Thursday, October 6, 2016

Rev. Proc. 2016-49

The recent issuance of Rev. Proc. 2016-49, which modifies and supersedes Rev. Proc. 2001-38, now puts the taxpayer in the driver’s seat. Recall that in Rev. Proc. 2001-38, the Service was providing relief for the surviving spouse when an unnecessary QTIP election was made, by treating such a QTIP election as though it had not been made. Practitioners began to question whether Rev. Proc. 2001-38 would render a QTIP election a nullity when made in order to qualify for a state marital deduction where such an election was not needed to reduce the Federal estate tax liability to zero. Then when portability came into the picture, the enhanced concern about basis adjustment at death drove practitioners to want to make a QTIP election even though not needed to reduce the estate tax liability, to permit the surviving spouse to make larger gifts that would not be subject to gift tax or solely to obtain a basis adjustment at death. Yet in view of Rev. Proc. 2001-38, it was not clear whether a QTIP election that did not result in a reduction in estate tax was viable.

Now the Service has solved this dilemma with Rev. Proc. 2016-49. A QTIP election will only be void if ALL of the following are satisfied:

  1. The estate did not exceed the applicable exclusion amount in any event so that a QTIP election would not reduce the estate tax liability.
  2. No portability election was effectively made, either because not actually made or because of a late filed return.
  3. The taxpayer notifies the IRS on a supplemental return that such a QTIP election previously made should be treated as void.
  4. The taxpayer provides sufficient evidence, which could consist of the return on which the
    unnecessary QTIP election was made, that the QTIP election was not needed to reduce the estate tax liability to zero based on the values as finally determined for estate tax purposes.

A QTIP election will not be treated as void where ANY of the following are true:

  1. A partial QTIP election was required to eliminate estate tax and the executor made a
    larger QTIP election than was necessary to reduce the estate tax liability to zero.
  2. The QTIP election was stated as a formula designed to reduce the estate tax liability to zero.
  3. The executor made a protection QTIP election.
  4. The executory made a portability election.

The taxpayer did not request that the QTIP election be treated as void and follow the procedure for having the election treated as void.

Monday, October 3, 2016

In a recent Tax Court decision, Harry H. Falk, and Steven P. Heller, Co-Executors, v. Commissioner of the Internal Revenue, the United States Tax Court ruled that in the case of the Madoff Ponzi scheme, an estate which paid estate tax on Madoff assets which subsequently have become worthless can claim a theft deduction.

James Heller, a New York state decedent, died in January 2008 owning a 99% interest in James Heller Family, LLC (the “LLC”).  The only asset held by the LLC was an account with Bernard L. Madoff Investment Securities, LLC.  In November of 2008, the Executors of Mr. Heller’s estate withdrew some money from the LLC’s Madoff account in order to pay estate taxes and other administrative expenses.  Shortly thereafter, the news of the Madoff Ponzi scheme became public. Suddenly, the LLC’s interest and the estate’s interest in the LLC became worthless.

In April 2009, the Executors of the Estate filed an estate tax return which included the decedent’s 99% interest in the LLC – as valued at the date of his death – in his gross estate.  But the estate also claimed a theft loss deduction relating to the Ponzi scheme in an amount equal to the difference between the values of the estate’s interest in the LLC at death and the estate’s share of the amount withdrawn from the LLC’s Madoff account.  The Internal Revenue Service issued a notice of deficiency, claiming the estate was not entitled to the theft loss deduction because the estate did not incur a theft loss.

Internal Revenue Code Section 2054 allows a deduction from the value of a gross estate of “losses incurred during the settlement of estates arising from…theft.”  The Internal Revenue Service argued that the LLC incurred the loss, not the estate, and as such the theft deduction is not appropriate.  However, the Court determined that the loss suffered by the estate related directly to its LLC interest, the worthlessness of which arose from the theft.  The theft extinguished the value of the estate’s LLC interest, thereby diminishing the value of the property available to the decedent’s heirs.  As such, the Court determined a theft deduction appropriate.

Tuesday, September 27, 2016




Both presidential candidates have proposed changes to the estate tax regime.  Coming as a surprise to nobody, the proposals are quite different. (more…)

Thursday, September 22, 2016



Based on the Consumer Price Index for the 12-month period ending August 31, 2016, Thompson Reuters Checkpoint has released their projected inflation-adjusted Estate, Gift, GST tax, and other exclusion amounts for 2017, as follows: (more…)

Monday, September 19, 2016

One of the many requirements that a trust must meet in order for it to qualify as a Charitable Remainder Annuity Trust (“CRAT”) is the “Probability of Exhaustion Test”.  This test applies to CRATs whose annuity term is based on one or more lifetimes, and requires the likelihood that the charitable remainder beneficiary will not receive its interest in the trust be 5% or less.  If a trust fails the test, then the charitable remainder interest does not qualify for income, gift, or estate tax charitable deductions, and the trust is not exempt from income tax. (more…)

Wednesday, August 17, 2016


Divorce decree, gavel and folder shot on warm wooden surface


At a minimum, we recommend that our clients review their existing estate planning documents every few years, and also when big life changes are happening.  Going through a divorce is one of those times.  Here are some things to consider when you are considering divorce or separation, and after your divorce is final: (more…)

Monday, June 20, 2016

When the taxpayer in PLR 201547010 decided to invest his IRA assets in a partnership, he forgot to check whether his IRA provider was able to hold an interest in a partnership as an investment in the IRAs for which it served as custodian.  While all IRA accounts are able to hold investments in publicly traded securities, i.e. stocks, bonds and mutual funds, not all IRA custodians are set up to handle alternative investments, such as direct ownership of a business, real estate, partnership interests and LLC member interests, in their IRA accounts managed pursuant to their IRA account agreements.  In fact, some IRA account agreements specifically preclude ownership of such alternative assets in the IRA accounts covered by the IRA custodian’s account agreement.

In this PLR, Taxpayer A instructed the IRA Custodian to invest his IRA assets in a percentage partnership interest of Partnership C.  The IRA Custodian issued a check in November of 2012 payable to Partnership C for the amount required for purchase of that percentage partnership interest in Partnership C, and Partnership C indicated that the percentage interest was owned by “Taxpayer A IRA”.  However, since the IRA Custodian’s account agreement did not authorize the Custodian to hold the partnership interest in Taxpayer A’s IRA, the IRA Custodian issued a 1099-R reporting the payment to Partnership C as a distribution from Taxpayer A’s IRA.  When finalizing the preparation of his 2012 income tax return in October 2013, Taxpayer A finally came to a full appreciation of the significance of the IRA Custodian’s 1099-R, that a mistake had been made in the purchase of the percentage partnership interest.  Had he opened another IRA with another IRA Custodian whose account agreement would permit the ownership of a percentage interest in Partnership C in a new IRA account for Taxpayer A and had he directed the old IRA Custodian to transfer the amount for purchase of the Partnership C percentage partnership interest in a custodian to custodian transfer from Taxpayer A’s IRA B for a new IRA to use to purchase the Partnership C percentage partnership interest directly in a Taxpayer A IRA, there would have been no 2012 IRA distribution to report on his 2012 income tax return.

Since more than 60 days had elapsed following the purchase of the Partnership C percentage partnership interest with assets from Taxpayer A’s IRA B, the amount of the purchase price for this interest could no longer be rolled over to a new IRA without a waiver by the Service of the 60 day rollover requirement under § 408(d)(3).  The Service has the authority to waive the requirement that the rollover of funds to an IRA be completed within 60 days from the date on which the distributee received the property distributed “where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.” § 402(c)(3)(B).

As set forth in Rev. Proc. 2003-16, 2003-4 I.R.B. 359 (January 8, 2003), in determining whether to waive the 60 day requirement, the Service will “consider all relevant fact and circumstances,” including:

1.                  Errors committed by a financial institution;

2.                  Inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error;

3.                  The use of the amount distributed; and

4.                  The time elapsed since the distribution occurred.

Taxpayer A attempted to convince the Service that his failure to purchase the Partnership C partnership interest in his IRA was due to financial institution error, to fall within one of the factors enumerated in Rev. Proc. 2003-16.  Instead, the Service stated that “Taxpayer A chose to use the proceeds from IRA B to fund a business venture rather than attempt to roll the proceeds over into an IRA account for retirement purposes.”  Apparently, the Service was focusing on the failure of Taxpayer A to open a new IRA with an IRA Custodian who was able to hold a partnership interest in Taxpayer A’s IRA, as a failure or error within the control of Taxpayer A.  All Taxpayer A had to do was read the IRA account agreement, or contact Custodian C directly about whether Custodian C was able to hold Partnership B partnership interests in Taxpayer A’s IRA.  Had he done that, he would have known that he needed a different IRA in order to do what he wanted to do, that is, own Partnership C partnership interests in his IRA.  This failure was, in the Service’s view, within the “reasonable control” of Taxpayer A, and was beyond the scope of the Service’s ability to waive the 60 day rollover requirement.


Monday, May 2, 2016

34997441Update: According to media sources, a lawyer for Bremer Bank and Trust, the corporate fiduciary appointed to administerPrince’s estate,  said the bank is continuing to search for a will and the judge in the Court, Judge Kevin W. Eidge, stated “We are not finding that there’s no will, but that no will has yet been found.”

The following was originally published on April 28, 2016.

As we’ve all seen in the news, musician Prince passed away on April 21, 2016 at the age of 57.  According to news sources, on April 26, just five days later, one of Prince’s six siblings, his sister Tyka Nelson, filed documents with the Carver County probate court stating “I do not know of the existence of a Will and have no reason to believe that the Decedent executed testamentary documents in any form.”  News sources have gone crazy, announcing that Prince died without a Will directing who should inherit his estate and therefore his six siblings will inherit everything.  But is this actually true?  Maybe, maybe not.

We don’t know about you, but, except for the fact that this is what we do for a living, our brothers (we each only have one sibling) would probably have no idea if we have a Will (or other estate planning) in place.  Maybe he would get around to going through all of our files to see if we have one stored somewhere or find the name of our lawyer in six days, but that’s pretty unlikely, given all of the things that typically take place immediately after someone dies (think, funeral, grieving, etc.).  Tyka may be absolutely correct – We’re not saying she’s not, but we don’t think that her statement that she doesn’t know of a Will conclusively means there isn’t one.  As of yesterday, TIME Magazine online reported that Bremer Trust Company was appointed by a judge to temporarily oversee Prince’s estate for six, which indicates that the court is not closing on the door on a possible Will being produced. (more…)

Wednesday, April 27, 2016
Photo from:

Photo from:

You may not have produced over 30 albums, accrued over $300 million and an equivalent amount of fans as Prince, but, like the recent pop star, you too have a legacy that could impact many individuals around you. (more…)

Tuesday, March 8, 2016
Budget concept

Budget concept

The Department of the Treasury has released the Treasury Green Book  for Fiscal Year 2017, which provides explanations of the President’s budget proposals.  One such proposal (remember…these are just proposals, not actual changes in the law) that may affect your estate planning, if passed, is found on page 240 of the Green Book and is re-printed here for your convenience:


Current Law

Private foundations that are exempt from Federal income tax generally are subject to a two percent excise tax on their net investment income. The excise tax rate is reduced to one percent in any year in which the foundation’s distributions for charitable purposes exceed the average level of the foundation’s charitable distributions over the five preceding taxable years (with certain adjustments). Private foundations that are not exempt from Federal income tax, including certain charitable trusts, must pay an excise tax equal to the excess (if any) of the sum of the excise tax on net investment income and the amount of the unrelated business income tax that would have been imposed if the foundation were tax exempt, over the income tax imposed on the foundation. Under current law, private nonoperating foundations generally are required to make annual distributions for charitable purposes equal to five percent of the fair market value of the foundation’s noncharitable use assets (with certain adjustments). The amount that a foundation is required to distribute annually for charitable purposes is reduced by the amount of the excise tax paid by the foundation. (more…)