Monday, October 29, 2012

As discussed in our prior post, “2012 Gift Tax Opportunities: Wait to Gift, but Do Not Wait to Plan“,  we discussed how the 2010 Tax Relief Act has provided a great opportunity for lifetime gifts to family members with a temporary increased estate and gift tax exemption of $5.12 million making these gifts potentially free of ever incurring gift or estate tax. The exemption will return to $1 million on January 1, 2013 unless Congress acts, and although most commentators think a return to $1 million is unlikely, there is a good possibility the exemption will be reduced.  However, many people are reluctant to make gifts of their liquid assets, in case they might have need of them as the get older.  Many people, therefore, are looking for ways of making a gift on a non-liquid asset, such as their home or another piece of real estate, such as a vacation home.  Two methods of making such gifts are the Qualified Personal Residence Trust (a “QPRT”) and the Intentional Grantor Residential Trust.

A QPRT is an irrevocable trust, to which the Grantor transfers a residence (either his primary residence or a vacation home) while retaining the right to live in the transferred residence rent-free for a term of years (not for life). If the Grantor outlives the term, (more…)

Thursday, October 25, 2012

In PLR 201231003, the taxpayer requested an extension of time to file the Form 8939 to make a timely election to apply the provisions of § 1022 of the Code to determine the basis of property acquired from a decedent who died in 2010, pursuant to § 301.9100-3.

Notice 2011-66 stated that an extension of time to file a Form 8939 could be sought and granted under four limited circumstance, one of which was that the taxpayer met the requirements for an extension under § 301.9100-3. That Regulation requires that the taxpayer acted reasonably and in good faith, defining such to include when the taxpayer “(v) 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.” (more…)

Monday, October 22, 2012

When is a transferee of a decedent’s assets not a transferee subject to liability under §6324(a)(2) of the Code? The U.S. District Court of Utah’s answer to that question in United States v. Johnson, 109 AFTR 2d 2012-2253 (DC UT, 5/23/2012) was surprising when it held that the trust beneficiaries who had received the outright distribution of all of the assets of the decedent’s trust, subject to a Distribution Agreement that each beneficiary would be responsible for the payment of any unpaid estate tax, were not transferees subject to transferee liability for the estate tax under §6324(a)(2).

This case came before the Court in a motion to dismiss for failure to state a claim upon which relief can be granted. The defendants in this case consisted of the four residuary trust beneficiaries (referred to as the Defendant Heirs) and the Personal Representative of the Estate administering the decedent’s pour over will and the Trustees of the decedent’s revocable trust charged by the trust instrument with the payment of the decedent’s debts and estate taxes (referred to as the Defendant Fiduciaries). The Trustees filed the estate tax return and, since the bulk of the estate consisted of closely held stock, elected to defer the payment of a portion of the estate tax under § 6166 of the Code. Within six months after the filing of the estate tax return, the Trustees distributed all of the trust assets to the Defendant Heirs, and the Defendant Heirs and Defendant Fiduciaries executed a Distribution Agreement under which the Defendant Heirs acknowledged that the payment of the federal estate tax had been deferred under § 6166 and would be an “equal obligation of the Beneficiaries to pay as the same becomes due.” (more…)

Thursday, October 18, 2012

The IRS recently released Rev. Proc. 2012-41, which, in part, announces the inflation adjusted figures for annual exclusion gifts in 2013.

According to the Revenue Procedure, “For calendar year 2013, the first $14,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts under § 2503 made during that year.”

In addition, for those with a non-citizen spouse, “For calendar year 2013, the first $143,000 of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) are not included in the total amount of taxable gifts under §§ 2503 and 2523(i)(2) made during that year.”

Monday, October 15, 2012

In late September, the Service posted on the IRS website the new Draft Form 709 for reporting 2012 gifts and Draft Instructions for the Form 709.  This new form has also been updated to address the deceased spousal unused exclusion (“DSUE”).  A new Line 19 has been added to Part 1 – General Information, asking whether the taxpayer has applied DSUE from a deceased spouse on this or any other Form 709.  If so, the taxpayer is directed to complete a new Schedule C to determine the available DSUE, which is then included on Line 7 of Part 2 – Tax Computation as part of the maximum applicable credit amount.  The Generation-Skipping Transfer Tax computation is now on Schedule D.

It is important to note the caution at the beginning of these drafts:

“This is an early release draft of an IRS tax form, instructions, or publication, which the IRS is providing for your information as a courtesy.  Do not file draft forms.  Also, do not rely on draft instructions and publications for filing.”

Friday, October 12, 2012

Update: The IRS has now posted the final Instructions for the Form 706 for decedents dying in 2012, which can be found here.

The IRS has posted the final Form 706 for decedents dying in 2012, which can be found here.  However, final Instructions have not yet been posted.  Our discussion of the current Draft Instructions can be found here, but until the final Instructions have been released, they cannot be relied upon.

Friday, October 12, 2012


Applying Michigan law, in Pennell v. Alverson the Arizona Court of Appeals recently came out with a well-written opinion explaining when a trustee owes fiduciary duties to the remainder beneficiaries of a revocable trust.

Cleo Hubbard executed a revocable trust that provided that Cleo was the sole income and principal beneficiary of the trust during her lifetime, and that the remainder beneficiaries were Cleo’s daughters and grandchildren.  The trust also named Cleo as trustee and Angella Alverson, one of Cleo’s grandchildren, as successor trustee in the event of Cleo’s death or resignation.  Cleo later amended the trust to appoint Angella as co-trustee.

Cleo died and the remainder beneficiaries sued Angella alleging breach of fiduciary duty and a number of other claims.  Angella sought to dismiss the claims on the grounds that they were based on acts that were alleged to have occurred before Cleo’s death.  Angella argued that, until Cleo died, she didn’t owe a fiduciary duty as co-trustee to the remainder beneficiaries.  The trial court agreed with Angella and so did the appellate court.

After sorting through some conflict of laws issues, the appellate court determined that Michigan law applied.  Under Michigan law, the trust instrument frames the duties that a trustee owes the beneficiaries.  The remainder beneficiaries contended that the trust instrument imposed on the trustee a fiduciary duty to them at all times, including during Cleo’s lifetime.

It’s a lengthy provision, but we’ll include it here because the court found that this language did not impose a duty to the remainder beneficiaries of a revocable trust prior to the grantor’s death:

Trustee may freely act under all or any of the powers by this agreement given to them in all matters concerning the trust herein created, after forming their judgment based upon all the circumstances of any particular situation as to the best course to pursue in the interest of the trust and the beneficiaries hereunder, without the necessity of  obtaining the consent or permission of any person interested therein, or the consent or approval of any court.  Trustee may so act notwithstanding that they may also be acting individually, or as Trustee of other trusts, or as agent for other persons or corporations interested in the same matters, or may be interested in connection with the same matters as stockholder, director, or otherwise.  However,  Trustee shall exercise such powers at all times in a fiduciary capacity primarily in the interest of the beneficiaries hereunder.


Trustee shall have the power to do all acts, institute all proceedings, and exercise all rights, powers and privileges that any absolute owner of the trust property would have, subject always to the discharge of Trustee’s fiduciary obligations.

(Emphasis added.)

While it lacks some clarity, there’s nothing terribly unusual about that language.  Still, we know this was a revocable trust.  So, by reserving the right to alter the trust, Cleo implicitly reserved the right to change or eliminate the remainder beneficiaries up until her death or until the trust became irrevocable.  The court reasoned that the trust instrument could not sensibly impose on the trustee a duty to the remainder beneficiaries when, in creating the trust, Cleo reserved the right to modify the trust terms to eliminate the interests of one or more of the remainder beneficiaries.  Because Cleo could change the remainder beneficiaries up until the time of her death, no duty was owed to the remainder beneficiaries until Cleo’s death.

Side note: Arizona has a statute that actually should have made this a much easier analysis for the court had Arizona law applied: “While a trust is revocable by the settlor, the rights of the beneficiaries are subject to the control of, and the duties of the trustee are owed exclusively to, the settlor.” A.R.S. § 14-10603.  Under Michigan law, however, the terms of the trust could prevail over statutory provisions governing the duties and powers of a trustee: “the duties and powers of a trustee. . .and the rights and interests of a trust beneficiary” will be governed by any applicable “terms of the trust” (subject to some exceptions). Mich. Comp. Laws Ann. § 700.7105.

The underlying lesson, at least under Michigan trust law, is still to remember that the trust instrument controls.  So conceivably, the trust instrument could impose on a trustee of a revocable trust a fiduciary duty owed to remainder beneficiaries prior to the grantor’s death (or the trust otherwise becoming irrevocable).

Thursday, October 4, 2012

On July 1, 2012 Virginia became the 13th state to permit a settlor to establish an irrevocable trust where the settlor is a beneficiary and can still receive spendthrift protection against the claims of the settlor’s creditors. SB 11, which was signed by Governor Bob McDonnell on April 4, 2012, expanded the number of types of permissible trusts in Virginia and added new Virginia Code Sections 55-545.03:2 and 55-545.03:3 to permit self-settled domestic asset protection trusts. The legislation is effective for trusts created on and after July 1, 2012.

Generally, a settlor establishes an irrevocable trust to minimize the settlor’s taxable estate and/or protect the settlor’s assets from claims from the settlor’s creditors. However, only under very rare occasions can the settlor be the beneficiary of the irrevocable trust. These rare occasions and lack of control make irrevocable trusts less attractive to most potential settlors. Virginia’s new law makes it much more desirable to a domestic asset protection trust.

Virginia is the 13th state to enact domestic asset protection trust legislation. It joins Alaska, Delaware, Hawaii, Missouri, Nevada, New Hampshire, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah and Wyoming. (more…)

Monday, October 1, 2012

The 7520 rate for October 2012 has increased to 1.2%.

The October 2012 Applicable Federal Rates can be found here.