{"id":1614,"date":"2020-01-17T04:22:00","date_gmt":"2020-01-17T09:22:00","guid":{"rendered":"https:\/\/actec.matrixdev.net\/?post_type=capital-letter&p=1614"},"modified":"2024-04-17T17:13:20","modified_gmt":"2024-04-17T21:13:20","slug":"top-ten-estate-planning-and-estatetax-developments-of-2019","status":"publish","type":"capital-letter","link":"https:\/\/actec.matrixdev.net\/capital-letter\/top-ten-estate-planning-and-estatetax-developments-of-2019\/","title":{"rendered":"Top Ten Estate Planning and Estate Tax Developments of 2019"},"content":{"rendered":"\n

These 2019 \u201ctop ten\u201d developments cover a variety of subjects, such as valuation, power
to tax, calculation of tax, income tax deductions, retirement planning, and wills.<\/em>
<\/p>\n\n\n\n

Dear Readers Who Follow Washington Developments:<\/p>\n\n\n\n

As in past years, I have prepared a list of what appear to me to be the \u201ctop ten\u201d estate planning and estate tax developments of the year. Also as in past years, these were not necessarily the only significant developments in 2019, and the selection is admittedly subjective. These comments are adapted from a Bessemer Trust Insight for Professional Partners, dated January 8, 2020, found here<\/a>.<\/p>\n\n\n\n

NUMBER TEN: QUALIFIED OPPORTUNITY FUND INCLUSION EVENTS (REG. \u00a71.1400Z2(b)-1)<\/strong><\/h2>\n\n\n\n

Regulations implementing a prominent feature of the 2017 Tax Act may shed light on how the IRS might view more common estate planning techniques.<\/p>\n\n\n\n

Statutory Background<\/strong><\/h3>\n\n\n\n

One of the provisions of the 2017 Tax Act that had bipartisan support added a new Subchapter Z to the income tax chapter of the Internal Revenue Code, containing two new sections 1400Z-1 and 1400Z-2. These sections provide income tax incentives to invest in distressed low-income communities called \u201copportunity zones.\u201d A qualified opportunity fund (QOF) is a corporation or partnership that has at least 90% of its assets invested in qualified opportunity zone property.<\/p>\n\n\n\n

An investor who has sold appreciated property may defer recognition of the resulting capital gain, at least until December 31, 2026, by investing the amount of the gain in a qualified opportunity fund within 180 days. The investor\u2019s basis in the QOF is initially zero and increases by 10% of the original deferred gain after five years (in effect the forgiveness of 10% of the original gain) and by another 5% after seven years (in effect the forgiveness of another 5% of the original gain). On December 31, 2026, the gain is recognized and the investor\u2019s basis in the fund is stepped up to the amount of the original gain that was invested in the fund.<\/p>\n\n\n\n

Of course Congress might extend the December 31, 2026, recognition date, like it might extend some or all of the other provisions of the 2017 Tax Act that sunset at the beginning of 2026. It is already impossible to make an investment and hold it for seven years before December 31, 2026. In addition, section 1400Z-2(c) provides an opportunity to avoid recognition of all gain and obtain a fair market value basis by holding the investment for 10 years (necessarily beyond December 31, 2026).<\/p>\n\n\n\n

Regulations<\/strong><\/h3>\n\n\n\n

Regulations implementing these provisions were published as proposed regulations in May 2019 and finalized in December 2019. T.D. 9889<\/a>, 85 Fed. Reg. 1866 (Jan. 13, 2020). As released by the Treasury Department and the IRS (not as published in the Federal Register), the final regulations are 190 pages, and the Preamble is 354 pages. The regulations discussed here generally will take effect for taxable years beginning after March 13, 2020 (that is, for calendar year taxpayers, January 1, 2021), with taxpayers permitted to elect to apply them earlier.<\/p>\n\n\n\n

Gifts Are Inclusion Events.<\/strong> Reg. \u00a71.1400Z2(b)-1 provides rules for determining when deferred gain is accelerated by an \u201cinclusion event\u201d regarding an investor\u2019s interest in a QOF, which the regulations call a \u201cqualifying investment\u201d (defined in Reg. \u00a71.1400Z2(a)-1(b)(34)). Of most interest from an estate planning perspective, Reg. \u00a71.1400Z2(b)-1(c)(1)(i) provides that an event is an inclusion event if it \u201creduces an eligible taxpayer\u2019s direct equity interest for Federal income tax purposes in the qualifying investment.\u201d As suggested by that broad definition, Reg. \u00a71.1400Z2(b)-1(c)(3)(i) provides in general that a transfer of a qualifying investment by gift is an inclusion event.<\/p>\n\n\n\n

Transfers by Reason of Death Are Not Inclusion Events.<\/strong> Reg. \u00a71.1400Z2(b)-1(c)(4)(i) provides that a transfer of a qualifying investment by reason of the investor\u2019s death is not an inclusion event. It further provides: \u201cTransfers by reason of death include, for example: (A) A transfer by reason of death to the deceased owner\u2019s estate; (B) A distribution of a qualifying investment by the deceased owner\u2019s estate; (C) A distribution of a qualifying investment by the deceased owner\u2019s trust that is made by reason of the deceased owner\u2019s death; (D) The passing of a jointly owned qualifying investment to the surviving co-owner by operation of law; and (E) Any other transfer of a qualifying investment at death by operation of law.\u201d<\/p>\n\n\n\n

In contrast, Reg. \u00a71.1400Z2(b)-1(c)(4)(ii) specifies that \u201ca transfer by reason of the taxpayer\u2019s death\u201d does not include any other sale, exchange, or disposition by the deceased investor\u2019s estate or trust, any disposition by the legatee, heir, beneficiary surviving joint owner, or other recipient who received the qualifying investment by reason of the taxpayer\u2019s death.<\/p>\n\n\n\n

Transactions with a Grantor Trust Are Not Inclusion Events.<\/strong> Another exception from the treatment of gifts of qualifying investments as inclusion events is Reg. \u00a71.1400Z2(b)-1(c)(5)(i), which exempts a contribution to a trust if \u201cunder subpart E of part I of subchapter J of chapter 1 of subtitle A of the Code (grantor trust rules), the contributing owner of the investment is the deemed owner of the trust (grantor trust).\u201d<\/p>\n\n\n\n

The reference to subpart E generally and the use of the term \u201cdeemed owner\u201d rather than \u201cgrantor\u201d suggest that the regulation applies to trusts deemed owned by a third party under section 678, not just trusts owned by the \u201cgrantor\u201d under sections 673 through 677. And, in an addition not included in the May 2019 proposed regulations, Reg. \u00a71.1400Z2(b)-1(c)(5)(i) goes on to provide: \u201cSimilarly, a transfer of the investment by the grantor trust to the trust\u2019s deemed owner is not an inclusion event. For all purposes of the section 1400Z-2 regulations, references to the term grantor trust mean the portion of the trust that holds the qualifying investment in the QOF, and such a grantor trust, or portion of the trust, is a wholly grantor trust as to the deemed owner. Such contributions may include transfers by gift or any other type of transfer between the grantor and the grantor trust that is a nonrecognition event as a result of the application of the grantor trust rules.\u201d<\/p>\n\n\n\n

This addition helpfully clarifies that transfers from the trust to the deemed owner, not just transfers from the deemed owner to the trust, are exempt from treatment as inclusion events. It also clarifies that the term \u201ccontribution\u201d includes not just gifts (as in funding the trust) but \u201cany other type of transfer \u2026 that is a nonrecognition event as a result of the application of the grantor trust rules.\u201d As an example, a sale to a deemed owned trust comes to mind. The Preamble, somewhat timidly, seems to affirm application to a sale in the following explanation: \u201cA commenter also requested clarification that non-gift transactions between a grantor trust and its deemed owner that are not recognition events for Federal income tax purposes are not inclusion events, and that such transactions do not start a new holding period for purposes of section 1400Z. In such transactions, the deemed owner of the trust continues, for Federal income tax purposes, to be the taxpayer liable for the Federal income tax on the qualifying investment. Thus, the Treasury Department and the IRS have determined that, like transfers by the deemed owner to the grantor trust, these transactions (including transfers from the grantor trust to its deemed owner) are not inclusion events.\u201d<\/p>\n\n\n\n

Finally, Reg. \u00a71.1400Z2(b)-1(c)(5)(ii) adds that \u201cthe termination of grantor trust status or the creation of grantor trust status \u2026 is an inclusion event,\u201d except that \u201ctermination of grantor trust status as the result of the death of the owner of a qualifying investment is not an inclusion event.\u201d<\/p>\n\n\n\n

Holding Period and Tacking.<\/strong> Consistently with the exception of transfers by reason of death and transfers to a deemed owned trust from treatment as an inclusion event, Reg. \u00a71.1400Z2(b)-1(d)(1)(iii) provides that the recipient in either of those scenarios does not begin a new holding period for the qualifying investment, but succeeds to or \u201ctacks\u201d the decedent\u2019s or other transferor\u2019s holding period. This is a clarifying rewording of the proposed regulation (Proposed Reg. \u00a71.1400Z2(b)-1(d)(1)(iv)), which bore the possibly misleading heading \u201cTacking with donor or deceased owner\u201d and identified one of its subjects as \u201ca gift that was not an inclusion event.\u201d The final regulation drops the use of the word \u201cgift\u201d and elaborates as follows: \u201cThis same rule [applicable to transfers by reason of death] also applies to allow a grantor trust to tack the holding period of the deemed owner if the grantor trust acquires the qualifying investment from the deemed owner in a transaction that is not an inclusion event.\u201d<\/p>\n\n\n\n

This does not explicitly pick up the expansion of Reg. \u00a71.1400Z2(b)-1(c)(5)(i) to include \u201ca transfer of the investment by<\/em> the grantor trust to<\/em> the trust\u2019s deemed owner\u201d (emphasis added) described above, but it is reasonable to hope that in context the tacking rule of Reg. \u00a71.1400Z2(b)-1(d)(1)(iii) will be given the same scope as Reg. \u00a71.1400Z2(b)-1(c)(5)(i).<\/p>\n\n\n\n

Comment<\/strong><\/h3>\n\n\n\n

Treatment of a gift as a recognition event is not the normal result estate planners are accustomed to, and it is especially surprising in light of section 1400Z-2(b)(1), which states that the otherwise deferred gain \u201cshall be included in income in the taxable year which includes the earlier of (A) the date on which such investment is sold or exchanged, or (B) December 31, 2026.\u201d A gift obviously is not a sale or exchange. But the Preamble explains why that obvious interpretation wouldn\u2019t work (emphasis added):<\/p>\n\n\n\n

\u201cAs indicated \u2026 in the Explanation of Provisions in the May 2019 proposed regulations, the termination of a direct interest in a qualifying investment that resulted in an inclusion event terminated the status of an investment in a QOF as a qualifying investment \u2018for purposes of sections 1400Z-2(b) and (c).\u2019 This is because the statutory text of each of section 1400Z-2(a), (b), (c), and (e)(1) focuses on one holding period of \u2018the taxpayer\u2019 tested at various points during a period of at least 10 years. [The inclusion of subsection (e)(1) looks like a typo, possibly meant to be subsection (d)(3).]<\/p>\n\n\n\n

\u201c\u2026 This degree of identity of taxpayer [between the transferor and transferee] is fundamentally different (and more demanding) than a mere \u2018step in the shoes\u2019 concept based on whether the transferee of the interest can tack the holding period and basis of the transferor. Accordingly, the May 2019 proposed regulations treated, among other transactions, gifts and section 351 exchanges as inclusion events because, in each instance, (i) the initial eligible taxpayer had severed the direct investment interest in the QOF and (ii) the transferee taxpayer was not treated for Federal income tax purposes either as the same taxpayer as the initial eligible taxpayer or as a successor taxpayer.<\/p>\n\n\n\n

\u201c\u2026<\/p>\n\n\n\n

\u201cAs noted in the preamble to the May 2019 proposed regulations, section 1400Z-2(b)(1) does not directly address non-sale or exchange dispositions, such as gifts and bequests. However, the Conference Report provides that, under section 1400Z-2(b)(1), the \u2018deferred gain is recognized on the earlier of the date on which the [qualifying] investment is disposed of<\/em> or December 31, 2026.\u2019 See Conference Report at 539 (indicating that continued gain recognition deferral requires the taxpayer to maintain directly the taxpayer\u2019s qualifying investment).<\/p>\n\n\n\n

\u201c\u2026 The Treasury Department and the IRS have concluded that (i) no authority exists to impose the donor\u2019s deferred capital gains tax liability on the donee of the qualifying investment, and therefore (ii) the Federal income tax on the deferred gain must be collected from the donor at the time of the gift of the qualifying investment. Accordingly, the final regulations continue to provide that a gift of the qualifying investment in a QOF is an inclusion event.\u201d<\/p>\n\n\n\n

In other words, a qualifying investment in a qualified opportunity fund is simply not like other assets, because section 1400Z-2 requires the tax law, in effect, to follow the investment, but the general rules in the rest of the Code do not provide a way to do that. So the tax is collected from the investor-transferor when the transfer is made.<\/p>\n\n\n\n

Applying that principle, the exception for transfers (in either direction) between a grantor trust and the deemed owner of the trust makes sense, because \u201cthe taxpayer\u201d \u2013 that is, the deemed owner who bears the tax liability under the grantor trust rules \u2013 does not change. Indeed, although the regulations and Preamble do not cite Rev. Rul. 85-13, 1985-1 C.B. 184 (the acknowledged foundation of much grantor trust planning), they do mirror its analysis.<\/p>\n\n\n\n

Similarly, the creation or termination of grantor trust status does not qualify for the exception and must be treated as an inclusion event, because \u201cthe taxpayer\u201d does change. Finally, a transfer at death can be exempted, because the rest of the Code does provide an enforcement tool in the rules of section 691 governing income in respect of a decedent, which are explicitly incorporated into section 1400Z-2(e)(3).<\/p>\n\n\n\n

The Preamble provides confirmation of this analysis:<\/p>\n\n\n\n

\u201cThe Treasury Department and the IRS have determined that [rules similar to those for certain other passthrough entities] for a grantor trust are not necessary because the grantor is treated as the owner of the grantor trust\u2019s property for Federal income tax purposes. Therefore, the final regulations set forth different rules applicable to the grantor.<\/p>\n\n\n\n

\u201c\u2026<\/p>\n\n\n\n

\u201cThe Treasury Department and the IRS have received several comments requesting clarification that qualifying investments include interests received in a transfer by reason of death that is not an inclusion event. In the case of a decedent, section 1400Z-2(e)(3) provides a special rule requiring amounts recognized under section 1400Z-2, if not properly includible in the gross income of the decedent, to be includible in gross income as provided by section 691. In that specific case, the beneficiary that receives the qualifying investment has the obligation to include the deferred gain in gross income in the event of any subsequent inclusion event, including for example, any further disposition by that recipient. \u2026 In other words, unlike an inclusion event contemplated by the general rules of section 1400Z-2(b), the obligation to include the original taxpayer investor\u2019s deferred gain in income travels with that taxpayer\u2019s qualifying investment to the beneficiary. Accordingly, the May 2019 proposed regulations excepted transfers of a qualifying investment to the deceased owner\u2019s estate, as well as distributions by the estate, from the definition of \u2018inclusion event.\u2019\u201d<\/p>\n\n\n\n

Implications for Estate Planning in General<\/strong><\/h3>\n\n\n\n

Because of the unique origin and nature of QOFs, care is required in generalizing the rules of these regulations beyond the QOF context. But a few observations may be safe.<\/p>\n\n\n\n

As noted above, the notion that a gift is a recognition event while death is not a recognition event is inconsistent with general rules, but is explained by the unique requirements of the QOF rules to follow the investment. Thus, the distinction between gifts and transfers by reason of death in the QOF regulations should have no general implications outside of that context.<\/p>\n\n\n\n

Similarly, when contrasted with general rules, it is ironic that a qualifying investment in effect gets a stepped-up basis upon a gift (because of the donor-investor\u2019s recognition) but a carryover basis at death (subject to the holding period that the recipient succeeds to or \u201ctacks\u201d). But that also is just the result of the unique requirements of the QOF rules, as well as the income in respect of a decedent rules that always produce a carryover basis at death.<\/p>\n\n\n\n

The most interesting implications arise from the treatment of grantor trusts. Recognition of gain upon the loss of grantor trust status during life has generally come to be expected, under authorities such as Reg. \u00a71.1001-2(c), Example 5; Madorin v. Commissioner<\/em>, 84 T.C. 667 (1985); and Rev. Rul. 77-402, 1977-2 C.B. 222. On the other hand, avoiding recognition of gain when grantor trust status is unavoidably lost at the death of the grantor is not always as clear and has sometimes been debated. Chief Counsel Advice 200923024 (issued Dec. 31, 2008; released June 5, 2009) has often been cited as an indication that the IRS acknowledges that there is no recognition at death. After discussing Reg. \u00a71.1001-2(c), Example 5, Madorin<\/em>, and Rev. Rul. 77-402, the CCA stated (emphasis added): \u201cWe would also note that the rule set forth in these authorities is narrow, insofar as it only affects inter vivos lapses of grantor trust status, not that caused by the death of the owner which is generally not treated as an income tax event<\/em>.\u201d<\/p>\n\n\n\n

Now a regulation has added significantly more weight to that proposition.<\/p>\n\n\n\n

NUMBER NINE: ESTATE TAX CHARITABLE DEDUCTION AFFECTED BY SUBSEQUENT ACTIONS (DIERINGER<\/em>)<\/strong><\/h2>\n\n\n\n

Factual Background<\/strong><\/h3>\n\n\n\n

In Estate of Dieringer v. Commissioner<\/em>, 917 F.3d 1135 (9th Cir. March 12, 2019), aff\u2019g<\/em> 146 T.C. 117 (2016), the decedent, a widow in Oregon with 12 children, died in 2009. Her son Eugene was her executor, the trustee of her trust, the director of the family foundation, and the president of a family real estate business. Her trust left some personal effects to her children, $600,000 to various charitable organizations, and the residue of her estate to the family foundation, including a solid majority interest in the family business (425 out of 525 voting shares and 7,736.5 out of 9,220.5 nonvoting shares). The estate tax values, determined on a controlling basis, were $1,824 per share of voting stock and $1,733 per share of non-voting stock (reflecting a 5% discount for lack of voting rights), for a total estate tax value of $14,182,471 for the decedent\u2019s interest. Because of the charitable deduction, the return showed no estate tax due.<\/p>\n\n\n\n

After the decedent\u2019s death, the family corporation elected S corporation status and, to avoid making annual distributions of income to fund the foundation\u2019s 5% minimum distributions and creating excess business holdings problems, the company decided to redeem the trust\u2019s interests in the company. Ultimately, by April 2010, the company had reduced the redemption to what was thought to be more affordable and had redeemed, for promissory notes, all of the trust\u2019s 425 shares of voting stock and 5,600.5 (out of 7,736.5) shares of its nonvoting stock. The stock values used in the redemption were determined by an appraiser whom Eugene\u2019s lawyer instructed to value the stock as if it were a minority interest. Those values were $916 per voting share and $870 per non-voting share, reflecting a 15% lack of control discount, a 35% lack of marketability discount, and, for the nonvoting stock, a 5% lack of voting power discount.<\/p>\n\n\n\n

The trust reported a capital loss on the redemption for 2009. The Foundation reported receipt of the promissory notes and the remaining nonvoting stock from the trust on January 1, 2011. In November and December 2011, to satisfy the private foundation self-dealing requirements, Eugene sought and obtained the retroactive approval of the appropriate Oregon court.<\/p>\n\n\n\n

Tax Deficiency and Court Proceedings<\/strong><\/h3>\n\n\n\n

In September 2013, the IRS reduced the estate tax charitable deduction to reflect the value of the property actually distributed to the foundation. On that basis, the IRS assessed a deficiency of $4,124,717 and an accuracy-related penalty of $824,943. The Tax Court upheld both the deficiency and the penalty, and the estate appealed, arguing that the Tax Court erred in taking into account post-death events in determining the value of the charitable deduction.<\/p>\n\n\n\n

The Court of Appeals for the Ninth Circuit also upheld both the deficiency and the penalty. Quoting its opinion in Ahmanson Foundation v. United States<\/em>, 674 F.2d 761, 772 (9th Cir. 1981), it found: \u201cThe proper administration of the charitable deduction cannot ignore such differences in the value actually received by the charity.\u201d The estate had argued that any consideration of post-death events also required finding that the decline in the value of the stock was due, at least in part, to market forces. The Tax Court, however, had found: \u201cThe evidence does not support a significant decline in the economy that resulted in a large decrease in value in only seven months\u201d; and: \u201cThe reported decline in per share value was primarily due to the specific instruction to value decedent\u2019s majority interest as a minority interest with a 50% discount.\u201d The court of appeals concluded: \u201cWe find nothing in the record\u2014nor does the Estate point to anything in the record\u2014that suggests the Tax Court\u2019s findings were clearly erroneous.\u201d<\/p>\n\n\n\n

Comment<\/strong><\/h3>\n\n\n\n

This case presents extremely bad and, it is hoped, uncommon facts. But it also offers a lesson: It normally doesn\u2019t matter what people do that reduces the value of their own property. But where a charitable deduction is involved and the executor has made representations on an estate tax return about what charity is going to get, it is dangerous business to effectively change the estate plan after the return is filed. Letting value be affected by post-valuation-date events is serious stuff, but the IRS and courts are willing to go that route on facts like these.<\/p>\n\n\n\n

The Tax Court and Ninth Circuit opinions do not reveal what Eugene told the Oregon court that approved the redemption. But this case also offers the lesson that approval of a state court alone is not a guarantee of immunity from the IRS in a context like this.<\/p>\n\n\n\n

NUMBER EIGHT: <\/strong>FOLLOW-UP OF <\/strong>STATE TAXATION OF QTIP TRUSTS <\/strong>AT THE SURVIVING SPOUSE\u2019S DEATH <\/strong>(SEIDEN<\/em> (NY), TAYLOR<\/em> (MD))<\/strong><\/h2>\n\n\n\n

The facts in these cases are simple; the consequences could be complex.<\/p>\n\n\n\n

Introduction<\/strong><\/h3>\n\n\n\n

In 1981, when Congress added section 2056(b)(7) to the Code to permit what have become known as QTIP trusts, it seemed like such a perfect idea. Even though the trust for the surviving spouse (or donee spouse under section 2523(f)) did not need any of the traditional features that by their terms would include the value of the trust assets in the surviving spouse\u2019s gross estate \u2013 such as a general power of appointment under sections 2056(b)(5) and 2523(e) or payment to the spouse\u2019s estate under Reg. \u00a720.2056(c)-2(b)(1)(iii) \u2013 that inclusion in the surviving spouse\u2019s gross estate was assured by the contemporaneous enactment of section 2044, providing for inclusion whenever a marital deduction had been allowed under section 2056(b)(7) or 2523(f), backstopped by section 2519 in the case of the surviving spouse\u2019s actions during life. Thus was maintained the fundamental character of the marital deduction as a deferral only \u2013 the asset escapes tax at the first death but is taxed at the second death. Even if the surviving spouse, who generally must be a U.S. citizen under section 2056(d), moves out of the country, section 2001(a) continues to apply, and if such a surviving spouse with sufficient income or assets also renounces that U.S. citizenship, sections 877 and 2107 ensure continued taxation for 10 years. Meanwhile, the 1981 objective of making the marital deduction unlimited without having to give the surviving spouse control over the disposition of the remainder is fulfilled in the QTIP trust.<\/p>\n\n\n\n

Since the phase-out of the credit for state death taxes under the 2001 Tax Act, and especially with state legislatures setting their estate tax exemptions lower than the federal basic exclusion amount, some states that still have an estate tax have provided for a state-only QTIP election, available when the estate is under the federal exclusion amount but not under the state exemption, or applicable to the extent the state exemption is less than the federal exclusion amount. But symmetry is lost to the fact that a state is powerless when the surviving spouse moves out of the state. \u201cWorldwide,\u201d or nationwide, taxation is not allowed, and, under Section 1 of the Fourteenth Amendment to the U.S. Constitution, a citizen of a state loses that citizenship merely by moving to another state. That dissymmetry is the backdrop for these cases that were Number Six in the 2018 Top Ten (Capital Letter Number 47<\/a>), and the follow-up of which is now Number Eight in the 2019 Top Ten.<\/p>\n\n\n\n

Seiden<\/em><\/strong> (New York)<\/strong><\/h3>\n\n\n\n

In In re Estate of Seiden<\/em>, NYLJ 10\/12\/18 p. 23, col. 5 (N.Y. County Surr. Ct.), the predeceased spouse died domiciled in New York in 2010, when there was no federal estate tax. But New York still had its estate tax, and a New York-only QTIP election was made. The surviving spouse died domiciled in New York in 2014.<\/p>\n\n\n\n

The New York court held that New York cannot tax the QTIP trust because New York totally piggybacks on the federal gross estate, and there was no QTIP trust for federal estate tax purposes to include in the federal gross estate. The New York court relied on New York Tax Law \u00a7954(a), which stated that the New York gross estate of a deceased resident \u201cmeans his or her federal gross estate.\u201d Because there was no federal QTIP election, the value of the trust assets was not included in the federal gross estate and hence was not included in the New York gross estate either.<\/p>\n\n\n\n

The court added that \u201cthe legislature could still amend the Tax Law to apply to future estates.\u201d Sure enough, effective April 1, 2019, the New York Executive Budget (signed into law by the Governor April 12, 2019) applied the New York estate tax at the surviving spouse\u2019s death to a trust for which a QTIP election was made for New York estate tax purposes even if a federal QTIP election was not made.<\/p>\n\n\n\n

Taylor<\/em><\/strong> (Maryland)<\/strong><\/h3>\n\n\n\n

In contrast, in Comptroller of the Treasury v. Taylor<\/em>, 189 A.3d 799 (Md. Ct. Spec. App. July 25, 2018), the predeceased spouse died domiciled in Michigan in 1989 and created a trust. Both federal and Michigan QTIP elections were made. The surviving spouse moved to Maryland in 1993 and died domiciled in Maryland in 2013.<\/p>\n\n\n\n

The Maryland court of special appeals held that Maryland cannot tax the QTIP trust because no Maryland<\/em> QTIP election had been made. The court cited Code of Maryland-Tax-General (TG) \u00a77-309(b)(6)(i) (emphasis added): \u201cFor purposes of calculating Maryland estate tax, a decedent shall be deemed to have had a qualifying income interest for life under \u00a72044(a) of the Internal Revenue Code with regard to any property for which a marital deduction qualified terminable interest property election was made for the decedent\u2019s predeceased spouse on a timely filed Maryland estate tax return<\/em>.\u201d<\/p>\n\n\n\n

Then, in Comptroller of the Treasury v. Taylor<\/em>, 213 A.3d 629 (Md. July 29, 2019), the Court of Appeals (Maryland\u2019s supreme court) reversed<\/em>, on the odd ground that the decedent \u201chad a property interest in the full value of the marital trust\u201d because of the \u201cfictional transfer\u201d created by federal tax law.<\/p>\n\n\n\n

A more understandable concurring opinion noted that TG \u00a77-301(b) states, like the New York statute applied in Seiden<\/em>, that \u201c\u2018Estate\u2019 means the federal gross estate.\u201d and that TG \u00a77-309(b)(6)(i) includes<\/em> a Maryland QTIP trust even if it is not subject to federal estate tax, but does \u201cnot state or imply that that is the only<\/em> circumstance under which the Maryland estate tax can apply to a Maryland resident\u2019s interest in a QTIP trust.\u201d<\/p>\n\n\n\n

One judge dissented, noting: \u201cThe QTIP deduction is premised on an exchange of benefits between the surviving spouse and the government granting a tax deferral\u201d; and that Maryland had granted no benefit because the predeceased spouse had resided in Michigan. He also pointed out that even if the surviving spouse had stayed in Michigan, Michigan would not have taxed the QTIP trust upon her death in 2013, because its estate tax was tied to the federal credit for state death taxes, which was phased out by the 2001 Tax Act.<\/p>\n\n\n\n

NUMBER SEVEN: FINAL \u201cANTI-CLAWBACK\u201d REGULATIONS (REG. \u00a720.2010-1(c))<\/strong><\/h2>\n\n\n\n

Background<\/strong><\/h3>\n\n\n\n

Number Four in the 2018 Top Ten (Capital Letter Number 47<\/a>) was the proposal of regulations on November 20, 2018, pursuant to section 2001(g)(2), to ensure that the a large gift made before the doubling of the gift and estate tax basic exclusion amount (BEA) sunsets in 2026 would not in effect be \u201cclawed back\u201d into the calculation of the estate tax if the donor dies after 2025. The November 2018 proposed regulations, accompanied by only one simplified example, were reassuring on the basic issue, but they left some doubt about secondary issues, including the application of inflation adjustments and the effects of a portability election made during the 2018-2025 doubling period.<\/p>\n\n\n\n

Final Regulations<\/strong><\/h3>\n\n\n\n

The final regulations<\/a> issued on November 12, 2019, respond to those concerns. The Preamble notes that inflation adjustments were omitted from the example just for the sake of simplicity. That example, now Example 1 in Reg. \u00a720.2010-1(c)(2), has been changed to include hypothetical inflation-adjusted numbers. Example 2 has been added to illustrate what the Preamble acknowledges is the \u201cuse or lose\u201d nature of the doubled BEA when a donor uses some BEA, but not the entire BEA, available from 2018 through 2025. And new Examples 3 and 4 illustrate scenarios where a deceased spousal unused exclusion (DSUE) amount from a predeceased spouse who dies before 2026 is applied to the surviving spouse\u2019s gifts before 2026 and to the calculation of the estate tax when the surviving spouse dies after 2025.<\/p>\n\n\n\n

Portability History<\/strong><\/h3>\n\n\n\n

Referring to the 2015 portability regulations (T.D. 9725), the Preamble to the final anti-clawback regulations states: \u201cThe regulations in \u00a7\u00a7\u200920.2010-1(d)(4) and 20.2010-2(c)(1) confirm that the reference to BEA is to the BEA in effect at the time of the deceased spouse\u2019s death, rather than the BEA in effect at the death of the surviving spouse.\u201d<\/p>\n\n\n\n

The reason for that result is very logically and helpfully explained in the Preamble to the 2012 temporary regulations (T.D. 9593): \u201cThe temporary regulations in \u00a7 20.2010-2T(c)(1)(i) confirm that the term \u2018basic exclusion amount\u2019 referred to in section 2010(c)(4)(A) means the basic exclusion amount in effect in the year of the death of the decedent whose DSUE amount is being computed. Generally, only the basic exclusion amount of the decedent, as in effect in the year of the decedent\u2019s death, will be known at the time the DSUE amount must be computed and reported on the decedent’s estate tax return. Because section 2010(c)(5)(A) requires the executor of an estate electing portability to compute and report the DSUE amount on a timely-filed estate tax return, and because the basic exclusion amount is integral to this computation, the term \u2018basic exclusion amount\u2019 in section 2010(c)(4)(A) necessarily refers to such decedent\u2019s basic exclusion amount.\u201d<\/p>\n\n\n\n

Portability Problem<\/strong><\/h3>\n\n\n\n

The problem was that the 2015 regulations were arguably addressed to the calculation of the DSUE amount by the predeceased spouse\u2019s executor. The title to Reg. \u00a720.2010-2 is \u201cPortability provisions applicable to estate of a decedent survived by a spouse\u201d \u2013 that is, the predeceased spouse, not the surviving spouse. In contrast, section 2010(c)(4) itself states (emphasis added):<\/p>\n\n\n\n

\u201cFor purposes of this subsection, with respect to a surviving spouse<\/em> of a deceased spouse dying after December 31, 2010, the term \u201cdeceased spousal unused exclusion amount\u201d means the lesser<\/em> of\u2014<\/p>\n\n\n\n

\u201c(A) the basic exclusion amount<\/em>, or<\/p>\n\n\n\n

\u201c(B) the excess of\u2014<\/p>\n\n\n\n

\u201c(i) the applicable exclusion amount of the last such deceased spouse<\/em> of such surviving spouse, over<\/p>\n\n\n\n

\u201c(ii) the amount with respect to which the tentative tax is determined under section 2001(b)(1) on the estate of such deceased spouse<\/em>.\u201d<\/p>\n\n\n\n

The use of the term \u201cbasic exclusion amount\u201d in subparagraph (A) under the introduction \u201cwith respect to a surviving spouse,\u201d with the explicit focus on \u201cthe last such deceased spouse\u201d not occurring until the following subparagraph (B), could imply that the term \u201cbasic exclusion amount\u201d in subparagraph (A) is indeed the BEA in effect when the surviving spouse dies and therefore applicable to the surviving spouse\u2019s estate. In other words, regardless of the DSUE amount calculated at the predeceased spouse\u2019s death and reported on the predeceased spouse\u2019s estate tax return, that DSUE amount might be recalibrated at the death of the surviving spouse to take into account the BEA in effect at that time.<\/p>\n\n\n\n

That interpretation would give effect to the general notion held by congressional drafters that in order to prevent tax avoidance by successive acquisition of DSUE amounts from multiple successive marriages (perhaps even tax-motivated \u201cdeathbed marriages\u201d), portability should in effect be allowed to no more than double what would otherwise be the survivor\u2019s exemption. For example, a statement submitted on behalf of The American College of Trust and Estate Counsel to the Senate Finance Committee when it was considering portability addressed that problem with doubling as the presumed solution: \u201cOne of the technical challenges to implementing portability was the tracing problem. Tracing refers to tracking assets from the deceased spouse to the surviving spouse in order to determine how much unused exemption should be transferred to the surviving spouse\u2019s estate. H.R. 5970 [the Estate Tax and Extension of Tax Relief Act of 2006, passed by the House of Representatives on July 29, 2006] solved this problem by transferring the entire unused exemption of the deceased spouse to the estate of the surviving spouse but capping the amount of unused exemption the survivor\u2019s estate can use to the same amount as the survivor\u2019s exemption. Therefore, the total exemption in the surviving spouse\u2019s estate would never exceed twice the amount of a single exemption.\u201d Outside the Box of Estate Tax Reform: Reviewing Ideas to Simplify Planning, Senate Hearing 110-1019<\/a>, 110th Cong., 2d Sess. 124 (Statement of Shirley L. Kovar, Chair of ACTEC\u2019s Transfer Tax Study Committee (now renamed as the Tax Policy Study Committee), April 3, 2008).<\/p>\n\n\n\n

H.R. 5970<\/a> predated the development of the limitation of portability to the \u201clast\u201d deceased spouse now included in section 2010(c)(4)(B)(i) as a way to address the \u201ctracing problem.\u201d While H.R. 5970 would have allowed portability of a DSUE amount from more than one predeceased spouse, it would have added the following limitation as section 2010(c)(4):<\/p>\n\n\n\n

\u201cFor purposes of this subsection, the term \u2018aggregate deceased spousal unused exclusion amount\u2019 means the lesser of\u2014<\/p>\n\n\n\n

\u201c(A) the basic exclusion amount, or<\/p>\n\n\n\n

\u201d(B) the sum of the deceased spousal unused exclusion amounts of the surviving spouse.\u201d<\/p>\n\n\n\n

In that case, \u201cthe basic exclusion amount\u201d in subparagraph (A) evidently is the BEA of the surviving spouse, because no single deceased spouse is identified at all. The current limitation of portability to the \u201clast\u201d deceased spouse in the version that ultimately became law in 2011 arguably makes the doubling limitation unnecessary. Nevertheless, the similarity of current section 2010(c)(4) to H.R. 5970, and the fact that the portability regulations were not written in a climate when a \u201csunset\u201d or a \u201cclawback\u201d issue would necessarily have been in view, justified the concerns about the durability of the DSUE amount under the 2017 Tax Act. And certainly preserving the DSUE amount when portability has been elected with that expectation is the right result.<\/p>\n\n\n\n

Conclusion<\/strong><\/h3>\n\n\n\n

Although the statement in the Preamble alone might not have allayed all concerns (any more than the Preamble to the 2012 temporary portability regulations), the incorporation of DSUE amounts into new Examples 3 and 4 should suffice. The anti-clawback regulations are final and portability is preserved. This is a welcome affirmation of the significance of public comments in the regulation process.<\/p>\n\n\n\n

NUMBER SIX: DEDUCTIBILITY OF TRUST AND ESTATE ADMINISTRATION EXPENSES (SECTIONS 67(e)(1) AND 642(h)(2))<\/strong><\/h2>\n\n\n\n

Background: Section 67(e) and (g)<\/strong><\/h3>\n\n\n\n

Section 67 was added to the Code by the Tax Reform Act of 1986. Section 67(a) limits an individual\u2019s income tax deduction of \u201cmiscellaneous itemized deductions\u201d to the amount that such deductions exceed 2% of the individual\u2019s adjusted gross income. Section 67(e)(1), as amended in 1988, allows an estate or trust a deduction in computing adjusted gross income \u2013 that is, an \u201cabove the line\u201d deduction not subject to the 2% floor of section 67(a) \u2013 \u201cfor costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate.\u201d But Reg. \u00a71.67-4(b)(4) and (c)(2) (proposed in 2011 to reflect the Supreme Court\u2019s decision in Knight v. Commissioner<\/em>, 552 U.S. 181 (2008) and finalized in 2014) controversially \u2013 and, in the view of many, including this author, wrongly \u2013 provided that fees for investment advice, including the portion of a \u201cbundled\u201d fiduciary fee attributable to investment advice, are generally not covered by section 67(e)(1) and are therefore subject to the 2% floor.<\/p>\n\n\n\n

Then the 2017 Tax Act (often called the \u201cTax Cuts and Jobs Act\u201d) added section 67(g), providing: \u201cNotwithstanding subsection (a), no miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017, and before January 1, 2026.\u201d But the Act did not alter or limit section 67(e).<\/p>\n\n\n\n

In the 2018-2019 Treasury-IRS Priority Guidance Plan, Part 1 was titled \u201cImplementation of Tax Cuts and Jobs Act (TCJA).\u201d Item 3 of Part 1 was described as \u201cGuidance clarifying the deductibility of certain expenses described in \u00a767(b) and (e) that are incurred by estates and non-grantor trusts.\u201d This was carried over as Item 6 in Part 1 of the 2019-2020 Priority Guidance Plan<\/a>, issued October 8, 2019, to cover the plan year from July 1, 2019, through June 30, 2020; the only change was to replace the word \u201cGuidance\u201d with \u201cRegulations.\u201d<\/p>\n\n\n\n

Meanwhile, Notice 2018-61, 2018-31 I.R.B. 278<\/a>, was released on July 13, 2018, and published in the Internal Revenue Bulletin on July 30, 2018. Because the 2017 Tax Act did not alter or limit section 67(e), Notice 2018-61 stated that \u201cThe Treasury Department and the IRS intend to issue regulations clarifying that estates and non-grantor trusts may continue to deduct expenses described in section 67(e)(1)\u201d despite the eight-year \u201csuspension\u201d of section 67(a) by section 67(g).<\/p>\n\n\n\n

It appears, however, that deductibility will continue to be limited by the harsh treatment in Reg. \u00a71.67-4(b)(4) and (c)(2) of fiduciary investment advisory fees, which now will mean total disallowance, not just the application of a 2% floor. Notice 2018-61 stated flatly that \u201cnothing in section 67(g) impacts the determination of what expenses are described in section 67(e)(1).\u201d<\/p>\n\n\n\n

Application to Section 642(f)(2)<\/strong><\/h3>\n\n\n\n

Notice 2018-61 also stated that Treasury and the IRS intend to issue regulations to address the availability of \u201cexcess deductions\u201d to individual beneficiaries under section 642(h)(2) and Reg. \u00a71.642(h)-2(a) on termination of a trust or estate \u2013 in other words, the pass-through to beneficiaries the amount of otherwise deductible expenses in the final taxable year of the trust or estate that exceed the gross income of the trust or estate \u2013 and the Notice asked for comments from the public on that issue.<\/p>\n\n\n\n

Reassurance from the Instructions.<\/strong> The instructions<\/a> for the 2018 Form 1041, dated February 5, 2019, appeared to assume a favorable resolution of that issue, and the draft instructions<\/a> for the 2019 Form 1041, dated November 4, 2019, make no change in that reassuring impression. The specific instructions for line 22 of the 2018 Form and line 23 of the draft 2019 Form, Taxable Income, on page 26, state: \u201cIf the estate or trust has for its final year deductions (excluding the charitable deduction and exemption) in excess of its gross income, the excess is allowed as an itemized deduction to the beneficiaries succeeding to the property of the estate or trust.\u201d<\/p>\n\n\n\n

On page 36 of the 2018 instructions and page 38 of the draft 2019 instructions, at the beginning of the specific instructions for Schedule K-1, Beneficiary\u2019s Share of Income, Deductions, Credits, etc., there is this warning: \u201cNote.<\/strong> Section 67(g) suspends miscellaneous itemized deductions subject to the 2% floor for tax years 2018 through 2025. See Notice 2018-61 for information about allowable beneficiary deductions under section 67(e) and 642(h).\u201d<\/p>\n\n\n\n

Nevertheless, on page 39 of the 2018 instructions and page 40 of the draft 2019 instructions, the instructions confirm: \u201cIf this is the final return of the estate or trust, and there are excess deductions on termination (see the instructions for line 22), enter the beneficiary\u2019s share of the excess deductions in box 11 [Final year deductions], using code A. Figure the deductions on a separate sheet and attach it to the return.\u201d<\/p>\n\n\n\n

In contrast, the instructions<\/a> for line 16 of the 2018 Form 1040, Schedule A (\u201cOther Itemized Deductions\u201d), dated December 10, 2018 (page A-12), and the instructions<\/a> for line 16 of the 2019 Form 1040, Schedule A, dated December 10, 2019 (page A-12), state that \u201cOnly the expenses listed next can be deducted on line 16\u201d and then provide a list that does not include excess deductions on termination of a trust or estate. In this respect, however, those instructions are identical to the instructions<\/a> for line 28 of the 2017 Schedule A, dated February 15, 2018 (page A-13), before the 2017 Tax Act when there was no doubt that excess deductions on termination could be deducted.<\/p>\n\n\n\n

Comment.<\/strong> It is common for an estate or trust to actually have extra expenses related to its wind-up and final distributions in its final taxable year, at the same time its gross income is declining because it is distributing its income-producing assets. The ability of a fiduciary to pass through those final-year excess deductions provides very important relief from what would otherwise be pressure to artificially time the payment of expenses, the distribution of trust assets, and the termination of the trust or estate to preserve this tax benefit, which could be unfair and frustrating to beneficiaries.<\/p>\n\n\n\n

Addressing this concern in light of section 67(g) is more difficult than addressing the year-to-year deductibility of administration expenses by the trust or estate because individual beneficiaries are not given the explicit workaround of an above-the-line deduction that fiduciaries are given by section 67(e)(1). Indeed, Reg. \u00a71.642(h)-2(a) bluntly states that the deduction \u201cis not allowed in computing adjusted gross income.\u201d That is probably why Notice 2018-61 speaks more decisively about the fiduciary\u2019s deduction (\u201cintend to issue regulations clarifying that estates and non-grantor trusts may continue to deduct expenses\u201d) than about the passthrough to beneficiaries (\u201cintend to issue regulations in this area\u201d). And the blunt prohibition currently in Reg. \u00a71.642(h)-2(a) is probably at least one reason why the 2019-2020 Priority Guidance Plan changes the description of the project from \u201cguidance\u201d to \u201cregulations.\u201d<\/p>\n\n\n\n

The 2019 developments are only instructions, and the new development is only a draft of instructions. Obviously, regulations supersede instructions. But it is very significant that, even after the opportunity to think about this issue for eight months since the publication of the 2018 instructions, eight months during which this issue has been widely discussed in professional circles, the draft of the 2019 instructions does not back down. Reassuring proposed (and perhaps temporary) regulations on this vexing topic should be seen in 2020. Although they apparently will not undo the now total disallowance of fiduciary expenses for investment advice under the unfortunate choice made in the 2014 regulations, their sensitivity to the challenges of terminating a trust or estate will be most welcome.<\/p>\n\n\n\n

NUMBER FIVE: UNIFORM ELECTRONIC WILLS ACT<\/strong><\/h2>\n\n\n\n

Overview<\/strong><\/h3>\n\n\n\n

At its annual meeting in Anchorage, Alaska, in July 2019, the Uniform Law Commission (ULC) approved the new \u201cUniform Electronic Wills Act<\/a>,\u201d (or \u201cE-Wills Act\u201d), thereby recommending it for enactment in all of the states to allow for the electronic execution and enforcement of wills. The first paragraph of the Act\u2019s Prefatory Note sets the stage: \u201cPeople increasingly turn to electronic tools to accomplish life\u2019s tasks, including legal tasks. They use computers, tablets, or smartphones to execute electronically a variety of estate planning documents, including pay-on-death and transfer-on-death beneficiary designations and powers of attorney. Some people assume that they will be able to execute all their estate planning documents electronically, and they prefer to do so for efficiency, cost savings, or other reasons. Indeed, a few cases involving wills executed on electronic devices have already arisen.\u201d<\/p>\n\n\n\n

The Prefatory Note continues by noting cases that have approved wills for which a testator typed his signature in a cursive font at the end of the electronic text (Taylor v. Holt<\/em>, 134 S.W.3d 830 (Tenn. 2003)); a testator dictated a will to his brother, who wrote the will with a stylus on an electronic tablet, and the testator and two witnesses signed the will on the tablet with the stylus (In re Estate of Javier Castro<\/em>, Case No. 2013ES00140, Court of Common Pleas Probate Division, Lorain County, Ohio (June 19, 2013)); and a 21-year-old testator, shortly before committing suicide, handwrote a journal entry with instructions for accessing a \u201cLast Note\u201d on his phone, which included directions relating to his property as well as apologies and personal comments about his suicide, with his name typed at the end of the document (In re Estate of Horton<\/em>, 925 N.W.2d 207 (Mich. 2018)). And the Prefatory Note observes that as of 2019 four states (Arizona, Florida, Indiana, and Nevada) had adopted electronic wills legislation and five jurisdictions (California, the District of Columbia, New Hampshire, Texas, and Virginia) had considered such legislation.<\/p>\n\n\n\n

Approach of the E-Wills Act<\/strong><\/h3>\n\n\n\n

The E-Wills Act seeks to reduce uncertainty (as illustrated by the above cases that required litigation) and promote uniformity that is especially important in a mobile population. It also recognizes and seeks to preserve the four functions served by will formalities, as described in Langbein, Substantial Compliance with the Wills Act<\/em>, 88 Harv. L. Rev. 489 (1975):<\/p>\n\n\n\n