PLR 201633025 Allows for Creativity in Cleanup, but Not for Planning, Says Natalie Choate

PLR 201633025, the IRS was asked to determine the proper applicable distribution period under Internal Revenue Code § 401(a)(9) for payments from an IRA.  Decedent died at age 59 with a trust named as the sole beneficiary of her three (3) IRAs.  After Decedent’s death, the trustee of the beneficiary Trust combined the three (3) IRAs into one inherited IRA for the benefit of the Trust.

Under the terms of the Trust, the Trustee is to distribute all income to the Decedent’s child, with the discretion to distribute principal to the Decedent’s child and/or the Decedent’s grandchildren.  The Trust will terminate when the Decedent’s child attains fifty (50) years of age, at which point the Trust will be distributed to the Decedent’s grandchildren, but such distribution would only be outright if the grandchildren had already attained twenty-one (21) years of age. If the grandchildren died prior to attaining twenty-one (21) years of age, then the IRA would pass to the grandchild’s estate.  If the Decedent’s child and grandchildren are deceased prior to the trust termination date, then the remainder of the Trust is distributed to the Decedent’s siblings, and if the Decedent’s siblings are deceased on the termination date, then the remainder is distributed to various charities.

Since the Decedent’s death, the Trustee has taken minimum required distributions based on the life expectancy of the Decedent’s child.

The IRS found that based on the applicant’s representation, the Trust meets the four requirements of §1.401(a)(9)-4, Q&A-5 and therefore the beneficiaries of Trust are treated as designated beneficiaries of the IRA for purposes of determining the applicable distribution period under section 401(a)(9).  The IRS further provided that only the Decedent’s children and grandchildren were the beneficiaries taken into account for purposes of determining the applicable distribution period, concluding that all other potential recipients of the funds in the Trust are mere successor beneficiaries within the meaning of the regulations.  Because the Decedent’s child had the shortest life expectancy of the three (3) beneficiaries examined for purposes of determining the applicable distribution period, then the applicable distribution period of the Trust is the Decedent’s child’s life expectancy.

This PLR suggests that there is more flexibility to the determination of the applicable distribution period than had previously been acknowledged by the IRS.

What does Natalie Choate think?  She “chalked it up to a ‘mistake by the IRS’ or ‘an unspecified change of IRS policy.’”  Why didn’t the IRS care about the age twenty-one (21) contingency for the grandchildren to take or the fact that the grandchildren’s estates are not countable beneficiaries?

The “moral,” Choate says, is “planning, conservative…cleanup, creative! […] Since the PLR didn’t offer any explanation of how it got to its result or why the grandchildren’s estates (or their great aunts and uncles) were not “countable” beneficiaries, [Choate’s] conclusion was: I can maybe use this ruling in “cleanup mode” (when I’m dealing with a trust that already exists and a participant who is already dead, and trying to get the IRS to accept it as a see-through).”

LISI Employee Benefits and Retirement Planning Email Newsletter #701 (December 10, 2018) at, Copyright 2018 Leimberg Information Services, Inc. (LISI)


Reconsideration of 199A (Again)

The IRS plans to finalize the pass-through regulations by the end of December. According to Holly Porter, Internal Revenue Service associate chief counsel, “There is a discussion around every single word” of the proposed regulations.

The proposed regulations issued in August would allow businesses to elect to aggregate their activities at the level of the business owner. Porter indicated that the IRS is thinking about allowing aggregation at the entity level.

The proposed regulations provided that “for businesses that earn at least $25 million in gross receipts and engage in minor activities that fit the specified service description, [there is ] a 5 percent threshold allowing the company to disregard that activity when calculating the deduction. For those making less than $25 million, the threshold rises to 10 percent.” Some practitioners describe this rule as punitive and would suggest, instead, “an allocation rule, which would allow businesses to base the deduction on how much income stems from eligible and ineligible activities.” Porter suggested that allocations wouldn’t provide much in the way of simplification.

I’ll be on the lookout for finalized regulations coming down the chimney with Santa Claus this holiday season.

O’Neal, Lydia and Allyson Versprille. IRS Reconsidering Parts of Pass-Through Write-Off Rules: Official. BNA Bloomberg. Tax Management Weekly Report. Pass-Through Entities. Nov. 19, 2018.

Should Estates Give the IRS a Creditor’s Notice? Perhaps.

In US v Estate of Albert Chicorel, 2018 WL 5289703 (E.D. Mich., October 25, 2018), the IRS assessed Chicorel approximately $140,000 in 2005 in income taxes for the 2002 tax year. Chicorel died in 2006 without satisfying the assessment. In 2007, the personal representative filed a claims notice for unknown creditors, but did not provide actual notice to the IRS.

“M[ichigan Compiled Laws] 700.3801 provides for a shortening of the statute of limitations for claims against the estate, but only when there is compliance with the procedural requirements of notice to known and unknown creditors. In the absence of such compliance, creditors will have up to 3 years in which to file a claim against the estate. Publication alone only works to shorten the statute of limitations (to 4 months from the date of publication) as to creditors whose claims were not known. When a claimant is “known”, then actual notice needs to be provided to that creditor within 4 months of the publication of the notice to unknown creditors.

In the Estate of Chicorel, the personal representative’s failure to provide actual notice to the IRS (who by definition in Michigan was a known creditor), resulted in the IRS having a longer period in which to file a proof of claim against the Estate. As a result, when the IRS filed a proof of claim 2 years after the decedent died, that claim was timely. [Further,] the personal representative also did not disallow the claim. In the absence of the personal representative disallowing the claim, the IRS did not need to do anything further in order to extend the period when it could levy on the Estate’s assets.

  1. U.S. C. §6502(a) permits the government to collect an assessed tax “by levy or by a proceeding in court, but only if the levy is made or the proceeding begun – (1) within 10 years after the assessment of the tax.” Of import to the outcome of the Estate of Chicorel was whether, under Michigan law, the IRS’s timely filed proof of claim constituted a “proceeding” such that statute of limitations was tolled. MCL §700.3802(3) provides that “[f]or purposes of a statute of limitations, the proper presentation of a claim … is the equivalent to commencement of a proceeding on the claim”. Because it had timely filed a proof of claim, the government’s collections proceedings commenced on March 11, 2016 (more than 10 years after the assessment) were timely and not barred. For purposes of analyzing the facts in this case the court held it is not the receipt of a judgment that determines the timeliness of the government’s levy actions, but rather that the claim was timely filed. Here, the claim was filed within 10 years of the assessment and within the claims period relative to a known creditor who was not provided with actual notice. Further, the claim was not disallowed.”

Here in Tennessee, Tenn. Code Ann. 30-2-310 provides that if a claim is not filed within twelve (12) months of the decedent’s death, those claims “shall be forever barred,” except if it is a claim for state taxes, which “shall continue to be governed by Tenn. Code Ann. 67-1-1501.”

But, don’t forget about Bacigalupo v. United States, 399 F.Supp.2d 835 (M.D. Tenn. 2005), which holds that the IRS is not subject to T.C.A. § 30-2-307, as to filing claims. In Bacigalupo, the Administrator of the decedent’s estate challenged the timeliness of the government’s claim for unpaid federal income taxes. The court held that the Tennessee statute requiring probate proceeding claims to be filed within twelve months of the decedent’s death did not apply to the federal government’s tax claim.

According to Bacigalupo, regardless of whether its claim is filed in federal or state court, the United States is not bound by state statutes of limitation in enforcing its rights. The federal government’s consent to a state statute of limitations for probate claims could not be inferred from its filing of claim in a state probate proceeding and its attempt to comply with state procedural requirements for filing claims. Absent its own consent, the United States is not bound by the twelve month time limitation governing claims filed in probate proceedings pursuant to T.C.A. § 30–2–307.

Each tax assessment has a collection statute expiration date. Internal Revenue Code section 6502 provides that the length of the period for collection after assessment of a tax liability is ten years. The collection statute expiration ends the government’s right to pursue collection of a liability.

What’s the takeaway? If the IRS is a known creditor, is there any harm in sending the creditor’s notice to the IRS? And, if you send it, you might as well send it via certified mail, return receipt requested.

LISI Estate Planning Newsletter #2679 (November 13, 2018) Copyright 2018 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.

Note that descriptions of the case, where quoted, are verbatim from the LISI summary.

Thanks to Harlan Dodson at Dodson Parker Behm & Capparella, PC for bringing this case to my attention.


Where Oh Where is the Updated Form 706?

On October 25, 2018, the IRS has released Draft Form 706 and Draft Form 706 Instructions for decedents dying after December 31, 2017.  The draft forms reflect changes from the Tax Cuts and Jobs Act.

The Tax Cuts and Jobs Act increased the federal estate and gift tax unified credit basic exclusion amount and the federal GST exemption amount to $10 million (adjusted for inflation), effective for decedents dying and gifts made after 2017 and before 2026.

For decedents dying in 2018, the instructions reflect the following amounts: (1) the basic exclusion amount is $11,180,000; (2) the ceiling on special-use valuation is $1,140,000; (3) the amount used in figuring the 2% portion of estate tax payable in installments is $1,520,000; and (4) the basic credit amount is $4,417,800.

Bloomberg Tax. Tax Management Weekly Report. October 29, 2018 – Number 44.

Veterans Benefits Now Have Look-Back Period

In January 2015, the VA proposed regulations in response to a Government Accountability Office investigation that found veterans were hiding or gifting assets in order to qualify for benefits.  At the time, the VA, unlike Medicaid, did not penalize veterans for transfers for less than fair market value prior to applying for benefits.

Effective October 18, 2018, the regulations proposed in 2015 went into effect.  These new regulations contain a 36-month look-back period and penalty periods for assets transferred for less than fair market value in order to qualify for VA benefits. Any asset transfers for less than fair market value made prior to October 18, 2018, will be disregarded for purposes of determining eligibility.

The regulations establish a presumption that, absent clear and convincing evidence to the contrary, asset transfers for less than fair market value during the 36-month look back period were made in order to obtain eligibility for VA benefits.

LISI Employee Benefits and Retirement Planning Email Newsletter #700 (October 25, 2018) at, Copyright 2018 Leimberg Information Services, Inc. (LISI).


Retirement Accounts Received as Property Settlement in Divorce Not Exempt from Bankruptcy

Debtor appealed the bankruptcy court’s order disallowing Debtor’s claimed exemptions in a Wells Fargo 401K and an IRA account (“Accounts”) that Debtor received from his ex-wife as part of a property settlement.

11 U.S.C. §522(d)(12) contains two requirements in order for the Accounts to be exempt from creditors: (1) that the amount must be retirement funds; and (2) that the retirement funds must be in an account that is exempt from taxation under one of the provisions of the Internal Revenue Code set forth therein. In order for the Accounts to be exempt, both of these elements must be established.

In Clark v. Rameker, 134 S. Ct. 2242 (2014), the Supreme Court ruled that an inherited IRA did NOT qualify as a retirement fund for purposes of exemption under federal law.  In addressing the definition of a “retirement fund,” the Court stated:

“The Bankruptcy Code does not define “retirement funds,” so we give the term its ordinary meaning. The ordinary meaning of “fund[s]” is “sum[s] of money . . . set aside for a specific purpose.” And “retirement” means “[w]ithdrawal from one’s occupation, business, or office.” Section 522(b)(3)(C)’s reference to “retirement funds” is therefore properly understood to mean sums of money set aside for the day an individual stops working.”

Here, this Court interprets the above as limiting the exemption to individuals who create and contribute funds into the retirement account. Therefore, retirement funds obtained or received by any other means, including by means of a property settlement in a divorce, do not meet this definition.  The intent by the Debtor to use the Accounts for his retirement is irrelevant.

The Court found that the Accounts at issue in this case are not retirement funds exempt from creditors in a bankruptcy proceeding.

In re: Brian A. Lerbakken v. Sieloff and Associates, P.A., No. 18-6018, United States Bankruptcy Appellate Panel For the Eighth Circuit. Oct. 16, 2018.

Irrevocable Partial Release of Power of Appointment Saves See-Through Trust Treatment

In PLR 201840007, the Decedent named Trust A as the beneficiary of his 401(k), which is a qualified plan under Code § 401(a).  Trust A is a discretionary trust for the benefit of the Decedent’s three (3) children, Child A, B and C (the “Discretionary Trust”).  The Discretionary Trust for each beneficiary provides that the trustee may distribute to the beneficiary income and principal for the beneficiary’s support and reasonable comfort prior to the beneficiary attaining thirty (30) years of age, and for the best interests of the beneficiary after attaining thirty (30) years of age.  The beneficiary also has a general power of appointment.  To the extent that the general power of appointment is not exercised, the remaining principal and income are to be distributed to the beneficiary’s lineal descendants, per stirpes.

Before September 30th of the calendar year following the Decedent’s death, each of Child A, B and C executed an Irrevocable Partial Release of Power of Appointment, releasing each child’s right to appoint at such child’s death any portion of the income or principal of such child’s Discretionary Trust to any person or entity other than to a person who is younger than Child C, the oldest of the Decedent’s children (either outright or through a “see-through trust” under the Discretionary Trust).

The IRS determined that, taking into consideration the timely executed partial release, the applicable distribution period for each Discretionary Trust is the life expectancy of the Decedent’s oldest child, Child C.

Trustees “shall proceed expeditiously,” at least that’s what the Court said, backed by the Tennessee Uniform Trust Code.

The Tennessee Court of Appeals affirmed the trial court’s determination that the trust terminated by its own terms upon the death of the primary beneficiary, Mr. Farmer, the father of the seven remainder beneficiaries.   The trust’s sole asset was a non-income producing 56-acre tract of real property.

Mr. Farmer died in October 2015, and upon his death, the trust was to be distributed outright to the remainder beneficiaries, each having attained the trust’s requisite age for distribution prior to Mr. Farmer’s death.  Yet, more than two (2) years after Mr. Farmer’s death, the Trustees still hadn’t distributed the real property to the beneficiaries.

Not only does the Tennessee Code require the Trustee to “act in accordance with the terms and purposes of the trust and the interests of the beneficiaries,” it also requires that Trustee “shall proceed expeditiously to distribute the trust property to the persons entitled to it.” (emphasis added by the Court) Tenn. Code Ann. §§ 35-15-105(b)(2) and 35-15-817(b).

Because the Court may intervene with a trustee’s “distribution discretion” when a trustee “fails to act if under a duty to do so,” Tenn. Code Ann. § 35-15-814(b)(2), the Court was justified in ordering the Clerk of the Court to prepare a deed to transfer the real estate to the seven beneficiaries.

In re Augusta C. Farmer Family Trust, No. M2018-00121-COA-R3-CV (Tenn. Ct. App. Oct. 11, 2018).

Disclaimers: Time Limitations and Filing Requirements are Mandatory

Karen Klyce Smith (the “Decedent”) died intestate on August 13, 2011, leaving her mother and three siblings surviving her.  The Decedent did not have a spouse and had no children.  Accordingly, the Decedent’s mother, Esther Pearson, was the sole heir of the approximately $3.2 million estate.

In April 2013, Ms. Pearson received a partial distribution from the estate totaling $1,322,000.00.

Then, on June 29, 2013, Ms. Pearson signed a notice of disclaimer (the “Disclaimer”) as to the entirety of Decedent’s estate.  Four days later, Ms. Pearson signed an affidavit stating that she signed the Disclaimer “without reading all of it.”  The affidavit further stated that Ms. Pearson did not wish to disclaim any interest in the estate.  This affidavit was filed on July 11, 2013, the same day that the estate’s administrator, the brother of the Decedent, filed a Rejection of Disclaimer, asserting the following:

  1. He, as the administrator, did not receive the Disclaimer within nine (9) months of the Decedent’s death.
  2. The Disclaimer was not filed with the trial court within nine (9) months of the Decedent’s death.
  3. Pearson had already accepted a distribution from the estate.
  4. The Disclaimer was not filed by Ms. Pearson or anyone on her behalf, but was filed by counsel for the Decedent’s sister, who would benefit from the purported disclaimer.

The Decedent’s sister argued that the nine-month rule under Tenn. Code Ann. § 31-3-103(b)(2) was not mandatory.  The Court held that the nine-month rule is mandatory, but even if it weren’t, the Disclaimer was nevertheless defective because the person who is renouncing his or her interest must be the one who files the instrument with the probate court.  Lastly, the Court held that Ms. Pearson’s acceptance of a partial distribution was in direct contradiction to Tenn. Code Ann. § 31-3-103(b)(3).

Practice Tip: Remember that as to real property, the disclaimer must be filed in two places: (1) with the county registrar’s office where the property is located, and (2) with the court in which the decedent’s estate proceedings are pending. Tenn. Code Ann. § 31-3-103(b)(2)(A).

In Re Estate of Karen Klyce Smith, No. W2017-02035-COA-R3-CV (Tenn. Ct. App. Oct. 8, 2018).