With portability, the estate tax concerns of most clients have been alleviated. However, in some cases, the generation skipping transfer tax (“GSTT”) problem remains unsolved, because the portability provisions of Internal Revenue Code (“IRC”) § 2010(c) do not port or transfer the GST exemption of the deceased spouse (“Decedent”) to the surviving spouse (“Survivor”).
Portability and its new developments have caused many estate planners to move away from drafting the previously oft used “A-B trust” or “two trusts.” Instead, estate planners have increasingly employed the disclaimer trust – a trust where all of the trust assets stay in one trust unless the Survivor decides for estate tax or non-tax reasons to disclaim assets to the equivalent of a bypass trust. Because of portability, the disclaimer trust will satisfy the estate tax objectives of many married clients without the necessity of creating an “A-B trust.” However, the disclaimer trust will not fully satisfy the needs of every client. This is particularly the case for those clients who may be subject to the GSTT.
For these clients instead of employing the pure disclaimer trust, they can either revert back to using the traditional “A-B” trust or consider creating a QTIP trust and making a reverse QTIP election. Depending on the nature of the client’s assets and the domiciliary of the client, however, it may be more advantageous from an income tax perspective to avoid the bypass trust in the traditional “A-B” trust regime. In these circumstances, use of a QTIP trust with a reverse QTIP election could be a fruitful solution.
By making a reverse QTIP election under IRC § 2652(a)(3) over a properly executed QTIP trust (with an inclusion ratio of zero), the Decedent is deemed to be the transferor of the assets passing under the QTIP trust for GSTT purposes. In other words, no QTIP election is deemed to have been made for purposes of GSTT. Therefore, the Decedent’s GSTT exemption can be allocated to the QTIP trust even though the trust is includable in the Survivor’s estate for estate tax purposes. Effectively, then, the Decedent is able to port his or her GSTT exemption to the Survivor (to the extent the QTIP trust is funded). In this way, married clients who may be subject to GSTT may avail themselves to the benefits of portability while also maximizing their GSTT exemption. This solution may result in greater usage of the reverse QTIP election.
Many of our clients have residences in or spend a significant amount of time in both Nevada and California. Although the state of Nevada has no income tax, the state of California taxes non-residents on any California taxable income and California residents on all income. If individuals are not careful, they may be considered residents of California and therefore subject to California income tax on all of their income. Fortunately, the California Franchise Tax Board has issued some guidelines for determining resident status.
FTB publication 1031 sets out the test for determining residency as follows:
“A resident is any individual who meets any of the following:
The publication further explains, “the underlying theory of residency is that you are a resident of the place where you have the closest connections.” The Franchise Tax Board Publication also provides the following partial list of factors that the state may consider in determining whether a person is a resident or non-resident:
If a person is treated as a resident of California, it may subject them to potentially large income tax consequences. Aside from the tests and factors outline, there are many other things to consider when determining or evaluating residency. Should you have any questions regarding your residency status, please contact our office.
Every once in a while we hear rumors that lawmakers might make changes to our tax laws that would affect planning involving Legacy Trusts. We heard this about a year ago, and new rumors have been heard on the same subject very recently.
A Legacy Trust (also known as a Dynasty Trust or Generation Skipping Trust or GST Trust) is a trust set up in a state that has repealed the “rule against perpetuities” so that the trust can remain in place for multiple generations. In Nevada, a Legacy Trust can exist for up to 365 years. These trusts are typically designed so that the assets held by the trust are not included in the estate of any beneficiary of the trust and therefore the trust is not subject to the federal estate tax during the duration of the trust. For example, if $5 Million were funded into a Legacy Trust today and if those funds could appreciate consistently at 6% and not be subject to multigenerational transfer taxes (estate tax), then the trust would be worth $92 Million in 50 years.
Now for the scare tactics: We strongly suspect that we have a limited opportunity to take advantage of the $5 Million gift tax exclusion that is set to expire at the end of 2012. If lawmakers also somehow remove the advantages of a Legacy Trust in the coming years, then today is the perfect opportunity to engage in some estate planning that will utilize a Legacy Trust for your children and grandchildren. A trust that is established and that is funded with assets would be almost certainly “grandfathered” in the event of a change in the laws. We feel that now is the best possible time to engage in this type of planning.
We are now nine months into 2010 and many of the same questions facing estate planners and their client earlier this year in January are still unanswered.
Will we see estate tax legislation prior to 2011 preventing a return to a pre-EGTRRA tax regime?
Will that legislation affect the current estate tax environment and provide for the retroactive installment of an estate tax?
How do I handle this carryover basis business?
What federal estate tax form should be filed for persons dying during 2010?
Thus, with these and other unanswered quizzical queries floating around the estate tax world, what’s an estate planner to say at the next neighborhood BBQ when his/her clients, tax preparing colleagues, and/or the throngs of interested parties and neighborhood children are almost certain to ask if a 706 needs to be filed during 2010? Unfortunately, as far as we can tell, these and many similar questions are no closer to being answered today than they were at the beginning of the year. And with a pivotal election season on the horizon, it’s unlikely we’ll see any resolution on the estate tax front before November. That being said, there are some hints of guidance and forthcoming information in the area of estate tax return compliance which we are wont to share with you, our readers, as expressed below:
First, Internal Revenue Code Section 6075 addresses the time for filing an estate tax return. Section 6075 states that those required to file estate tax returns are required to do so by the due date on which the final federal income tax return the decedent would have filed, i.e. April 15, 2011. At this point, you might be saying, “That’s great! But, on what form do I report the pertinent information, and how do I file it, seeing as how there is no IRS Form 706, United States Estate (and Generation- Skipping Transfer ) Tax Return for 2010 available?” To which I would reply, “See my second point below.”
Second, the word on the street is that the IRS will not be releasing a traditional Form 706 for 2010. Rather, the Service will be providing a new type of return meant to address the carryover basis provision of the 2010 estate tax law as well as the accompanying allocation of stepped-up basis allowances ($1.3 million to anyone and $3 million going to a spouse or QTIP-like trust) feature. Apparently the new return will require that within 30 days of its due date, each person receiving property as part of the administration of the trust/estate is to receive the basis information being reported on the return. Additional information from the IRS supports the rumor that the death of the 706 for 2010 is not exaggerated seeing as how an attorney for the IRS (Patrick Leahy) publicly stated that it is not necessary to file a Form 706 this year and that if one is filed, it will be returned to the party that filed the form. Consequently, in an estate tax world of many uncertainties, at least three things are quite certain: (1) The IRS will provide a mechanism to report the allocation of stepped-up basis on inherited assets for 2010; (2) the tracking of this basis will likely be the bane of many a CPA’s existence for years to come; and (3) whatever you do, don’t file a Form 706 for 2010.
Third, if new estate tax legislation is not put in place in the near future, the estate tax regime formerly known as a “55% rate and a $1 million exemption”s will be making an encore appearance come 2011. In the event of such an occurrence, rest assured, one more thing is relatively certain: enough federal estate tax returns will be filed for deaths taking place in 2011 to more than make up for the dearth of such filings this year.
Fourth, plan accordingly.
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