, 2018 WL 2374116

(Texas 2018)

Ø The spendthrift provisions of a testamentary trust rendered invalid, for the purposes of a standing analysis, the terms of an agreement between former beneficiaries of the trust

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• 64. Rachins v. Minassian, 2018 WL

3387236 (Florida 2018)

Ø The remainder beneficiaries of a family trust were qualified beneficiaries under Florida law with standing to challenge a trust’s administration, even though they would receive their interests through newly created trusts

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• 65. Trudel v. SunTrust Bank, 288 F. Supp.

3d 239 (D.D.C. 2018)

Ø Bank did not owe fiduciary duties to a deceased savings account owner. Therefore, the court denied request from the customer’s children for an equitable accounting

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• 66. EGW v. First Federal Savings Bank of

Sheridan, 413 P.3d 106 (2018)

Ø Wyoming strongly adheres to the notion that a testator has the absolute right to dispose of his property as he sees fit at his death assuming he is legally competent to do so, and therefore in terrorem clauses do not violate public policy even when an action challenging such a clause is brought in good faith or is based on probable cause

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• 67. In the Matter of the Will of E. Warren

Bradway, 2018 WL 3097060 (N.J. Sup.

• Ct. App. Div., June 25, 2018)

Ø New Jersey court admits to probate a codicil written entirely in the purported testator’s blood

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• 68. Horgan v. Cosden, 2018 WL 2374443

(Fla. Dist. Ct. App. May 25, 2018), review denied, No. SC18-1112, 2018 WL 3650268 (Fla. July 30, 2018)

Ø Early termination of a trust can only occur for the best interest of the beneficiaries when viewed in the light of the settlor’s intentions

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• 69. In Estate of Burkhalter, 806 S.E.2d 875

(Ga. Ct. App. 2017)

Ø The probate court finding that the petitioners’ proposed declaratory judgment actions would not violate a will’s terrorem clause was wrongfully decided because (1) a question regarding the validity

• f an in terrorem clause must be raised and resolved

in the first declaratory judgment action raising that issue, and (2) the request for a declaration that a future petition to remove the executors would not violate the in terrorem clause lacked sufficient specificity for the trial court to make the required analysis that such a request would not be a violation

• f the in terrorem clause.

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• 70. Sveen v. Melin ____ U.S. ____ (2018)

Ø Supreme Court holds that retroactive application of Minnesota statute providing that the dissolution or annulment of a marriage revokes any revocable beneficiary designation made by an individual to the individual’s former spouse does not violate the Contracts Clause of the Constitution

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• 71. Letter Ruling 201839005 (Issued June

25, 2018; Released September 28, 2018)

Ø Taxpayer allowed to rollover deceased husband’s state maintained retirement plan into IRA

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• 72. United States v. Jan M. Mengedoht,

______, F. Supp. 3d ______ (Dist. Neb. 2019)

Ø Court allows foreclosure for unpaid estate taxes

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• 73. Berkenfeld v. Lenet, _____ F.Supp.3d

____ (D.Md. 2018)

Ø Broker not liable for annuity beneficiaries taking lump sum distributions

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• 74. Letter Ruling 201805011 (Issued

November 2, 2017; Released February 2, 2018)

Ø IRS grants extension to waive family attribution rules

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• 75. United States v. Paulson, 204 F. Supp.

3d 1102 (S.D. Cal. 2018)

Ø Court denies defendant’s motion to stay proceedings pending decision of state court

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• 76. Comptroller of the Treasury v. Taylor, 189

A.3d 799 (Md. Ct. Spec. App. July 25, 2018), In re Estate of Seiden, NYLJ 10/12/18 p. 23, col. 5 (N.Y. County Surr. Ct.) Ø Maryland and New York Courts address impact of federal QTIP elections on calculation of state death taxes

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• 77. Changes in state death taxes in 2018

and 2019

Ø Several states see changes in their state death taxes in 2018 and 2019

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• 78. 2019 State Death Tax Chart (as of

January 26, 2019)

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