Proposed Opportunity Zone Regs Clarify Triggers for Inclusion Events

The most recent proposed Opportunity Zone regulations, released on April 17, provided clarification as to grantor trusts and transfers at death with respect to the triggering of an inclusion event.

An inclusion event is an event that triggers an investor’s inclusion in previously deferred gain.  Generally, the transfer of an investment in a qualified opportunity fund by means of a gift will be treated as triggering an inclusion event of deferred gain.

The following transfers, however, do not trigger an inclusion event:

  1. Transfer by an owner of a qualifying investment to the owner’s grantor trust
  2. Transfer to the beneficiary of a deceased owner’s estate
  3. Transfers from a grantor trust to a beneficiary of that trust, which could be another trust

Note that while an investment owner technically relinquishes such owner’s interest in a qualified investment at death, the investment is treated as income in respect of a decedent (“IRD”) under Code § 691.  Such IRD will be triggered later upon disposition.

Curry, Jonathan. Tax Notes Today. Estate Planners Score Points in New O-Zone Regs. Apr. 19, 2019.


IRA Funds Exempt in Bankruptcy Despite Rollover

The court overruled the bankruptcy trustee’s objection to an exemption for IRA funds where the rollover of funds from the IRA was permissible.  Here, the debtor withdrew $50,000 from his IRA and deposited the funds into his personal checking account, eventually transferring $20,000 back into his IRA.  The bankruptcy trustee argued that the IRA funds lost their exempt status on withdrawal from the IRA because the debtor commingled the withdrawn funds with the debtor’s personal funds.  The court ruled that the commingling of the withdrawn funds was irrelevant.  The relevant fact was that the withdrawn funds in the amount of $20,000 were reinvested into the same IRA within the 60-day rollover time frame allowed by the IRS.  Therefore, the withdrawn, and later re-contributed, funds in the amount of $20,000 retained their exempt status.

Bloomberg Tax Daily Tax Report. Case: IRA Funds Exempt in Bankruptcy Despite Rollover. Apr. 18, 2019.

In re Jones, No. 18-31532 (Bankr. S.D. III. Apr. 15, 2019).

10-Year Statute of Limitations Applies to Government’s State Law Claim as Third Party Beneficiary Instead of State’s 6-Year Statute of Limitations

The estate’s estate federal estate tax liability was approximately $6.6 million, $4 million of which was paid to the IRS at the time the estate tax return was filed.  Because a closely held business accounted for more than 35% of the Decedent’s adjusted gross estate, the estate made a valid election pursuant to Code § 6166(a) to defer payment of the federal estate tax liability with ten annual installments.

Although the estate tax remained unpaid, the trustees of the trust holding the estate’s assets distributed stock from the closely held business to the trust’s beneficiaries.  The trust’s beneficiaries signed a Distribution Agreement in which they agreed that they would be responsible for the remaining estate tax liability.  The estate, and the trust beneficiaries, failed to pay approximately $1.5 million in federal estate taxes.

The government filed a complaint naming the trust’s beneficiaries as defendants and sought to recover the remaining estate tax liability.  The trust’s beneficiaries argued that the government’s claim as a third-party beneficiary of the Distribution Agreement was untimely because it was not filed within the six-year state statute of limitations applicable to contract claims.  The Court held, however, that the ten-year statute of limitations set out in Code § 6502(a) was applicable to the government’s third-party beneficiary claim.  The Court supported its holding using United States v. Somerlin, 310 U.S. 414 (1940), which provided that the “United States is not bound by state statutes of limitation […] in enforcing its rights […] When the United States becomes entitled to a claim, acting in its governmental capacity and asserts its claim in that right, it cannot be deemed to have abdicated its governmental authority so as to become subject to a state statute putting a time limit upon enforcement.”

U.S. v. Johnson, No. 17-4083, 17-4093 & 18-4026 (U.S. Court of App. Mar. 29, 2019).

LISI 60-Second Planner: Johnson — Government’s Estate Tax Collection Claim is Timely

In the Matter of the Fund for the Encouragement of Self Reliance: Nevada Supreme Court Interprets Decanting Statute to Uphold Settlor’s Intent

The Nevada Supreme Court was asked to extend the ability of a co-trustee to unilaterally decant a trust even though the trust agreement requires joint co-trustee approval to make distributions.  The issue presented to the court was whether a trustee could decant half of a wholly charitable trust into a newly created wholly charitable trust with the same purpose as the original charitable trust, to be administered solely by one trustee of the original trust, against the objection of co-trustees.  Because the terms of the trust instrument require the unanimous consent of all trustees to make a distribution of half of the trust’s assets, the court found that the trustee could not decant without the unanimous consent  of all trustees.  While Nevada’s decanting statute provides that “a trustee” may decant if the trustee has discretionary distribution powers, the term “trustee” is statutorily defined and includes “a trustee, trustees, person or persons possessing a power or powers referred to in [the Charitable Trust Act].”

In the Matter of the Fund for the Encouragement of Self Reliance, An Irrevocable Trust, 135 Nev. Adv. Op. No. __ (March 21, 2019).

LISI Estate Planning Newsletter #2717 (April 15, 2019) at  Copyright 2019 Leimberg Information Services, Inc. (LISI).

Taxpayer Does Not Receive Miscellaneous Deduction–No Federal Estate Tax Attributable to Amounts Included in Taxpayer’s Gross Income

Taxpayer’s father-in-law died in 1999, and a Form 706 was filed for his estate.  Taxpayer’s husband died in 2002, and a Form 706 was filed for his estate.  Taxpayer’s husband was a designated beneficiary on his father’s annuity and IRA.  Taxpayer’s husband named Taxpayer as a beneficiary of those accounts upon Taxpayer’s husband’s death.

In 2014, Taxpayer received distributions from both the annuity and the IRA that she included in her gross income.  Taxpayer also claimed a miscellaneous deduction for federal estate tax paid.

Income in respect of a decedent (“IRD”) under Code § 691 consists of amounts of gross income which the decedent was entitled to receive at the time of death but were not properly includible in the decedent’s gross income before death, and were received by a taxpayer as the decedent’s successor in interest.  For example, when a distribution from an IRA is made in a lump sum to a beneficiary, the portion equal to the value of the IRA on the date of the decedent’s death, less any nondeductible contribution, is income in respect of a decedent and is includible in the gross income of the beneficiary in the year the distribution is received.  The recipient of the IRD, here, Taxpayer, is entitled to an income tax deduction equal to the amount of the federal estate tax attributable to the IRD.

Taxpayer argued that she was entitled to a miscellaneous deduction for federal estate tax paid by her father-in-law’s estate attributable to the IRD.  However, Taxpayer was the beneficiary of her husband’s accounts, not her father-in-law’s accounts.  Her husband’s Form 706 did not include income for these accounts; further, no estate tax was paid on her husband’s estate.  Also, the Form 706 for Taxpayer’s father-in-law did not include any of the distributions Taxpayer received and included in her gross income.

Taxpayer was denied the miscellaneous deduction.

Checkpoint Daily Updates. 4.11.19. Code Section 691-Income in respect of decedent-taxation of IRA distributions-proof.

Jill Schermer v. Commission, TC Memo 2019-28.

Deemed Allocation of GST Exemption: Or Is Estate Tax Inclusion Preferable?

With the currently high GST and estate tax exemption amounts, allowing the deemed allocation rule to apply to indirect skip trusts might not be the most tax efficient result.  For example, estate tax inclusion in order to achieve the step up in basis under Code § 1014 is often preferable for more modest estates.

Under Code § 2632(e), the balance of GST exemption that is not deemed allocated to direct skips on death will be allocated pro rata to each trust in which a taxable distribution or taxable termination may arise, even if an estate tax return is not required to be filed.  This automatic allocation is irrevocable.

See yesterday’s LISI Estate Planning Newsletter #2714 by Keith Schiller for information on planning techniques and post-death cures if the automatic allocation rules are not preferable.

LISI Estate Planning Newsletter #2714 (April 3, 2019) at Copyright 2019 Leimberg Information Services, Inc. (LISI).

House Introduced Setting Every Community Up for Retirement Enhancement Act of 2019

Some of the changes to current law are:

  1. Increases required beginning date to age 72
  2. Imposes 10-year payout when there is no eligible designated beneficiary
  3. Requires that 10-year payout rule would apply at death of eligible designated beneficiary
  4. The term “eligible designated beneficiary” means, with respect to any employee, a designated beneficiary who is (a) the surviving spouse of the employee, (b) a child of the employee who has not reached majority, (c) a disabled individual within the meaning of Code § 72(m)(7), (d) a chronically ill individual within the meaning of Code § 7702(c)(2); or (d) an individual who is not more than 10 years younger than the employee.
  5. A minor child of the employee will cease to be an eligible designated beneficiary upon attaining majority and any remainder of such individual’s interest shall be distributed within 10 years after such date.

LISI 60-Second Planner: Bipartisan Bill Would Raise RMD Age to 72. Leimberg Information Services, Inc.

Court finds Trust is a Donative Trust, not a Business Trust, and is therefore ineligible for bankruptcy protection

A business trust is eligible for bankruptcy protection, but a donative trust is not.  A donative trust is merely a fiduciary relationship, and is not a separate entity for purposes of eligibility for bankruptcy.

The issue was whether the Trust was a business trust or an ordinary donative trust.  Here, the primary purpose of the Trust was the management and preservation of assets, rather than conducting a business for profit.  Further, the Trust did not file IRS forms as a business entity, but filed trust form 1041.

Because the Court found that the Trust was not a business trust, the Trust was not eligible for bankruuptcy protection.

DeMaio, Andy. LISI 60-Second Planner: “Buck Rogers” Trust Not Eligible for Bankruptcy.

In In re Dille Family Trust, Bankr No. 17-24771-JAD (Bankr. Ct., W.D. Pa. 2/20/2019).

TN Supreme Court Unanimously Rules Bank is Liable for removing a Joint Tenant’s Name from Account without Consent

A person listed as a joint tenant with a right of survivorship on bank accounts sufficiently alleged claims for relief against a bank by asserting that the bank removed his name from the accounts without his consent and breached its duty to him as the co-owner of the account by accepting forged signature cards.

The Court concluded that the complaint was sufficient to survive the bank’s motion to dismiss for the following reasons: (1) each joint tenant is deemed an owner of the account; (2) all joint tenants have presumptive equal ownership of account funds; (3) a contractual relationship arises between a bank and joint tenants upon the creation of joint tenancy bank accounts; (4) contracts cannot be modified except upon consent of the parties; and (5) no statute affords banks protection from liability for removing a joint tenant’s name from an account without the joint tenant’s consent.

Estate of Ella Mae Haire, et al, v. Shelby J. Webster, et al, No. E2018-00066-SC-R11-CV. (Tenn. Filed Mar. 20, 2019).