United States: Wealth Management Update – November 2017

November Interest Rates for GRATs, Sales to Defective Grantor Trusts, Intra-Family Loans and Split Interest Charitable Trusts

The November § 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 2.4%, up from 2.2% in October. The November applicable federal rate (AFR) for use with a sale to a defective grantor trust, self-canceling installment note (SCIN) or intra-family loan with a note having a duration of 3-9 years (the mid-term rate, compounded semiannually) is 1.99%, up from 1.84% in October.

Despite the recent uptick, the still relatively low § 7520 rate and AFRs continue to present potentially rewarding opportunities to fund GRATs in November with depressed assets that are expected to perform better in the coming years.

The AFRs (based on semiannual compounding) used in connection with intra-family loans are 1.38% for loans with a term of 3 years or less, 1.99% for loans with a term between 3 and 9 years, and 2.58% for loans with a term of longer than 9 years.

Thus, for example, if a 9-year loan is made to a child, and the child can invest the funds and obtain a return in excess of 1.99%, the child will be able to keep any returns over 1.99%. These same rates are used in connection with sales to defective grantor trusts.

IRS May Audit Estate of First Spouse to Die if Survivor's Estate Tax Return Reflects Portability Election Estate of Sower v. Commissioner, 149 T.C. No. 11 (September 2017)

Frank Sower died in 2012. His estate filed an estate tax return, in which a deceased spousal unused exclusion (DSUE) was reported, and portability of that DSUE was elected. The IRS accepted the return as filed, and provided Frank's estate with an estate tax closing letter. Frank's wife, Minnie, died in 2013. Her estate claimed the unused DSUE reported by Frank's estate in filing and paying her estate tax. Minnie's estate was audited, and as part of the process, Frank's estate was examined, due to the fact that Minnie's return reflected portability of the DSUE. In examining Frank's estate, it was determined that Frank's unused DSUE was lower than expected, and that as a result, Minnie's estate had an estate tax deficiency. Minnie's estate challenged this finding on the basis that the IRS should not have been allowed to examine Frank's estate.

Code Section 2010(c)(5)(b), enacted in 2010, gives the IRS the power to examine a predeceased spouse's return and adjust the DSUE without regard to the statute of limitations in Code Section 6501. An exception to this power exists however, in cases where the first spouse's estate is audited.

Minnie's estate argued that the IRS was estopped from examining Frank's estate, because the estate had already been examined, and the estate tax return accepted and approved, as evidenced by the estate tax closing letter received in connection with Frank's estate tax return.

The Tax Court however rejected the argument that an estate tax closing letter is a closing agreement between the IRS and the estate concluding any examination. In doing so, it stated that the issuance of a generic estate tax closing letter does not estop the IRS from examining the return of the predeceased spouse. What's more, estate tax closing letters, including the one issued to Frank's estate, included language advising that the estate could be reopened for examination for any valid reason.

The court similarly rejected the argument posed by Minnie's estate that an examination of Frank's estate constituted a "second examination" by the IRS, as Frank's estate was not audited. The opinion expresses that absent an actual audit of Frank's estate, there was no "first examination" until the one initiated in light of Minnie's estate claiming Frank's estate's unused DSUE.

The Court further held that Minnie's estate only had standing to argue the validity of examinations of Minnie's estate, not Frank's estate.

In this case, both spouses died after the enactment of Code Section 2010(c)(5)(b) in 2010. However, it is worthwhile to note that the Tax Court's opinion in this case makes mention that only the survivor need to have died after the enactment of Code Section 2010(c)(5)(b) to enable the IRS to examine the estate of the first spouse to die.

Finally, the Court held that the period of limitations on assessment of tax for the estate of the predeceased spouse is not implicated if there was no determination of estate tax deficiency for the estate of the predeceased spouse.

IRS Tax Liens Trump Reasonable Administration Expenses of Estates In re: Estate of Simmons, 120 AFTR 2d 2017-5368 (July 2017)

Frederick Alan Simmons died on June 5, 2014. His surviving spouse and personal representative, Raelinn M. Spiekhout, opened a probate estate in their home state of Indiana. Upon the opening of the estate, several claims were filed against the estate for a total of $1,812,622, one of which was a $591,406 claim by the IRS for unpaid federal income taxes and trust fund recovery penalties. The personal representative did not serve notice on the U.S. in accordance with 28 USC 2410(b) so as to trigger a 30 day period allowing removal to federal court. The main asset of the estate was a piece of real property. The surviving personal representative sought and was granted permission from the court, and successfully sold the property for $275,000, receiving a net payout of $245,766 after payments of commissions and other fees. The probate court would eventually issue an order closing the estate as insolvent, and directing distribution of estate assets, which were essentially the proceeds from the sale of the property. This distribution listed the federal tax lien as seventh in priority among creditors of the estate.

Shortly thereafter, the U.S. removed the state court action to district court, challenging the probate court's decision with regard to the priority of the federal tax lien against the estate. The personal representative then filed a motion for a hearing to determine claim priorities. The court, relying on the Federal Tax Lien Act (Code Sections 6321-6323) held the federal government had priority over all claims, including any claims for fees or reimbursement of costs by the personal representative. The personal representative challenged this holding noting that (1) the judge improperly relied on the Federal Tax Lien Act, and not the Federal Priority Statute, in determining priority of claims, and (2) without her efforts, the property would not be sold, and the estate would be completely insolvent. The personal representative did not argue that the federal government took priority over other claims (instead of being seventh in line as the probate court determined) but rather took the position that she was entitled to compensation for her expenses before making payment to other creditors.

On appeal, the court acknowledged that generally, the Federal Priority Statute is appropriate for determining priority of claims against an estate, and that further, generally, ordinary expenses of administration of an estate, like the ones incurred by the personal representative, would be paid, regardless of what other claims existed. However, the court cited, and based its ruling upon U.S. v. Romani (S. Ct. 1998), which held that the Federal Tax Lien Act, and not the Federal Priority Statute applies when determining order of payments of claims when dealing with insolvent estates of delinquent taxpayers. Thus, in light of the estate being insolvent, the Federal Tax Lien trumped all claims, including those in connection with the expenses incurred in the administration of the estate.

The court further held that the personal representative's efforts and costs are irrelevant where the federal government takes priority as determined by the Federal Tax Lien Act.

Estate Tax Deduction Unavailable for Unpaid Gift Tax on Net Gift Estate of Sommers v. Commissioner, 149 T.C. No. 8 (August 2017)

Sheldon Sommers made gifts to his nieces, Wendy, Julie and Mary Lee, within approximately one year of his death. These gifts were contingent upon an agreement that each niece would pay the gift tax associated with her gift. Sheldon's surviving spouse / executor, Bernice Sommers, filed motions of summary judgment seeking determinations that (1) the gift tax owed on death for these gifts was deductible, (2) that the estate was entitled to a marital deduction equal to Sheldon's non-probate estate, given that under New Jersey state law, such was exempt from debts and expenses of the estate (including the aforementioned payments of gift tax) and (3) that any federal estate tax due must be apportioned among the nieces, as recipients of these gifts, so as to not reduce the estate's marital deduction. The Tax Court held against Bernice on all three counts.

The court found that as the nieces' payment of the decedent's gift tax liability would have given rise to a claim for reimbursement from the nieces under the agreements governing the gifts, the gift tax owed on those gifts at death was found to not be deductible.

The court further determined that as the actual marital deduction turns on the question of the extent to which assets otherwise exempt from claims against the estate are used to pay estate debts and expenses, the motion regarding the effect of debts and claims on the marital deduction was also without merit, and thus was similarly denied.

Finally, because New Jersey state law does not allow apportionment of estate tax liability among any other individuals, the court also denied the surviving spouse's motion to apportion estate tax liability among nieces.

Conveyance of Home from Taxpayer to Parents Determined to be Part Sale and Part Gift Fiscalini v. Commissioner, T.C. Memo 2017-163 (August 2017)

In 1993, Robert Fiscalini, along with his parents, purchased a home for $274,312. Mr. Fiscalini contributed $234,312 of this amount, and his parents paid $40,000 in cash. Ten years later, Mr. and Mrs. Fiscalini transferred their interest in the home to their son, Robert, gratuitously, and without consideration.  Over the next four years, Robert Fiscalini made several improvements to the home, using resources from his construction business, and also refinanced the house several times. In 2007, the mortgage owed was up to $664,048, and the Robert had fallen behind on his mortgage payments. In an effort to avoid foreclosure, he sold the house back to his parents. The closing statement showed that the total consideration was $975,000, which consisted of his parents paying off the mortgage balance on one hand, and Robert making a gift of his equity interest in the property, valued at $295,655, to his parents.

Robert did not file or pay taxes on the sale of the home on his 2007 return, because he did not have the funds to do so. He finally did so however, in 2013. Upon receipt of this very late filing and payment, in addition to levying failure to file and failure to pay penalties, the IRS sought determinations on the amount realized by the sale, and Robert's basis, arguing that Robert had underreported his amount recognized by $335,655, which included the $295,655 listed on the closing statement as the portion of this house gifted to his parents, and the $40,000 value of the portion of the house previously gifted to him by his parents. A further underreporting was alleged in connection with the additions to his basis in the property resulting from his reported improvements.

The Tax Court agreed with Robert's argument that the $40,000 value of the parents' gift to him of their interest in the house should be included in his basis, thus elevating such basis to the initial total purchase price of $274,312. The court, however, declined to accept the inclusion of his improvement costs in the house, as he was unable to present any sort of evidence of cost or payment, beyond anecdotal evidence. This is likely due to the fact that the he used resources from his own construction business to make the improvements, and seemingly did not keep track of his expenses.

The Tax Court did however also agree with Mr. Fiscalini regarding his amount realized. While the IRS argued that the amount realized was the full $975,000 shown in the closing statements, the Tax Court ruled that the transaction was actually part gift and part sale, and thus, Mr. Fiscalini's amount realized was limited to the portion actually sold, and not gifted, to his parents.

Determination that Inappropriate Method Was Used in Valuing Hunting Trophies Donated to Charity Results in Significant Reduction of Charitable Deduction Gardner v. Commissioner, T.C. Memo 2017-165 (August 2017)

This case begins "To paraphrase Ernest Hemingway, there is no hunting like the hunting for tax deductions."  Paul Gardner, an avid big game hunter, decided in 2006 to downsize his substantial collection of hunting trophies by donating many of his less desirable specimens to the Dallas Ecological Foundation. This donation consisted of mounted animal heads, skulls, antlers, skins and hides, etc. Relying on an appraisal, he claimed a charitable deduction of $1,425,900, which he was able to carry forward into 2007 and 2008. The IRS selected his 2006, 2007 and 2008 returns for examination, and determined that the value of the specimens were at most $163,045. The IRS accordingly determined a total deficiency of $411,875.

The appraiser and the IRS had such disparate valuations because the appraiser used a replacement cost valuation method, while the IRS used a comparable sales valuation method. The question of which valuation method was appropriate to use would turn on the quality and rarity of the specimens. If the specimens were indeed rare and/or high quality, the appraiser's replacement cost system would be appropriate, whereas if the specimen were found to be ordinary, for lack of a better word, the comparable sales model would be appropriate.

The IRS referred to record books maintained by certain hunting organizations, which provide guidelines as to the quality of a hunting trophy based on scoring systems, including the animal's size or other features, as well as any other unusual provenance. These record books only list animals whose features or provenance would score exceptional ratings. Mr. Gardner donated 177 specimens in all, none of which were found to be "record book" quality. The Tax Court notes that of his entire collection, only three trophies were record book quality, and none of those were donated.

The Appraiser, however, still used the replacement cost method, taking the position that the costs reflected in his report were Mr. Gardner's likely costs of travelling to find, killing, transporting back to the U.S., and mounting or otherwise preparing a specimen. For instance, one Central Asian sheep's skin was valued at $75,600.

It turns out that after accepting the donation, the Dallas Ecological Foundation put all of the items into storage, and eventually dispersed them all, selling or donating the same. As such, no experts were able to testify at trial as to the quality of the specimens.

After the IRS conducted its own valuation using comparable sale valuation, it determined that Mr. Gardner's tax liability would not increase for 2006, as it would be covered by the deduction they calculated, but would increase significantly for each of 2007 and 2008.

The Tax Court agreed with the IRS, finding, absent physical evidence of the specimens actually donated, that given the presumed quality/rarity of the specimens, that Mr. Gardner was only entitled to use the comparable sales valuation method.

Withdrawal of Proposed § 2704 Regulations

As a result of Executive Order 13789 which set its sights on regulations, the Treasury Department has announced the withdrawal of the proposed § 2704 Regulations, which were designed to curtail valuation discounts on interests in family-controlled entities, due to the owners' limitations over control/alienability of these interests.

Announcement of 2018 Unified Estate and Gift Tax Exclusion Amount, Generation-Skipping Transfer Tax Exemption and Gift Tax Exclusion

The 2018 Exception and Exclusion amounts are expected to be officially announced by the IRS shortly.

The unified estate and gift tax exclusion amount, as well as the GST tax exemption are both expected to be $5,600,000, up from $5,490,000.

The gift tax annual exclusion amount is expected to be $15,000, up from $14,000.

Wealth Management Update – November 2017

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions