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.
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 http://www.LeimbergServices.com. Copyright 2019 Leimberg Information Services, Inc. (LISI).
On February 15, 2019, the American Institute of CPAs (AICPA) submitted comments on proposed estate and gift tax regulations regarding the increased basic exclusion amount enacted as part of the Tax Cuts and Jobs Act (TCJA).
AICPA seeks clarification that if the basic exclusion amount is lower in future years, either as a result of the 2026 expiration of the TJCA provision or other Congressional action, that the deceased spousal unused exclusion is equal to the amount filed on the Form 706 of the first spouse to die, rather than being based on the potentially lower basic exclusion amount when the second spouse dies.
AICPA Seeks Clarification on Estate and Gift Tax Exclusion Amount. Tax Notes Today. Feb. 20, 2019.
The doubled estate and gift tax exemption, albeit temporary, resulting from the Tax Cuts and Jobs Act, has made it more difficult to convince surviving spouses with modest estates to file a Form 706 estate tax return to preserve the deceased spouse’s unused exemption (“DSUE”) amount. Failure to file a Form 706 causes all of that remaining exemption to be forfeited.
If, as a practitioner, you are unable to convince a surviving spouse to file a Form 706, you’ll want to document your communications with the surviving spouse on this topic. And, you’re not alone. According to IRS data, only 681 NONtaxable returns were filed in 2017 claiming DSUE amounts.
Curry, Jonathan. Getting Surviving Spouse to File Estate Return Now Even Harder. Taxnotes.com. Feb. 1, 2019.
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.
In PLR 201825013, the Co-Executors of Decedent’s estate hired Attorney to prepare the estate’s Form 706. Attorney prepared Form 706, but did not make the alternate valuation date election under § 2032. The Co-Executors timely filed the Form 706.
At a later date, after the due date of Form 706, the Co-Executors filed a supplemental Form 706 making the alternate valuation date election under § 2032. The IRS issued a letter to the Co-Executors stating that because the § 2032 election was not timely filed, the estate’s assets could not be valued under § 2032 unless an extension of time was granted under the relief provisions of §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations (“9100 Relief”).
Section 20.2032-1(b)(3) of the Estate Tax Regulations provides that a request for an extension of time pursuant to §§ 301.9100-1 and 301.9100-3 will not be granted unless the estate tax return is filed no later than 1 year after the due date of the return (including extensions actually granted).
Under § 301.9100-1(c), the Commissioner may grant a reasonable extension of time to make a regulatory election, or statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), if the taxpayer demonstrates to the satisfaction of the Commissioner that the taxpayer has acted reasonably and in good faith, and granting relief will not prejudice the interests of the government.
Section 301.9100-3(b)(1)(v) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election.
The IRS concluded that the standards for 9100 relief had been satisfied granted the estate an extension of time of 120 days from the date of this letter to make the alternate valuation election under § 2032.
Compare to PLR 201815001 where the estate’s CPA intended to make the alternate valuation election, but failed to check the box. The IRS granted 9100 relief there as well.