a. Income Tax Planning More Important. With the increase of the estate tax
exemption amount, and the increased income tax rates that apply to estates, income tax planning will become a more important post-mortem planning issue. The federal estate tax rate is approximately the same as the income tax rate on ordinary income (which applies after only about $12,000 of income for estates or trusts).
b. Fiscal Year Selection. For decedents dying in 2012, consider electing a
November 30 fiscal year so that undistributed income from the estate through November 30, 2013 will not be subject to the 39.6% high income tax bracket or the 3.8% Medicare tax on net investment income. See Item 9.k above.
For estates of decedents who do not die in 2012, a January 31 fiscal year end may defer the recognition of income. For example, if a decedent died in February of 2011, selecting a fiscal year of January 31 means that in any distributions in the first fiscal year will carry out income to the beneficiary and are deemed received on the last day of the fiscal year, or January 31, 2012, so would be included the beneficiary’s income tax for 2012, reported on the return filed in 2013.
If a “qualified revocable trust” makes the §645 election, the trust can take advantage of the estate’s fiscal year during the time the election is operable. (Funded revocable trusts typically will want to make the §645 election.)
c. Income Shifting. Carefully consider the income tax impact of distributions on the
estates and beneficiaries to determine whether making current distributions or accumulating distributions by the estate during a particular year is preferable.
d. Election of Deducting Administration Expenses. There is an election for
deducting most administration expenses on either the estate income tax return or on the estate tax return. The general rule is that estate management expenses
(as described in Reg. §§20.2055-3(b)(1)(i) & 20.2056(b)-4(d)(1)(i)) should always be deducted on the income tax return if there is a substantial marital or charitable deduction. Taking an estate tax deduction would not result in any estate tax savings, and would forego getting any income tax savings. On the other hand, for
estate transmission expenses (as described in Reg. §§20.2055-3(b)(1)(ii) & 20.2056(b)-4(d)(1)(ii)) there is no clear answer. Taking a current income tax deduction will usually increase the estate tax (or under a marital deduction formula clause, may operate to decrease the amount of assets passing to the non-marital share or reduce the DSUE amount if portability is elected, see Reg. §20.2056(b)-4(d)(1)(iii)(4)). However, deducting estate transmission expenses on
the income tax return may yield more savings if the marginal income tax bracket exceeds the marginal estate tax bracket or if the surviving spouse’s estate is not subject to estate tax because of future law changes and increases in the estate tax exemption amount and reductions to the estate tax rates.
As a way to assure that estate management expenses are deducted on the estate tax return if there is a surviving spouse, the estate tax return could state that the estate waives the right to take as estate tax deductions all administration expenses other than management expenses, which the estate elects to deduct on the estate tax return. That should preserve the right to take estate management expenses as an estate tax deduction.
Many planners are now starting to take the position that at the first spouse’s death, unless the income tax bracket is very low or unless the parties expect huge appreciation, the family is probably better off deducting transmission expenses on the income tax return rather than the estate tax return. That has the effect of reducing the bequest to the bypass trust. However, the idea is to take the “Bird in the hand” income tax savings in light of the uncertainty of the estate tax savings that may be achieved years later with the bypass trust. Another exception might be if the surviving spouse is expected to die in the next several years, and there would not be much appreciation in the bypass trust assets. While many attorneys are tending to take the deduction on the 1041 now and give up on the bypass trust reduction, there is no one answer that fits all.
e. Retirement Plans. Review appropriate deadlines. For example, be sure to make
the minimum required distributions in the year of death to avoid penalties. Consider rollover elections. For example, the surviving spouse will typically want a spousal rollover IRA, and beneficiaries should consider whether to rollover their interests in IRAs into inherited IRAs.
f. Disclaimers. Disclaimers may be used to implement pre-mortem planning (in
which event, the will probably provides for a default taker in the event of a disclaimer), or may be used in a remedial manner to fix unintended results. Some of the important issues regarding disclaimers are as follows.
(1) Timely Disclaimer. The disclaimer must be made within nine months of the
taxable disposition (or if later, after the disclaiming person reaches age 21), §2518(b)(2). (If a beneficiary has a general power of appointment over a trust, the nine-month disclaimer period runs for future beneficiaries as of the time the general power of appointment is exercised or lapses.)
(2) Acceptance of Benefits. One of the statutory requirements of a qualified
disclaimer is that the disclaiming person “has not accepted the interest or any of its benefits.” §2518(b)(3).Because of this requirement, before planners are able to determine whether disclaimers would be appropriate for a particular estate beneficiary, the beneficiary should be wary of accepting any benefits from the estate. The portion of joint property that came from the decedent spouse can be disclaimed. E.g., Ltr. Rul. 199932042. The acceptance of benefits issue can be difficult if the decedent spouse was the sole owner of the residence--and if the spouse continues to live in the house after the date of death before the disclaimer
is made. (For example, consider transferring a 1% interest in the house to the surviving spouse before death so that he or she could continue residing in the house with respect to the co-tenant interest. Alternatively, consider providing that the surviving spouse would pay rent until the disclaimer decision is made; or take the position that paying insurance, property taxes, etc. is the functional equivalent of paying rent. The IRS is probably not overly strict about this if the disclaimer is made promptly.)
(3) Beneficiary of Disclaimed Property. The surviving spouse may be a
beneficiary of a disclaimer trust, but no other disclaimant can have an interest in the disclaimed property. §2518(b)(4).
(4) Disclaimer of Specific Trust Assets. After a specific trust asset is
disclaimed, it must “leave” the trust and pass to someone other than the disclaimant. Reg. §25.2518-3 (a) (2).
(5) Fiduciary Powers Over Disclaimed Property. If the disclaimant is a
fiduciary of a trust or fund to which the disclaimed property passes, he or she can exercise fiduciary powers to preserve or maintain the disclaimed property without being treated as accepting the property or any of it benefits. However, the disclaimant fiduciary cannot retain a wholly discretionary power to direct the enjoyment of the disclaimed interest. Treas. Reg. §25.2518-2(d)(2). The disclaimant/fiduciary can retain the fiduciary power to distribute to designated beneficiaries if the power is subject to an ascertainable standard. Treas. Reg. §25.2518-2(e)(1)(i) & 25.2518-2(e)(5)Ex.(12).
(6) No Retained Limited Power of Appointment. A significant disadvantage to
making a disclaimer is that the disclaimant cannot retain a limited power of appointment over disclaimed assets. Reg. §25.2518-2(e)(2) & §25.2518- 2(e)(5)(Ex. 5).
(7) Remedial Disclaimers. Examples of possible “remedial” disclaimers
include
• disclaimers by children to allow assets to pass to the surviving spouse in order to qualify for the marital deduction, or
• disclaimers to “fix” an overly broad tax apportionment clause (for example, a disclaimer that would result in assets passing to persons who are unexpectedly having to pay estate taxes with respect to assets passing to other individuals, or a direct disclaimer of the right to have estate taxes on property received by the disclaimant paid by another person under the tax apportionment clause, Estate of Boyd v.
Commissioner, 819 F.2d 170 (7th Cir. 1987)).
g. Gift Tax Returns.
(1) Unfiled Returns. Any taxable gifts made by the decedent during life must
be reported on timely filed federal gift tax returns. If the executor is aware of taxable gifts by the decedent for which returns have not been filed, the executor should file returns as soon as possible. Reg. §25.6019-1(c) (executor required to file gift tax return for deceased donor).
(2) Due Date. If the donor dies during the calendar year in which a gift is made, the Form 709 must be filed and the gift tax must be paid no later than the earlier of (i) the date (including extensions) the decedent’s estate tax return is due or (ii) April 15 of the year following the calendar year in which the gifts were made. I.R.C. §6075(b)(3); Treas. Reg. §25.6075- 1(b)(2)(filing); §25.6151-1 (payment). If no estate tax return is required to be filed, the gift tax return is due on April 15 of the following calendar year. Treas. Reg. §25.6075-1(b)(2).
h. Miscellaneous Alternatives For Consideration.
• GST exemption allocation.
• “Reverse” QTIP election to allocate decedent’s GST exemption to QTIP trust.
• Expanding special powers of appointment to general powers of appointment if doing so could save GST taxes.
• Reformation/construction proceedings to correct unintended results.
• Amending, revoking, splitting, or merging trusts.
• Appointments in further trust.
• Section 754 election by a partnership to achieve an inside step up in basis of partnership assets.
• Section 6161, 6163 and 6166 elections to defer estate tax payments.
• Allocating IRD to marital deduction share, to be reduced by income taxes payable with respect to it.
• Testamentary estate freezes.
• Tax consequences of spousal rights of election.
• Waiver of commissions or whether to receive multiple commissions by multiple executors.