Post Mortem Estate Planning Executors Elections
Date other state(s) fiduciary income tax return(s) due:
Alternate valuation date:
references are to the Internal Revenue Code (“IRC”) unless otherwise indicated.
“DNI” refers to distributable net income; “IRS” to the Internal Revenue
Service; “QTIP” to qualified terminable interest property;
“ERTA” to the Economic Recovery
Tax Act of 1981, Pub. L. No. 97-34, 95 Stat. 172; “TRA 1997” to the
Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat. 788, “EGTRRA” to the Economic
Growth and Tax Relief Reconciliation Act of 2001,
Pub. L. No. 107-16,
“JGTRRA” to the Jobs and Growth Tax Relief Reconciliation Act of 2003, Pub. L.
No. 108-27, the “2010 Tax Relief
Act” to the Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation
Act of 2010, Pub. L. No. 111-312,
and “ATRA” to the American
Taxpayer Relief Act of 2012,
Pub. L. No.112-240.
During the course of the estate’s administration, an
executor performs four basic functions. The executor:
Determines and raises cash needs;
Pays reasonable funeral expenses, debts, administration expenses, and taxes; and
Distributes assets in accordance with the decedent’s will.
In the performance of these tasks, the executor is
faced with various alternatives, time limitations, and elections. Depending on
the uniqueness of the estate, the executor may be faced with a multitude of
elections and should be cautious in the exercise or non-exercise of each
of them. The executor must consider the estate tax, gift tax, income tax, and generation- skipping transfer
tax consequences of each election.
An equitable adjustment may be required because of an executor’s
election or the executor’s failure to make an election. The compression and reduction of the income
tax rates for individuals, trusts,
and estates caused
by the Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085, has
greatly influenced an executor when he or she makes an election. Non-tax
factors, such as the beneficiaries’ needs or a
beneficiary’s age may also have to be considered.
Notice of Fiduciary Relationship – Section 6903
An executor is required to provide written notice to
the Internal Revenue Service of the creation or termination of the fiduciary
relationship. §6903; Treas. Reg. §301.6903-1.
Written notice is generally provided
by Form 56, Notice Concerning Fiduciary Relationship.
Treas. Reg. §301.6903-1(b)(2) provides the requirements for notices filed
after April 24, 2002. The
notice must be signed by the fiduciary and filed with the service
center where the return of the person for whom the fiduciary is
acting is required to be filed. The notice must state the name and address of the person for whom the fiduciary is
acting, and the nature of such person’s liability; that is, whether
it is a liability for tax, and if so, the type of tax and the year
or years involved.
If notice of fiduciary capacity is not provided to the
Internal Revenue Service, notice of deficiency sent by the IRS to the deceased
taxpayer’s last know address will be sufficient compliance with the requirements of the Internal
Revenue Code, even though the taxpayer is deceased. Treas. Reg. §301.6903-1(c).
II. Decedent’s Final Income Tax Return
The final return is due on the regular date for filing
had the decedent lived for the entire taxable year, generally April 15. Treas.
It includes income
and deductions of the decedent
for a period beginning with the first day of the taxable year (generally January 1)
and ending with the date of death.
The executor should consider securing an automatic six
month extension of time to file the decedent’s final federal (using IRS Form
4868) and state personal income tax returns, if additional time is required.
The executor of an individual’s estate is not required
to make installment payments of a taxpayer’s
estimated income tax in respect
of income earned in the period
prior to death,
where the installments are not due until after death. IRS Letter Ruling 9102010.
The executor should prepare and submit IRS Form 4506
to the appropriate IRS Center, if necessary, to secure the decedent’s prior
years’ income tax returns. §6103(e).
The executor should make certain that decedent’s final
Form W-2 does not include salary, commissions, and bonuses paid after death
that are reportable as income in respect of a decedent on the estate’s
fiduciary income tax returns.
Note that a decedent’s final income tax return must
report all income actually distributed to that individual before death from a
simple trust regardless of the date on which the trust’s fiscal year ends.
§652. Income required to be distributed, but is in fact distributed to that individual’s estate,
is included in the estate’s
gross income as income in respect of a decedent under section 691. Treas. Reg.
Similar rule applies
with respect to distributions made from an estate or a complex
trust. §662; Treas. Reg.
For partnership tax years beginning
after December 31, 1997, the death of a partner
will result in the closing of
the partnership’s tax year with respect to that partner. §706(c)(2)(A). The
partnership’s tax year
continues for the
remaining partners. Consequently, partnership income or loss received by the partner
through date of death will be reportable on that individual’s final personal
income tax return. Is there any possibility of deferring or accelerating this
income or loss prior to death?
The executor or administrator must sign the return, if
an executor or administrator has been appointed.
a. a. The surviving spouse and the fiduciary must sign the return if it is a
If no fiduciary
has been appointed, on a joint
return, the surviving spouse should sign the
return and write “Filing as surviving spouse” in the signature area.
The executor should
prepare and file IRS Form 1310 (Statement of Person Claiming
Refund Due a Deceased Taxpayer), with evidence of the fiduciary’s
appointment to the appropriate Service Center, if income tax refund is due.
Form 1310 will normally be filed by a fiduciary
claiming a refund for the decedent on Form 1040X or Form 843.
b. b. The executor need not file Form 1310
A surviving spouse is filing an original or amended joint return with
A personal representative is filing an original Form
1040, Form 1040A, or Form 1040EZ for the decedent and is attaching a court certificate
showing his or her appointment.
Joint Return Versus
The executor and surviving spouse can file a joint
return on behalf of the decedent and surviving
spouse, if the decedent was
married at the time of death and
the surviving spouse
has not remarried before the end of the surviving spouse’s
taxable year. §6013(a)(2). However, a joint return is not available if either spouse
is a nonresident alien at any time during the taxable
A joint return
includes income and deductions of the decedent
for the period
ending at the date
of death and includes a surviving spouse’s
income and deductions for the entire
year. Treas. Reg. §1.6013-1(d)(1).
Liability for the entire tax shown on the return is
joint and several. §6013(d)(3). The executor
should consider whether
he or she is assuming
a risk for the surviving
spouse’s unknown tax liabilities.
Liability for joint tax must be allocated. The estate tax deduction for income taxes due is limited to that amount for which the
decedent’s estate would be liable under local law. Absent contrary evidence, that deductible amount is determined as follows:
the decedent’s separate tax liability divided by the combined separate
tax liability of the decedent and the surviving
spouse, multiplied by the total joint tax liability. Treas. Reg. §20.2053-6(f).
Consider filing a joint return
if the decedent’s deductions exceed
income, to avoid
the loss of excess deductions
in the final tax year. Excess capital losses and excess charitable deductions
may be otherwise wasted, unless the surviving spouse has or can generate
capital gains or other income in the final tax
Review decedent’s previously filed income tax returns
for carryovers (charitable contributions, capital losses, and net operating
expenses) that may otherwise be lost if not taken on a joint return with the
surviving spouse. Consider accelerating income to offset these losses (for example, making
§454(a) election re Series E Savings Bonds or
accelerating payouts under a deferred compensation plan).
The primary advantage of filing a joint return is that
the income is subject to more favorable tax rates; otherwise, the less favorable tax rate schedules
for married persons filing separately must be used by each of the parties.
For example, in 2014 with
$100,000 of taxable
income, the federal income tax saving can amount to $4,921.
The disadvantage of filing a joint return is the
potential exposure to the estate by becoming jointly and severally liable with
the surviving spouse for the entire tax and penalties.
2. The surviving spouse may
make a joint return with the deceased spouse
a. a. The decedent has made no return for the taxable year;
b. b. No executor has been appointed at or before the time of making the
joint return; and
No executor is appointed before the last day
prescribed by law for filing the surviving spouse’s return. Treas. Reg.
The executor may disaffirm a joint return filed by a surviving spouse.
The joint return
must be made in the form of a separate
return for the taxable year of the decedent concerning which the joint
return was made. Treas. Reg. §1.6013-1(d)(5).
It must be made within one year after the last day
prescribed by law for filing the surviving spouse’s return (including extensions). Id.
The separate return made by the executor shall
constitute the return of the deceased spouse for the taxable year.
d. d. The penalty and interest for delinquent returns,
as provided in sections 6651 and 6601, are applicable to the return made
by the executor in disaffirmance of the joint
The executor should consider making an election to
file a joint return for the prior taxable years in which the decedent filed
separate returns, for which a joint return could have been made by the decedent
and the decedent’s spouse under section 6013(a). §6013(b)(1); Treas. Reg.
Request for Prompt Assessment – Section 6501(d)
Under section 6501(d), a request for prompt assessment
must be in writing, filed after the return in question has been filed, and
filed with the district director for the internal revenue district in which the
return was filed.
The request must:
i. Be transmitted separately
from any other document;
ii. Set forth classes of tax and
taxable periods; and
iii. Clearly indicate that it is
a request for prompt assessment.
Its effect is to limit the time in which an assessment
of tax may be made, or to start court proceedings in court without
an assessment, to a period
of 18 months from the date the request
is filed with the proper district director. Treas. Reg. §301.6501(d)-1(b).
The special 18-month
period of limitations does not apply to any return filed after the request
has been filed unless an additional request is filed. Id.
Requests for prompt assessment can be made on IRS Form
4810, to insure that the requirements of Treas. Reg. §301.6501(d)-1 are
satisfied. However, such a request may precipitate an audit.
Request for Discharge from Personal Liability –
A request for discharge from personal liability must
be in writing, filed after the return in question has been filed, and filed with the internal revenue
office where the estate tax return is required to be filed. If no estate tax return is required to be filed,
the application should
be filed where the decedent’s final income tax return is required to be filed. §6905(a); Treas. Reg.
Within nine months after receipt of the application, the executor shall be notified
of the amount of taxes due and, upon
payment thereof, shall
be discharged from personal liability for any deficiency thereafter
found to be due.
If not notified,
the executor will be discharged at the end of the nine-month period
from personal liability for any deficiency thereafter found to be due.
A discharge under this section
from personal liability
applies only to the executor
in her personal capacity
and applies only to the executor’s own assets; it does not apply to the
executor’s liability in her fiduciary capacity to the extent of the estate’s
assets in her possession or control.
An executor should request a discharge from personal liability on IRS
A request for discharge from personal liability may precipitate an audit.
United States Savings Bonds – Section 454(a)
Cash-basis owners of Series E savings bonds
and similar obligations normally do not elect to report each year the increase in their
redemption price as taxable income.
If a decedent failed to make this election, the
executor may do so and the bonds previously unreported interest will be
included in the gross income on the decedent’s final income tax return.
§454(a); Rev. Rul. 68-145, 1968-1 C.B. 203.
The executor may make this election on the decedent’s final income tax return if the bonds
are held in a revocable trust
and the decedent
did not make the election. Rev. Rul. 79-409,
If a section 454(a) election is made:
a. a. The executor must make the election for all bonds - Series
E, EE, and Series H and HH U.S.
savings bonds (bonds acquired by the decedent in exchange for Series E or EE
b. The income tax liability attributable to the accrued
interest constitutes a deduction for federal estate tax purposes.
c. c. The section 691(c) deduction is lost.
d. d. The election presents
a good opportunity for accelerating income on the decedent’s final return; the estate may need additional income to avoid a loss of excess
deductions in the final year.
The election may be advantageous if the decedent is in
the 10 percent or 15 percent bracket and the beneficiaries of the bonds
are in the 35 percent
or 39.6 percent bracket.
Neither the estate nor any subsequent beneficiary is bound to report interest
annually in subsequent years
unless they elect to do so. Treas. Reg. §1.454-1(a)(1). Consequently, the beneficiary who receives the bonds may defer
tax on the interest accrued on them until redemption.
If a section 454(a) election is not
a. a. Unreported interest is income in respect of a
decedent, taxable under section 691(a) to the
estate or beneficiary, and subject to the income
tax deduction allowed under section 691(c).
The executor may make the election on a subsequent fiduciary income tax return. This practice may be desirable if there is a short
first taxable year for an estate with little other income.
c. c. The executor can redeem bonds to allow the estate
to report a portion of accrued income over a number of taxable years;
however, the executor should plan the redemptions to avoid any loss of
d. d. The executor should consider distributing the bonds to
residuary beneficiaries of the estate who would
report all accrued
interest on their own personal
income tax returns
in the earlier of the tax year in which they make a section 454(a)
election, or in which they redeem the bonds. Rev. Rul. 64-104, 1964-1 C.B. 223.
e. e. Bonds are includable in the gross
estate at a value equal
to the sum of the principal and accrued interest, regardless of
whether the executor made the section 454(a)
The executor may deduct unpaid medical expenses either
as a medical expense on the decedent’s income tax return or on the estate tax return, at the election
of the executor.
If the executor
pays the expense
during the one-year
period after death,
medical expenses may be
deducted on the return for the year when the expenses were incurred, but the executor
must waive the right to deduct those expenses for federal estate tax
purposes. Treas. Reg. §1.213-
3. A 7.5 per cent threshold applies for income tax purposes.
If the decedent
has not satisfied the 7.5 per cent threshold before
death, the portion
of the medical expenses paid
after death required to meet the threshold amount may not produce any tax
The portion of medical expenses
below the 7.5 per cent threshold may not be claimed for estate tax purposes, if medical expenses
above the 7.5 per cent threshold are deducted on the income tax return. Rev. Rul.
77-357, 1977-2 C.B. 328.
This provision does not apply to medical expenses that
the decedent incurs on a dependent’s behalf.
4. If the executor takes the
deduction for medical expenses for income tax
a. a. If the expenses
were incurred in the year before the final year, the executor
will have to deduct those expenses on that year’s
return, possibly requiring an amended return.
The deduction may reduce the final income tax liability, thus reducing the deduction of that liability on the estate tax
return, thereby increasing the estate tax.
If no estate tax is due, this may cause the credit shelter bequest
to be decreased and the marital deduction bequest to be
increased - the executor must take the potential future estate tax into
This deduction is normally more valuable for estate
tax purposes. If this deduction is taken on the estate tax return, the section 2053 deduction for the decedent’s income tax liability
A determination of where to deduct medical
expenses will give
the executor the power to change dispositive consequences and may require
some sort of equitable adjustment, as in the case of administration expenses and casualty losses.
Executor’s Compensation - Accept or Decline
Fees and commissions paid to the executor for services rendered
are deductible by the estate either on the estate tax return or
the estate’s income tax return (or partially on each), as the executor chooses.
§§642(g), 2053(a)(2); Treas. Reg. §1.642(g)-2.
The compensation is also taxable income. §61.
The executor must consider these factors:
a. a.. Whether the executor is also a beneficiary of any portion of the estate.
The personal liability assumed by the executor. For
example, see 31 U.S.C.A. §3713, which imposes personal liability on fiduciaries
for paying debts or distributing assets, which result in insufficient funds
available to satisfy a decedent’s tax obligations.
c. c. The estate’s net incremental estate tax bracket and
income tax bracket versus the executor’s marginal income tax bracket.
If beneficiaries are of a younger generation than the
executor, the executor’s waiver passes the fees down without incurring estate
or gift tax.
Taking commissions brings income tax advantages to the estate and beneficiaries.
The commissions reduce
the estate’s taxable
income during the tax year;
however, check local law to
determine whether a court order is required for the advance payment of
b. b. Excess deductions are passed through to the beneficiaries in the final
Section 67 makes this planning technique less valuable
to individuals since those excess deductions are no longer
deductible except to the extent that they exceed two per cent of the individual’s adjusted
However, it is still a viable planning
technique for individuals whose miscellaneous
itemized deductions already exceed two per cent of adjusted gross income.
They may be able to keep the estate open for a longer
period of time by using the deduction for commissions to offset additional
If a fiduciary is taking commissions, determine
whether local law authorizes the payment of
compensation in excess of the commissions prescribed by statute, if he or she
renders extraordinary services.
The IRS issued
guidelines on when the executor
may waive the right to receive commissions without incurring income tax
or gift tax liability. Rev. Rul. 66-167, 1966-1 C.B. 20. The executor may do so:
a. a. If the executor
formally waives the right to compensation for services within
six months after the initial appointment.
If the executor
fails to claim fees or commissions at the time of filing
usual accountings, and all other attendant facts and circumstances are consistent with a continuing intention to serve gratuitously.
“If the timing, purpose, and effect of the waiver make
it serve any other important objective, it may then be proper to conclude that
the fiduciary has thereby enjoyed a realization of income by means of
controlling the disposition thereof, and at the same time, has also effected
a taxable gift by means of any resulting transfer
to a third party of his
contingent beneficial interest
in a part of the assets under his fiduciary control.” Rev. Rul.
66-167, 1966-1 C.B. 20; see also Breidert
v. Commissioner, 50 T.C. 844 (1968), acq., 1969-2 C.B. xxiv.
III. Estate’s Fiduciary Income Tax Return – Form 1041
Selection of the Tax
Section 644, which requires all trusts to adopt a
calendar year as their taxable year, does not
apply to estates.
a. a. This provision eliminates the ability of trusts to
defer taxes on amounts distributed to trust beneficiaries.
The rule does not apply to tax-exempt trusts
(described in section 501(a)) and wholly charitable trusts (described in
section 4947(a)(1)). §644(b).
Under the current law, the selection of an estate’s
tax year is still one of the most important elections that the executor must make.
The election is made on the first
fiduciary income tax return, which
is due three and one half
months after the close of the taxable year. Treas. Reg. §1.6072-1(a).
a. a. It allows the executor to use hindsight in making the election.
The primary objectives of the election are to:
i. Equalize the income tax
brackets of the estate and beneficiaries.
ii. Defer payment of income taxes.
Use the estate’s $600 exemption and separate taxpayer status.
iv. Satisfy the immediate
financial needs of the beneficiaries.
Before the election is made, the executor should
project the anticipated income and estimate allowable deductions for a
succeeding 12-month period.
Make the election by the statutory due date of the
first return. An estate’s taxable year is adopted by filing its first Federal
income tax return
using that taxable
year. Treas. Reg.
§1.441-1(c)(1). Any change
to another accounting period requires the prior approval of the Commissioner.
Treas. Reg. §1.441-1(e).
For tax years ending after May 16, 2002, the filing of an application for an extension of time to file
the estate’s first income tax return with the payment
of the tax due will no longer
establish the estate’s taxable period for tax reporting purposes. Rev.
Rul. 69-563, 1969-2 C.B. 104, obsoleted by T.D. 8996, 67 Fed. Reg. 35009 (5/16/02), which published Treas. Reg. §1.441- 1(c)(1).
The estate’s first
tax year need not run a full 12-month period.
Depending on the anticipated
flow of income and actual
deductible expenses, a shorter period
should sometimes be used for the first tax year.
A situation may exist wherein during the early months
of administration, the estate receives substantial sums of non-recurring items
of income, such as salaries, bonuses, commissions, deferred compensation, and
other forms of income in respect of a
If the first year is terminated before the receipt
of substantial sums of income,
the tax on this income can be
deferred more than one year.
The executor may want to split the income into two separate
tax years, to avoid the bunching of income in any one year.
The beneficiaries may require substantial distributions shortly after
the decedent’s death.
If a distribution is made in an initial short tax year, the estate
should have little distributable net income that would be tracked out to the
beneficiary when the distribution is made.
The executor may select a short fiscal year to reduce
income receivable in the current year, if income tax rates are expected to decrease.
The selection of the proper fiscal year may defer the
beneficiary’s realization of taxable income.
Beneficiaries report distributions for their taxable
year with which
or within which
the estate’s year ends. §662(c).
Example - The decedent dies August 1, 2014 and the
estate selects the first fiscal year ending January 31, 2015. Any distribution
to a beneficiary during this period will be deductible for the fiscal year ending January 31, 2015 and taxable to the beneficiary for the year ending December 31, 2015. Consequently, the beneficiary will not have to pay taxes on the income until April 15, 2016.
Section 644 has substantially reduced
the use of tax deferral, when the testamentary trust is involved.
The executor should consider an initial long year if the beneficiaries have no immediate need for a distribution and an estate
has not received substantial sums of non-recurring items of income.
An initial long year may be attractive if the estate incurs substantial deductible expenses
early in the period of administration.
The executor may select a long fiscal
year to receive as much income as possible in current tax year, if increase in income tax rates
The executor may also select a calendar year.
The election of the tax year requires careful analysis.
a. a. The executor must analyze the income earned and the deductible expenses incurred.
The executor must make the election early enough so as
not to lose the opportunity to select a short fiscal year.
During first nine months of the estate’s
administration, the maximum of earning assets are usually present. If the
executor fails to adopt a fiscal year, the estate must file its income tax return on a calendar-year basis.
Treas. Reg. §1.441-1(b)(4).
Treating Qualified Revocable Trust as Part of Decedent’s Estate
for Federal Income
Tax Purposes – Section 645
For estates of decedents dying after August 5, 1997,
the TRA 1997 added new section 646, later redesignated section
645, which grants
an election to treat a qualified revocable trust as part of the
decedent’s estate for federal income tax purposes. To be treated as a
“qualified revocable trust”, the trust must be one that was treated as owned by the decedent
as a result of a power
held by her or him. §645(b)(1).
The election must be made by both the trustee
of the revocable trust and the executor
of the estate, if any. §645(a).
The election must be made no later than the due date
for filing the estate’s income tax return for its first year, including
Once made, the election is irrevocable. Id.
The election is effective for two years from the date
of decedent’s death, if no federal estate tax return is required, or six months
after the final determination of estate tax liability, if a federal estate tax
return is required. §645(b)(2).
The procedure for making the election to treat the
revocable trust as part of the estate was initially found in Revenue Procedure
98-13, 1998-1 C.B. 370.
To make the election, a required statement must be attached
to a U.S. Income Tax Return for Estates and Trusts (Form 1041). The
statement must provide the following:
Identify the election as a section 645 election;
Contain the decedent’s name, address, date of death,
and taxpayer identification number (TIN);
Contain the trust’s name, address and TIN; however, if
the trust does not have a TIN because the trust
was reporting under
the alternate grantor
trust reporting requirements of Treas. Reg. §1.671-4(b)(2)(i)(A), the trustee must
obtain a TIN,
unless a Form
1041 does not have to be
filed (see Rev. Proc. 98-13, 1998-1 C.B. 370, Sec. 3.01(3));
Contain the estate’s name, address and
Represent that the trust for which the election is
being made was treated under section 676 as a grantor trust owned by the decedent
due to the decedent’s power to revoke the
Be signed by both the estate’s executor or
administrator and a trustee of the qualified revocable trust. Rev. Proc. 98-13,
The original required
statement must be attached to the estate’s
Form 1041 for its first
taxable year. A copy of the required statement must be attached to the
trust’s Form 1041 for the taxable year ending after the date of decedent’s death.
The election is considered made upon
the earlier of such filings. Once made, the election is effective from the date
of decedent’s death. Rev. Proc. 98-13, Sec.3.02.
If the section 645 election is made, the income,
deductions and credits attributable to the qualified revocable trust for the period
subsequent to decedent’s death, must be excluded from the
trust’s Form 1041 for the taxable year ending after
the date of decedent’s death
and must be reported on the
estate’s Form 1041. Id.
If there is no probate
estate, and neither
an executor nor an administrator will be appointed, a trustee of the qualified revocable trust must sign every Form
1041 for the estate. Id.
Qualified revocable trust secures similar income tax
treatment as an estate when the section 645 election is made.
Trust will now be allowed
a charitable deduction for amounts permanently set aside for charitable purposes, without
requirement that such amount be paid in order to secure a charitable deduction (see §642(c)).
Trust will now be able to report
its income on a fiscal
year basis rather
than on a calendar
The active participation requirement under the passive loss rules will now be waived for qualified revocable trusts for two
years after the settlor’s death (see §469(i)(4)).
On December 18, 2000, the IRS issued proposed
regulations under section 645 which contained different procedures for making
the election and for filing the short year return for a Qualified Revocable
In most situations, Rev. Proc. 98-13 required a trust that made a section 645 election to secure a taxpayer identification number
(TIN) and to file a Form 1041 for the trust’s short taxable year beginning at decedent’s date of death and ending on December
31 of that year.
Under the proposed regulations, if a section 645
election was made for the trust, the trustee and the personal representative,
if any, may choose not to secure a TIN for the trust or file a Form 1041 for
the trust’s short tax year – the section 645 was considered made only after
a Form 1041 was filed,
with the requisite election statement attached, for the first taxable
year of the related estate,
or, if there was no personal representative, the first taxable year of the trust filing
as an estate. Prop. Reg. §1.645-1(c). Here,
the trust’s income,
deductions and credits were included on the combined Form 1041 for the electing
trust and the related estate under the related estate’s TIN. Prop. Reg. §§1.645- 1(d)(1)(i) and (ii)(A).
In response to numerous requests that taxpayers be
permitted to use the procedures set
forth in the proposed regulations prior to the date final
regulations were issued,
the IRS had indicated that it
would allow estates and qualifying revocable trusts of decedents who died after December
31, 1999 and before the effective date of the final regulations to choose either the election
and reporting procedures set forth in Rev. Proc. 98-13, or those enumerated in
Prop. Reg. §1.645-1(c) and Prop. Reg. §§ 1.645-1(d)(1)(i) and (ii)(A). (Notice
2001-26, 2001-13 I.R.B. 942).
The IRS has now issued final regulations under Section
645, effective for estates and trusts of decedents dying on or after December
24, 2002. Rev. Proc. 98-13 and Notice 201-26 are obsolete as of December 24, 2002.
The section 645 election may be made whether or not an
executor is appointed for the estate. Treas. Reg. §1.645-1(c).
If an executor is appointed, the executor and the
trustee of the QRT make the 645 election by filing a form provided by the IRS
for making the election (election form). Treas. Reg. §1.645-1(c)(1)(i).
If an executor
is not appointed, the trustee
of the QRT makes the 645 election
by filing the election form.
Treas. Reg. §1.645-1(c)(2)(i).
The election form,
IRS Form 8855,
“Election to Treat
a Qualified Revocable Trust as a Part of an Estate,” was issued in March 2004.
Regardless of whether there is an executor for the
estate and regardless of whether a section 645 election will be made for the
QRT, a taxpayer identification number (TIN) must be obtained for the QRT following the decedent’s death.
The trustee must furnish the TIN to the
payors of the QRT. Treas. Reg. §1.645-1(d).
If the trustee
of the QRT elects to make a section 645 election, the trustee is not required
to file a Form 1041 for the QRT for the short taxable
year beginning with the decedent’s death and ending on
December 31 of that year. Treas. Reg. §1.645-1(d)(2)(i).
Regardless of whether or not there is an executor, the
trustee of the QRT must file a Form 1041 for the short taxable
year beginning with the decedent’s death and ending
on December 31 of that year, if a section 645 will not be made for the trust, or if the trustee and executor, if any,
are uncertain whether
a section 645 election will be made for the QRT. Treas. Reg.
Election period terminates on earlier of the day on
which both the electing trust and related estate, if any, have distributed all
of their assets or the day before the applicable date. Treas. Reg.
If no Form 706 is required to be filed, applicable
date is the day which is 2 years after decedent’s date of death. Treas. Reg.
If Form 706 is required
to be filed, applicable date is later of the day which is 2 years after decedent’s date of death, or the day
that is 6 months after final determination of liability for estate tax. Treas.
Payment of Estate
Estates and trusts are required
to make estimated payments of income tax in the same manner as individuals. §6654(1).
Estates in the first two years following decedent’s death are exempted from this requirement.
Any grantor trust to which the decedent’s residuary
estate is payable is exempted from this requirement in the first two years
following decedent’s death. §6654(1)(2).
Private foundations and charitable trusts that are taxed on unrelated business
§511 are also exempted from this requirement. §6654(l)(3).
Trusts are required to make estimated payments commencing with the
first taxable year, except
as provided in (b) and (c) above.
Although trusts compute their taxable income as of a
date that is one month earlier than the cutoff
date used by individual for making estimated
payments, the due date for the estimated payments is the same for both.
A trustee can elect to treat any portion of excess estimated payments for any tax
year as a payment made by the beneficiary or beneficiaries. That sum or amount
will be treated as a distribution paid or credited to a beneficiary on the last day of the applicable tax year. §643(g).
The election must be made on Form 1041-T, Allocation of Estimated Tax Payments to Beneficiaries, and the election must be
filed within 65 days following the close of the trust’s tax year. §643(g)(2).
The sum or amount so treated shall be treated
as a payment of estimated
tax made by the
beneficiary on January 15 following the close of the trust’s tax year. §643(g)(1)(C).
In the case of a taxable year reasonably expected to
be the last taxable year of an estate, a fiduciary may elect to treat any
amount of an estimated tax payment made by an estate as a payment made by the
Treatment of Property Distributed in Kind – Section
Section 643(e) governs all non-cash distributions. The
distribution of appreciated (or depreciated)
property results in a gain (or loss) to the trust or estate, only if an election is made
to recognize the gain (or loss). §643(e)(3).
If a section 643(e) election is made:
The gain or loss will be recognized by the estate
or trust as if the property had been sold to the beneficiary at the property’s
fair market value. §643(e)(3)(A)(ii).
The estate or trust will be allowed
a distribution deduction equal to the fair market
value of the property distributed. §643(e)(3)(A)(iii).
The beneficiary will receive ordinary income equal to
the fair market value of the property distributed (to the extent of the
beneficiary’s share of DNI from the trust or estate). Id.
The beneficiary’s basis in the distributed property
will be the property’s fair market value on the date of distribution.
If a section 643(e) election is not
The distribution is treated as carrying out DNI only
to the extent of the lesser of the property’s
adjusted basis or its fair market value at the time of distribution. §643(e)(2).
The beneficiary will receive ordinary income equal to
the lesser of the property’s adjusted basis or its fair market value (to the
extent of the beneficiary’s share of DNI from the trust or estate). Id.
The beneficiary’s basis in the distributed property will
be the same as the trust’s or estate’s basis.
The recognition of any gain or loss will be deferred
until the beneficiary sells the property.
The executor must make the election on the income
tax return for the taxable
year in which
the distribution was made.
The election shall apply to all distributions made by
the executor or trustee during the taxable year.
Once made, the election is irrevocable, except
with the Secretary’s consent.
This provision does not apply to distributions
described in section 663(a) - distributions of property to satisfy a specific
bequest or certain charitable distributions.
A primary benefit
of making a section 643(e)
election is to offset the trust’s or estate’s capital losses in current tax year.
Advise a trustee
against making the section 643(e)
election for assets
worth less than their cost basis, to avoid creating loss that
would be non-deductible under section 267(a)(1).
An interesting planning opportunity arises if a
trustee of a discretionary trust distributes appreciated property in kind to a charitable - minded trust beneficiary and the trustee
does not make a section 643(e)
election. If the beneficiary transfers the property to a charity, the gift will qualify
for a charitable income tax deduction at its fair
market value on the date
– without recognition of any capital gains by the
trust or the beneficiary.
Regardless of whether
the section 643(e)
election is made, inform each beneficiary of the cost basis of all assets distributed in kind.
The 65 Day Rule – Section 663(b)
A trustee of a complex
trust has for many years
been able to elect to treat certain
distributions made within 65 days after the close of the trust’s tax year as having been made earlier,
on the last day of that
previous tax year. §663(b).
For taxable years beginning after August 5, 1997, the TRA 1997, which amended
section 663 (b), has made
this election available to an executor of an
The election will
provide greater flexibility in timing distributions for tax purposes, since
an executor can now make a decision
based on known information rather than estimated projections.
Due to the great disparity between the federal
income tax rates
applicable to individuals and estates, this election
will allow an executor to better coordinate the income tax planning for an
estate and the beneficiaries. The following Tables can be used to determine the federal income
tax liability for an estate
or trust for tax years beginning in 2014 and 2015.
The election is made by checking the box on line 6,
page 2, of the Form 1041 under “Other Information.”
The election must be made no later than the due date for filing
the fiduciary income
tax return, including extensions. Treas. Reg. §1.663(b)-2(a)(1).
b. The election is irrevocable
after the last day prescribed for making it.
c. The election is effective
only for the taxable year for which it is made. Treas. Reg.
Does the 65 day rule apply to an estate in final tax year?
Final Tax Year
Since the estate is a separate entity for income tax
purposes, there are tax advantages in maintaining the existence of an estate as
long as possible.
The estate will be considered terminated when all
assets have been
distributed except for a
reasonable amount set aside for unascertainable or contingent liabilities (not including claims
by a beneficiary in that capacity). Treas. Reg. §1.641(b)-3(a).
If the estate’s administration is unreasonably
prolonged, the estate will be considered terminated for income tax purposes
after the expiration of a reasonable period for the performance by the executor
of all duties of administration. Id.
The estate can be kept open if reasonable grounds or a
bona fide purpose exist for holding the estate open:
The payment of estate tax in installments under section 6166.
Rev. Rul. 76-23,
1976- 1 C.B. 264.
The prosecution of a tax refund claim. McCauley v. U.S., 193 F. Supp. 938 (E.D.
The payment of claims from estate income to avoid the
sale of valuable assets at a sacrifice. Carson
v. U.S., 317 F.2d 370 (Ct. Cl. 1963).
The IRS will not issue advance rulings
or determination letters
on whether the period of administration or settlement of an
estate is reasonable or unduly prolonged. Rev.
Proc. 98-3, 1998-1 C.B. 100, superseded by Rev. Proc. 99-3, 1999-1 C.B. 103, superseded by Rev. Proc. 2000-4, 2000-1 C.B. 115.
The executor can achieve income tax savings by the wise selection of an
estate’s final year.
Excess deductions are lost in any other year.
Only in the year of termination can beneficiaries take
advantage of excess deductions (deductions in excess
of estate’s or trust’s gross income). §642(h).
However, section 67 makes
this election less valuable to the extent
that a portion of those
excess deductions may not be
deductible to an individual beneficiary, except to the extent that those
deductions exceed two per cent of that individual’s adjusted gross income.
In the year of termination, excess deductions pass to
“beneficiaries succeeding to the property of the estate or trust.” §642(h).
Generally, these beneficiaries are the residuary beneficiaries of an estate
or the remaindermen of a trust. Treas.
The excess deductions are passed through
to beneficiaries on Schedule K-1 of Form 1041.
They are useful only to beneficiaries who itemize
since they are not allowable in determining the beneficiary’s adjusted gross
income. Treas. Reg. §1.642(h)-2(a).
Since the two per cent floor imposed by section 67(a)
does not apply to trusts and estates, the executor may consider terminating the
estate in favor of trusts or other estates, where otherwise appropriate and
The estate’s $600 personal exemption is lost in its final year.
Avoid the “bunching of income” and excess income build-up in the final year.
Upon the termination of an estate that is on a fiscal
year, it is possible for a residuary beneficiary to receive more than 12 months income
in one taxable year. For example, if an
estate with a fiscal year
ending March 31,
2015 terminates on November 30,
2015, the residuary beneficiary will be taxed on a full year’s
income, to the extent of distributions
and distributable net income, plus income for the final eight-month period.
Selection of a January 31,
2016 termination date would avoid this “bunching of income.”
In the final year, all of the estate’s net income is
distributed to the beneficiaries, and is therefore taxable to them. Consider
terminating the estate shortly after the close of the prior taxable period to
reduce the total income earned during the final year.
The executor should coordinate the timing of the
estate’s termination with the beneficiaries’
income tax planning.
The executor should
advise residuary beneficiaries of their right
to claim deductions for losses and excess
deductions of the estate or revocable trust
pursuant to section
642(h), and of their potential income tax liability for income received
in the final year.
Advise beneficiaries of need to accelerate receipt of
other income, to offset excess deductions and losses passed through in the
estate’s final year.
U.S. ESTATE TAX RETURN –
EXTENSION OF TIME TO FILE ESTATE TAX RETURN –
Generally, the U.S. Estate Tax Return (Form 706), must be filed within nine months after the date of death. §6075(a).
Unless an extension of time for filing the estate tax return has been granted,
if there is no
numerically corresponding date in the ninth month,
the due date is the last date of the ninth
month. For example, if the decedent dies on July 31, 2015, the estate
tax return is due on April
30, 2016. If the due date falls on a Saturday, Sunday,
or a legal holiday, the return is due
on the next succeeding day which is not a Saturday, Sunday,
or legal holiday.
Treas. Reg. §20.6075-1.
Effective for estate tax returns due after July 25,
2001, an executor will be allowed an automatic
six-month extension of time to file the Form 706. An automatic extension will be
allowed if the application:
Is filed on or before the date prescribed in §6075(a) for filing the
Is filed with the appropriate IRS office designated in
the application’s instructions (except as provided in Treas. Reg. §301.6091-(b)
for hand-carried documents); and
Includes an estimate of the full amount of estate and
generation skipping transfer tax due. Treas. Reg. §20.6081-1(b).
The application should be made on IRS Form 4768 (Application for Extension of Time to File
a Return and/or
Pay U.S. Estate
(and Generation-Skipping Transfer) Taxes). It should
be made before
the expiration of time within
which the return
must otherwise be filed and failure to do so may indicate
negligence and constitute sufficient cause for denial. Treas. Reg. §20.6081-1(c).
The Internal Revenue
Service may, upon a showing
of good and sufficient cause,
extend the time for filing the estate tax return for a period
not to exceed six months from the usual
date the return is due in certain situations. Treas. Reg. §20.6081-1(c). Such
an extension may be granted to an estate
that did not request an automatic extension of time to file the Form 706. In that case, the Form 4768
must also contain an explanation showing good cause for not requesting the
automatic extension. Id.
An extension of time to file the return will not
operate as an extension of time to pay the
estate tax. Treas. Reg. §20.6081-1(e).
Note the penalty
for filing a late return
- 5 percent (of the amount of tax) for the first month
and an additional 5 percent
for each additional month or part thereof, up to a maximum of 25 percent. §6651(a)(1).
The executor should give serious consideration to
securing an automatic six-month extension of time to file the estate tax return
when assets pass to a QTIP trust. If the surviving spouse dies or becomes seriously ill within the six-month extension period, the executor may wish to make a partial QTIP election (or elect not to make a QTIP election)
to reduce the combined estate taxes. The executor may wish to pay some estate tax in first estate, causing a reduction of surviving spouse’s
estate, to equalize brackets and to secure a section 2013 credit for transfers
previously taxed for estate taxes attributable to the spouse’s income interest
on taxable portion.
Deferral of Payment of
Estate Tax - Section 6161
Generally, the U.S. Estate Tax Return (Form 706) is due nine months after the date of
death, and the tax must be paid in full with the return. §§6075(a); 6151(a).
A district director or a director of a regional
service center may extend the time for payment of the estate tax for 12 months
from the usual date payment is due.
§6161(a)(1). If an
extension is granted, the time for payment of the estate tax is postponed until
21 months after the date of death.
If reasonable cause exists, a district director is
authorized to grant an extension for a reasonable period not to exceed 10 years from the due date for payment of any part of
the estate tax owed by the estate.
If the estate tax has
been deferred under
section 6166, the extension
of time for reasonable cause cannot be extended beyond
12 months after the due date for the last
installment. §6161(a)(2). An extension may be granted if:
The estate includes sufficient liquid assets to pay
the estate tax when otherwise due; however, the assets are located in several
jurisdictions, not immediately subject to the executor’s control.
A substantial part of the assets of the estate
consists of the rights to receive payments in the future (annuities, copyright royalties, contingent fees, or accounts receivable).
The estate includes a claim to substantial assets that
cannot be collected without litigation.
The estate does not have sufficient funds
to pay estate
tax and also
provide funds to pay a reasonable family allowance and
to satisfy claims against the estate. Treas.
An application for an extension of time for payment of the estate tax must:
Be in writing;
Identify the period of time for which the extension is requested;
Include a statement of the reasonable cause, if the application
is based upon reasonable cause; and include a declaration that the statement is
made under penalties of perjury. Treas. Reg. §20.6161-1(b).
The application should
be made on IRS Form
4768 (Application for Extension of Time
to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes).
The General Instructions accompanying the Form 4768
indicate that the request must be filed with the Department of the Treasury,
Internal Revenue Service Center, Cincinnati, Ohio 45999.
The application will not be considered unless
it is filed on or before the date fixed for payment of the tax. Id.
The executor should consider including in the section
6166 election a request under Treas. Reg. §20.6161-1(b), that the election be
treated alternatively as a request for extension under section 6161, if the
estate does not qualify for section 6166.
An extension for the payment of the
Will not relieve the executor
from the duty of filing a timely return. Treas. Reg.
Will not relieve the estate from liability for payment
of interest on tax deferred during the period of the extension. Treas. Reg.
The amount deferred
bears interest from the due date of payment at a rate of interest adjusted quarterly according
to section 6621. §6601.
The interest rate on an underpayment is equal to the
short-term federal rate plus three percentage points. §6621(a)(2).
For the calendar quarter beginning April 1, 2015, the
section 6621 interest rate is three percent. Rev. Rul. 2015-5, 2015-13 I.R.B. 788.
The district director may require a bond in an amount
up to twice the deferred amount. §6165.
The IRS will not grant an extension if the deficiency
is on account of negligence, intentional disregard of rules and regulations, or fraud with intent to evade tax.
the request for extension is denied, a written appeal may be made by registered or certified mail or hand delivery to the appropriate regional commissioner
within 10 days after the denial is mailed to the executor. Treas. Reg. §20.6161-1(b).
and Casualty Losses
Administration expenses and casualty losses,
herein “administration expenses,” can be used
as deductions in computing the decedent’s taxable estate and the
estate’s taxable income in whatever proportion the executor wishes to allow for
either purpose. §§642(g); 2053(a)(2); Treas.
Reg. §1.642(g)-2. For a comprehensive article on this topic, see Mariani, “Form 1041
vs. Form 706: Where to Deduct Administration Expenses,” Trust & Estates, June 1984, p. 37.
2. Types of administration expenses are:
Brokerage fees for selling estate property;
Auctioneers’ fees for selling estate property;
Costs incurred to store, insure, or maintain estate property;
Expenses incurred to collect assets,
pay debts, and distribute assets
to persons entitled
to them; and
Interest on federal and state income tax deficiencies that accrue after death.
Generally, administration expenses can be deducted
against only one tax. §642(g). This rule
does not apply to deductions for taxes, interest, business
expenses and other
items accrued at decedent’s death; these
“deductions in respect of a decedent” are deductible for estate tax purposes
under section 2053(a)(3) and for income tax purposes under section 691(b). Treas. Reg. §1.642(g)-2. The rule also applies
to selling expenses
incurred in disposing of an estate’s property. Expenses can be used either
as an offset against recognized gain or an administrative
expense deduction for estate tax purposes, not both. §642(g).
Will administration expenses be deducted on the Form
1041 or Form 706? The logical
starting point for this analysis
is a comparison of the estate’s estate tax bracket
with its income tax bracket,
and the effect that election will have upon the beneficiaries.
An income tax deduction will be less valuable, because
of a reduction and compression of income tax rates for trusts and estates, as
reflected in section 1.
Before comparing brackets, determine the estate’s net
incremental tax rate (the federal estate tax bracket minus a credit for state
death taxes) for a more accurate comparison.
What about the pre-ERTA maximum marital deduction
formula? Claiming administration expenses on an estate tax return will reduce
the value of the adjusted gross estate, thereby reducing the value of the
maximum marital deduction bequest by one half of the dollar amount of expenses.
This will be troublesome if the surviving spouse is the decedent’s second
spouse and also executor.
Conflicts of interest
can be a problem. The executor may benefit personally by taking all of the deductions on the estate’s
income tax return. Consider seeking the advice and direction of the probate
court having jurisdiction over the estate. Matter
of Fales,, 106 Misc. 2d 419, 431 N.Y.S. 2d 763 (N.Y. County Surr. Ct.,
1980); Matter of Rappaport, 121 Misc. 2d 447, 467 N.Y.S. 2d 814 (Nassau
County Surr. Ct., 1983).
Unless the will provides otherwise, statutory law, case law, and in some states equitable principles sensibly require
income interests to reimburse principal interests for the increase in estate taxes
caused by section
642(g) election. New York Estates,
Powers and Trusts Law §11-1.2 codifying the
results in In re Estate of Warms, 140
N.Y.S. 2d 169 (N.Y. County Surr.
Ct., 1955); Matter of Estate of Bixby’s, 140
Cal. App. 2d 326, 295 P.
2d 68 (Dist. Ct. App.1956); Maryland Estates and Trusts §11-106(a).
The election decision must take account of the reduction of the
Administration expenses allocable
to tax-exempt income
are not deductible for income tax purposes; the executor
should claim the unused portion
on the estate tax return
if the executor deducts them.
The executor should pass through excess deductions in
the final year to beneficiaries, who can deduct these expenses on their
individual returns, to the extent that the deductions exceed two per cent of the beneficiaries’ adjusted gross income.
Claiming inordinately high administration expenses
on the federal estate tax return may precipitate an audit of the Form 706.
The administration expenses
are deductible on the estate’s
income tax return
only in the year
in which paid; if the expenses exceed income in any year other than the final year,
those “excess deductions” are lost. The deductions can be claimed on the estate
tax return when it is filed, long before expenses are paid.
The executor must consider the effect of the election on the section
For section 2044
property, the executor must determine whether
expenses on the Form 1041 rather than on the Form 706 will increase the estate
tax payable on a QTIP trust created by the decedent’s pre-deceased spouse,
requiring an adjustment with that trust.
The executor must consider whether
claiming expenses on the Form 1041 rather than on the Form 706 will permit more estate
tax to be deferred under section 6166.
The executor must consider the effect on the apportionment of estate taxes.
The executor must consider the effect on the state
death tax credit allowable under section 2011.
The executor must consider the effect on the credit
for tax on prior transfers allowable under section 2013.
The executor must consider the effect on the credit
for foreign death taxes allowable under section 2014.
If administration expenses are claimed as deductions
on the estate’s income tax return, a statement must be filed in duplicate to
the effect that the items have not been allowed as deductions on the estate tax return
and that all rights to have the items subsequently allowed as
deductions are waived.
§642(g); Treas. Reg. §1.642(g)-1. The waiver is irrevocable and must
be filed before the expiration of the statutory period for the income tax return.
Claiming deductions for estate tax purposes on the
initial estate tax return does not preclude a subsequent allowance and waiver
for income tax purposes, if the estate tax deduction is not finally allowed and
a statement is filed.
If doubt exists, the executor should claim the
deduction on both the estate tax and income tax returns.
The technique is permitted, if the estate
tax deduction is not finally
allowed and the statutory period for filing the
waiver statement has not run.
This technique will preserve maximum
Alternate Valuation Election – Section 2032
The alternate valuation date is the date six months
after the date of death for property not disposed of before that time. If the
property is disposed of within that six-month period, the alternate valuation
date is that date on which the property was distributed, sold,
exchanged, or otherwise
disposed of. §2032(a). The actual sales price of the stock sold in an arm’s
length transaction during the six month period following the date of death, not
the median between the high and low on the date of the sale,
fixes the value
for alternate valuation purposes. Rev. Rul.
70-512, 1970-2 C.B. 192.
Before the enactment of the Tax Reform Act of 1984:
The election had to be made on a timely
filed return, including
the additional period of
extension of time granted by the district director.
The election could
not be made on a late return,
even if there was reasonable cause for a late filing. Estate of Calkins v. U.S., 79-2
U.S. Tax Cas. (CCH) 13,306
Because of the substantially increased unified gift
and estate tax credit and unlimited marital deduction, the availability of this election
granted the executor
a new technique to obtain a free step-up in basis of the property.
If the estate
was not subject
to estate tax and assets
appreciated within six-month
period, alternate valuation date election would increase the income tax cost basis
of the property without any estate tax cost.
The Tax Reform Act of 1984, Pub. L. No. 98-369, 98
Stat. 494, applies to the estates of decedents dying after July 18, 1984.
The election is available only when both the value
of the gross estate and the estate
tax (after allowable credits) are reduced. §2032(c).
This provision was added to discourage the executor’s
election of an alternate valuation date merely
to reduce a beneficiary’s income
tax liability upon a later sale
of the property. In such instances, the election was an abuse of the underlying
purposes of section 2032 - to reduce the overall estate tax liability when
assets had declined in value after
the decedent’s death.
The election is not available if a federal
estate tax return
is not required to be filed. If no federal estate tax return is
required, determine whether an alternate valuation election is allowable under
The election is not available if the “optimum” marital
deduction formula clause is used, since there would be no tax to be reduced.
The election may be made on an estate tax return filed any time within one year after the
time prescribed by law (including extensions) for filing
such returns. §2032(d)(2). Thus, the election can be made up to 27 months after death.
However, note the potential consequences of filing a Form 706 late:
A late filing
may cause the loss of section 6166 relief since
the section 6166 election
must be made on a timely filed return. §6166(d).
ii. Interest and penalty charges
will be imposed for a late filing.
The election is irrevocable. §2032(d)(1).
The election must also decrease any generation-skipping tax due. §2032(c)(2).
If there is no day in the sixth month following the
decedent’s death that corresponds numerically
to the date of death,
the correct alternate valuation date under
section 2032(a)(2) is the last day of the sixth month. Rev.
Rul. 74-260, 1974-1 C.B. 275.
The election is made by checking “Yes” to the box on line 1, page 2 of the Form 706 under the “Elections by the Executor.”
The executor must examine the following considerations:
How will the election affect the income tax basis-gain
or loss on subsequent sales or other disposition and the basis for depreciation purposes?
What will be the effect
on the election to pay federal estate
taxes under section
6166 in installments-will it
reduce the value of the interest in a closely held business below 35 per cent
of the adjusted gross estate?
What will be the effect on marital or charitable deductions?
Will the election assist the estate in meeting the
requirements of the section 2032A special use election?
Should any adjustment be made among any interests
under the will, revocable trust agreement, or otherwise because of the section
Should the executor make election if the decedent
owned, or gave away within three years before death, a policy insuring someone
else who died within six months after decedent’s death? Advise the executor
against doing this.
What about conflicts between beneficiaries? The
beneficiary of a parcel of real property or other asset that has declined in
value will desire the date of death value to secure a higher basis for income
tax purposes; the residuary beneficiary of a decedent’s estate who has the
obligation to pay estate taxes under the decedent’s will would want the section
2032 election to be made to reduce his or her tax burden.
Special Use Valuation – Section 2032A
If certain conditions are met, real property used for farming
or for a closely held business may be
valued on the basis of its actual
use, rather than on the traditional basis of highest
and best use. §2032A.
The amount by which qualifying real property can be reduced
under section 2032A is $750,000.
§2032A(a)(2). The potential
maximum federal estate
tax saving amounts to $346,500. For estates of decedents dying after 1998, the $750,000
limitation has been increased to an amount equal to $750,000
For estates of decedents dying in 1999, the value of the property may be
reduced by up to $760,000.
Rev. Proc. 98-61,
1998-2 C.B. 811. The value
of the property may be reduced by up to $770,000 for estates of decedents dying
in 2000. Rev.
Proc. 99-42, 1999-2
C.B. 568. For estates of decedents dying in 2001, the value of the property may be reduced
by up to $800,000. Rev. Proc. 2001-13, 2001-1 C.B. 337. The value of the
property may be reduced by up to $820,000
for estates of decedents dying in 2002. Rev. Proc. 2001-59, 2001-2
C.B. 623. For estates of decedents dying
in 2003, the value of the property
may be reduced by up to
$840,000. Rev. Proc. 2002-70, 2002-46 I.R.B. 845. The value of the property may
be reduced by up to $850,000
for estates of decedents dying
in 2004. Rev. Proc. 2003-85,
2003- 49 I.R.B. 1184. It may be reduced by up to $870,000 for estates of
decedents dying in 2005. Rev. Proc. 2004-71, 2004-50
I.R.B. 970. For estates of decedents dying in 2006, the value of
the property may be reduced by up to $900,000. Rev. Proc. 2005-70, 2005-47
I.R.B. 979. It may be reduced
by up to $940,000 for estates of decedents dying in 2007. Rev. Proc. 2006-53,
2006-48 I.R.B. 996. It may be reduced by up to $960,000 for estates of
decedents dying in 2008. Rev. Proc. 2007-66, 2007-45 I.R.B. 970; it may be
reduced by up to $1,000,000 for estates of decedents dying in 2009. Rev. Proc.
2008-66, 2008-45 I.R.B. 1107. For estates of decedents dying in 2010, the sum remains at $1,000,000. Rev. Proc. 2009-50,
2009-45 I.R.B. 617; it may be reduced by up to $1,020,000 for estates of decedents dying
in 2011. Rev. Proc.
2010-40, 2010-46 I.R.B.
663. For estates
of decedents dying in 2012, it may be reduced
by up to $1,040,000. Rev. Proc. 2011-52,
2011-45 I.R.B. 701; it may be reduced
by $1,070,000 for estates of decedents dying in 2013.
Rev. Proc. 2012-41, 2012-45 I.R.B. 539. It may be reduced by $1,090,000 for
estates of decedents dying in 2014. Rev. Proc. 2013-35, 2013-47
I.R.B. 537. For estates of decedents dying in 2015, the value of
qualified property may be reduced by up to $1,100,000. Rev. Proc. 2014-61,
2014-47 I.R.B. 860.
The purpose of this provision is to assist estates of
farmers and owners of closely held businesses
by providing an alternate means
for valuing real property that is used in farming
or other small business purposes for federal estate tax purposes,
thereby reducing the overall estate tax liability and encouraging the heirs to
continue the operation of the farm or closely held business.
The qualifications for the special use valuation are:
The decedent must have been a resident or citizen of the United States. §2032A(a)(1).
The property – “qualified real property” – must meet
the conditions in section 2032A(b)(1):
The property must be located in the United States.
The property must be devoted to a qualified use on the date of
The property must pass to a qualified heir and a requisite agreement
must be filed.
The decedent’s equity
in the real and personal
property used in the farm or closely
held business must be at least 50 per cent of the adjusted
value of the decedent’s gross estate. §2032A(b)(1),(3).
The decedent’s equity in the qualified real property
must be at least 25 per cent of the adjusted value of the decedent’s gross
The decedent or a member of his family must have
materially participated in the operation of the farm or closely held business for five of the eight years preceding
death, decedent’s disability, or the commencement of receipt of social security. §2032A(b)(1),(4).
The election to use a special use valuation must be made on the first federal
estate tax return filed. The election once made is
The requirement that the election
be made on a timely
filed return (including extensions) was repealed by Economic Recovery
Tax Act of 1981. The election may now be made
on a return filed late, so long as it is the first return. However, note the
potential consequences of filing a Form 706 late.
Since many estates that qualify for section 2032A
election also qualify for section 6166 relief, a late filed return may cause
the loss of the section 6166 election since
the section 6166 election must be made on a timely filed return. §6166(d).
Interest and penalty charges may be imposed for a late filing.
The election is made by checking “Yes” to line 2 of Part 3 of the Form 706 and attaching to the Return a completed
Schedule A-1 with the required statements and
Each person in being who has a present or contingent
interest in the qualified real property for which the election is made must
sign an agreement consenting to the application of a recapture tax for that property. §2032A(d)(2); Treas. Reg. §20.2032A- 8(c)(1).
A sample form of an agreement satisfying this provision is set forth
in Rev. Proc.
81- 14, 1981-1 C.B. 669. This form has been updated
by the IRS to include
a reference to the recapture of the
generation-skipping transfer tax and is designated as “Part 3. - Agreement to
Special Valuation Under Section 2032A” of Schedule A-1 of the Form 706.
The tax benefits realized by the estate where special
use valuation has been elected may be fully or partially recovered if the
qualified real property subsequently passes out of the family or ceases to be
used as a farm or closely held
business within 10 years of decedent’s death, or if there is insufficient
material participation by members of decedent’s family following death. §2032A(c).
Attached to the return must also be a statement containing detailed information required by the Treasury
Regulations, including the fair market
value of the property, its special
use valuation, and the method
used in computing the special
use valuation. Treas. Reg.
If a timely
special use valuation
election is made and the election substantially complies with the requirements of the Treasury
Regulations relating to a special
use valuation, the executor has a reasonable period of
time (not exceeding 90 days) in which to cure any technical defects
in the form of the election or agreement that would otherwise invalidate the election or agreement. §2032A(d)(3).
The executor should
consider making a protective election
to value real property under
section 2032A, if there is any uncertainty whether the estate qualifies
for this relief.
This election is made by a notice
of election filed with a timely estate tax return stating that a protective election under
section 2032A is being made pending the final determination of values. Treas.
The executor may
make the notice
by checking the
appropriate box on Part 1 of Schedule A-1 of Form 706 and providing
The notice must include the following
The decedent’s name and taxpayer identification number;
The relevant qualified use; and
The items of real and personal property
shown on the estate tax return that are used in a qualified use, and that pass to
qualified heirs (identified by schedule and number). Treas. Reg. §20.2032A-8(b).
If the estate
does qualify for special use valuation based
on values finally
determined, an additional
notice of election must be filed within 60 days after the date of such
determination. The election is made on an amended Form 706 and must set forth
the information required by Treas. Reg. §20.2032A-8(a)(3), together with the
agreement required under section 2032A(d)(2). Id.
When making the section 2032A election, the executor must:
Consider its effect on estate tax generally
and on the marital and charitable deductions.
Determine whether making
the election justifies claiming administration expenses on the income tax return rather than on the
estate tax return.
Ascertain whether it would be more advantageous to
make the section 2032A election than to make the qualified terminable interest election.
Consider whether making
the section 2032A
election will have any effect
on the section 6166 election.
Advise a non-qualified heir to consider disclaiming an
interest in property that will qualify for the section 2032A election, if that property
would pass to a qualified heir and allow the
election to be made.
Determine whether an alternate valuation date election will assist the estate in meeting
the requirements of the section 2032A election.
Advise the fiduciary that making the section 2032A
election will result in a lower income tax cost basis for purposes of
depreciation and later sale.
Consider the commencement of a court proceeding, as required by Treas. Reg.
§20.2032A-8(c)(3), to secure appointment of a representative for a minor, incompetent,
or decedent, who is required to sign a special valuation recapture agreement.
Determine whether any adjustment should
be made among any interests
under the will, revocable trust agreement or
otherwise because of the section 2032A election.
Determine whether a special use valuation election is available under
of Estate Tax Attributable to Reversionary or Remainder Interests
– Section 6163
If a reversionary or remainder interest
in property is included in the gross estate, the executor
may elect to postpone the payment of that part of the tax attributable to that interest
until six months after
termination of the precedent property interest. §6163(a).
The Commissioner may extend the time for payment for
an additional period not exceeding three years, if after the expiration of the six-month period the executor
establishes reasonable cause
for further extension. §6163(b).
The district director
may require a bond in an amount
up to twice the deferred
The section 6163 election must conform to the following requirements:
The notice of the exercise
of the election should be filed with the district
director before the date
prescribed for payment of the tax.
The notice may be made in letter form, addressed to the district director.
A certified copy of the will or other instrument under which the interest was created
must be filed with a notice of election, along with the names and birth dates
of any individuals who are
intervening lives. Treas. Reg. §20.6163-1(b).
The election is also made by checking
“Yes” to the box on line 4, page 2 of the Form
706 under the “Elections by the Executor.”
Prudence would dictate
using both procedures since the Instructions for Form 706 refer
the preparer to section 6163 and the related regulations; therefore the
executor should attach a duplicate copy of the notice to the district director
to the Form 706.
Qualified Terminable Interest Property (QTIP)
Election – Section 2056(b)(7)
The election is available to executors of estates of decedents dying after December
For QTIP trusts, there are certain similarities to prior law.
The property must “pass” from the decedent to the surviving spouse.
The surviving spouse must receive all income from the
property, payable at least annually.
A specific portion or fractional portion of the
property is treated as a separate property
The value of property is includable in the surviving spouse’s estate at the spouse’s
For QTIP trusts, there are changes from prior law.
No person, including
the spouse, has the power to appoint
any of the property to anyone
other than the surviving spouse during the spouse’s lifetime.
Note that if a surviving
spouse is granted
a general lifetime
power of appointment, there is no violation of section 2056(b)(7); however, section 2056(b)(5) would apply and there
would be no reason for exercising the election.
The surviving spouse may, but need not, be granted a
special testamentary power of appointment. If the surviving spouse
is granted a general power of appointment, section 2056(b)(5) would apply, and there would be no reason for
exercising the election.
The decedent may designate the recipients of the
remainder interest at the spouse’s death.
The executor must make the election on the estate tax return.
The election must be made on the last estate
tax return filed by the executor on or before the due date of the return,
including extensions, or, if a timely return
is not filed, on the first estate tax return filed by the
executor after the due date. Treas. Reg. §20.2056(b)- 7(b)(4)(i).
Once made, the
election is irrevocable. §2056(b)(7)(B)(v). However, an election may be
revoked or modified on a subsequent return
filed on or before the due date of the return,
including extensions actually granted. Treas. Reg. §20.2056(b)-7(b)(4)(ii).
The election procedure
is to list the qualified
terminable interest property
on Schedule M and
deduct its value.
Partial election is permitted; partial
election must relate
to a fractional or
percentage share of the
property so that the elective portion will reflect its proportionate share of
increases or decreases of the total property
for purposes of section 2044;
the fraction or percentage may be
defined by means of a formula. Treas. Reg. §20.2056(b)-7(b)(2).
A trust may be divided
into separate trusts
to reflect a partial election, if authorized under the
governing instrument or under local law. See, e.g.,
New York Estates,
Powers and Trusts
division must be accomplished before the end of the estate’s administration. If
the trust has not been divided when the estate tax return is filed, the intent
to divide the trust must be
unequivocally signified on the estate tax return. Treas. Reg. §20.2056(b)-
7(b)(2)(ii)(A). The division must be done on a fractional or percentage basis
to reflect the partial election. Treas. Reg. §20.2056(b)-7(b)(2)(ii)(B).
A protective election can be made only if there is a bona
fide issue concerning whether an asset is includable in the gross estate, or
the amount or nature of the property the surviving spouse is entitled to
receive, i.e., whether the property that is includable is eligible for the
election. Treas. Reg. §20.2056(b)-7(c)(1). The protective election, once made, is irrevocable.
Treas. Reg. §20.2056(b)-7(c)(2).
A surviving spouse’s
qualified disclaimer can override the election. Rev. Rul. 83-26, 1983-1 C.B. 234.
It may be desirable to give the executor guidance
in the governing instrument regarding
what factors the executor
should consider and how the executor should exercise that discretion. A direction to make full election may
prove costly since the main advantage of a QTIP trust is the flexibility permitted for the most
advantageous post-death tax planning.
The factors the executor should consider when making a QTIP election are:
Other qualifying assets
(DO NOT OVER
QUALIFY) - the more other
assets that qualify for the marital deduction, the
greater the reason for not making the full election, so at least the credit
equivalent amount is sheltered from double taxation.
The spouse’s anticipated life expectancy - the longer
the spouse is expected to survive,
the better the reason for making the election. The election will achieve a
maximum deferral of tax payment and the assets will increase in value. If the
surviving spouse’s life expectancy is relatively short, the executor may wish
to pay some tax in the first estate, causing reduction of surviving spouse’s
estate, to equalize
brackets and to secure
section 2013 credit for transfers previously taxed for estate tax attributable
to the spouse’s income interest on taxable portion.
The lower the spouse’s estate taxes are expected to be, the greater the reason for making
the election and deferring payment of taxes.
If the spouse has other substantial income
and resources, the reason for not making
the election is even greater.
The more tax that is avoided by making the election,
the less tax that can be deferred under section 6166.
The more estate taxes that are deferred by making the
QTIP election, the more assets remain to provide additional income to the
Since the section
2032 election is available only when both the value of the gross estate and the estate tax are reduced,
the alternate valuation
date cannot be elected if no estate tax is payable on the decedent’s
estate because of the QTIP election.
State death taxes - if the state has another
rate and tax structure, there
may be additional costs or savings by making the election.
Consider applying to the court for advice
and direction if a potential conflict of interest
exists. See Matter of Estate
of Gordon, 134
Misc. 2d 247, 510 N.Y.S. 2d 815 (N.Y. County Surr. Ct., 1986).
Petition the court to appoint a guardian for any
minor, incompetent, or incapacitated beneficiary, to make a qualified
disclaimer of an interest in the trust, to leave the surviving spouse as the trust’s
sole beneficiary, so the trust can constitute a qualified terminable interest.
Consider whether the executor should exercise the
election granted by section 2056(b)(7)(C)(ii) not to treat as qualified terminable interest property any joint
and survivor annuities that are included
in the gross estate and that would
otherwise be treated
as qualified terminable
interest property under section 2056(b)(7)(C).
Should a professional fiduciary be entitled to
additional compensation for exercising or not exercising the QTIP election?
Under what circumstances should a fiduciary be surcharged for exercising or not exercising the QTIP
What remedies, if any, does a remainderperson have, if
an executor’s accounting has been judicially
settled, the surviving
spouse dies, and a determination is made that a partial election or no election would have generated
substantially less combined estate taxes?
SPECIAL NOTICE – On March 16, 2010, the Taxpayer Guidance Division
of the Office of Tax Policy Analysis of the New York State Department of
Taxation and Finance issued Memorandum TSB-M-10(1)M which authorizes a QTIP election
to be made for New York State estate tax purposes
when no federal estate tax return is required.
If there is no federal estate tax in effect on the decedent’s date of
If the decedent dies while federal estate tax was in
effect but the value of the gross estate was below the threshold for fling a
federal estate tax return.
Domestic Trust (QDOT) Election – Planning for the Non-Citizen Spouse – Section
Generally, the estate tax marital deduction is
disallowed, if the decedent’s surviving spouse is not a U.S. citizen. §2056(d)(1).
Transfers to a non-citizen spouse are generally not
eligible for the gift tax marital deduction.
§2523(i)(1). However, the gift tax annual exclusion under Section 2503(b) is increased from $10,000 to
$100,000 (indexed for inflation) for gifts to
non-citizen spouses, so long as the transfers would otherwise qualify
for the marital deduction, if the donee spouse was a U.S. citizen.
§2523(i)(2). In 1999, the gift tax annual exclusion for these transfers is increased from
$10,000 to $101,000. Rev. Proc. 98-61,
1998-2 C.B. 811. In 2000, it is increased to $103,000. Rev. Proc. 99-42,
1999-2 C.B. 568. It is
increased to $106,000 in 2001. Rev. Proc. 2001-13, 2001-1 C.B. 337. In 2002, it is increased
to $110,000. Rev. Proc. 2001-59,
2001-2 C.B. 623. It is increased
to $112,000 in 2003. Rev. Proc. 2002-70,
2002-46 I.R.B. 845. In 2004, it is increased
to $114,000. Rev. Proc. 2003-85,
2003-49 I.R.B. 1184. It is increased to $117,000 in 2005. Rev. Proc. 2004-71, 2004-50
I.R.B. 970. It is increased to $120,000 in 2006. Rev. Proc. 2005-70, 2005-47
I.R.B. 979. In 2007, it is increased to $125,000. Rev. Proc. 2006-53, 2006-48
I.R.B. 996. In 2008, it is increased to $128,000. Rev. Proc. 2007-66, 2007-45
I.R.B. 970. It is increased
to $133,000 in 2009. Rev. Proc. 2008-66, 2008-45 I.R.B. 1107. In 2010, it is increased to $134,000. Rev.
Proc. 2009-50, 2009-45 I.R.B. 617. It increased to $136,000 in 2011. Rev. Proc. 2010-40,
2010-46 I.R.B. 663. In 2012, it is increased to
$139,000. Rev Proc. 2011-52, 2011-45 I.R.B. 701. It increased to $143,000 in 2013. Rev. Proc. 2012-41,
2012-45 I.R.B. 539. In 2014,
it is increased to $145,000.
Rev. Proc. 2013-35, 2013-47 I.R.B. 537. It is increased to
$147,000 in 2015. Rev.
Proc. 2014-61, 2014-47 I.R.B. 860.
To qualify for the gift tax annual
exclusion, the gift must qualify
for the gift tax
marital deduction and satisfy the present interest requirement for an annual
Regardless of whether
the donor is a citizen
or resident of the United
States at the time of the
gift, the gift tax marital deduction is allowed under Section 2523(a), if the
donor’s spouse is a U.S. citizen, subject to the otherwise applicable rules of
Section 2523. Treas. Reg. §25.2523(i)-1.
The marital deduction
is allowed for property passing
to a surviving spouse who is not a U.S. citizen, if the
property passes to the spouse in a “qualified domestic trust” (QDOT). §2056(d)(2)(A).
To qualify as a QDOT, the trust must meet the following
requirements, as set forth in Section 2056A(a):
The trust instrument must require that
at least one trustee (the
“U.S. trustee”) of the
trust be an individual citizen
of the United
States or a domestic corporation.
A domestic corporation is a corporation that is created or organized under the
laws of the United States or the District of Columbia. Treas. Reg.
The trust instrument must provide that
no distribution (other
than a distribution of income) be made unless a
U.S. trustee has the right to withhold from such distribution the tax imposed
by Section 2056A. §2056A(a)(1)(B).
The trust must meet the requirements of any
regulations prescribed to ensure the collection of any estate tax imposed on
the trust. §2056A(a)(1)(C).
The executor must make an election to treat the trust as a QDOT.
The executor must make the election to treat a trust as a QDOT on the estate tax return.
The election must be made on the last estate
tax return filed by the executor on or before the due date, including
extensions, or, if a timely return is not filed,
on the first estate tax return filed after the due date. Treas. Reg. §20.2056A-
3(a). However, please note that section 2056A(d) provides that “No Election may be made under this section
on any return if such return is filed more than
one year after the time prescribed by law (including extensions) for filing
Once made, the election is irrevocable. §2056A(d);
Treas. Reg. §20.2056A- 3(a).
The election is made in the form and manner
set forth in the decedent’s estate tax return, including applicable instructions. Treas.
The election procedure is to list the qualified
domestic trust or the entire value of the trust property on Schedule M of Form
706 and deducting its value.
The estate is presumed to have made the QDOT election if the trust or
trust property is listed and its value deducted on Schedule M.
If the election is made, the following information
should be provided for each QDOT on an attachment to the Schedule:
The name and address of every trustee;
A description of each transfer
passing from the decedent that is
the source of the property to be placed in trust; and
The trust’s employer
identification number (EIN).
Instructions for Form 706, Schedule M (9-2007) Page 30.
A partial QDOT election is not allowed
with respect to a specific
portion of an entire
trust that would otherwise qualify
for the marital
deduction but for the rule
disallowing the marital deduction when the surviving spouse is not a U.S. citizen. However,
if the trust is severed in
accordance with the applicable requirements of Treas. Reg.
§20.2056(b)-7(b)(2)(ii) prior to the due date for the actual election, a QDOT election may be made for one or more of
the severed trusts. Treas. Reg. §20.2056A-3(b).
A protective election may be made to treat a trust as
a QDOT only if there is a bona fide issue that concerns: (i) the decedent’s
residency or citizenship; (ii) the surviving
spouse’s citizenship; (iii) whether an asset is includible in the decedent’s gross estate; or (iv) the amount or nature of the property the surviving spouse
is entitled to receive.
Once made, the protective election is irrevocable. Treas. Reg. §20.2056A-3(c).
Consider the special
security requirements applicable to QDOTs with assets valued
in an amount greater than $2 million as of the date of decedent’s death:
The trust instrument must provide that at least one trustee
be a bank as defined in Section 581; or
The U.S. trustee must provide a bond in an amount
equal to 65% of the fair market value of the trust’s assets (determined without
regard to any indebtedness with respect
to the assets), as finally
determined for federal
estate tax purposes; or
The U.S. trustee
must furnish an irrevocable letter
of credit equal to 65% of the fair market value of the trust’s
assets (determined without regard to any indebtedness with respect to the assets),
as finally determined for federal estate tax purposes. Treas. Reg.
Sample language that may be used in a QDOT to satisfy
the additional security requirements contained in Treas. Reg. §20.2056A-2(d)(1) is found in Revenue
Procedure 96-54, 1996-2 C.B. 386.
Another exception to the general
rule which denies
an estate tax marital deduction to assets passing to a non-citizen spouse can be found in Section 2056(d)(4). Under this provision,
the estate tax marital deduction will be allowed where:
The non-citizen surviving spouse becomes a U.S. citizen
before the day on which the estate tax return is made.
The surviving spouse was a U.S. resident at all times
after the date of death and before becoming a U.S. citizen. §2056(d)(4)(B).
If assets pass to a non-citizen spouse in a marital
trust that does not meet the QDOT requirements, the trust may be reformed to
qualify as a QDOT, either in accordance with
the terms of the will or trust agreement or pursuant to a judicial
§2056(d)(5); Treas. Reg. §20.2056A-4(a)(1).
The reformation pursuant
to the will or trust agreement must be completed
by the estate tax return due
date, including extensions. Treas. Reg. §20.2056A-4(a)(1).
The judicial reformation must be commenced by the
estate tax return due date, including extensions. Prior to the time the
judicial reformation is completed, the
trust must be treated as a QDOT; therefore, the trustee is responsible for filing the Form 706-QDT, paying any Section
2056A estate tax that is due, and filing an annual statement, if required.
Treas. Reg. §20.2056A-4(a)(2).
A marital deduction is also allowed on property
passing directly to a non-citizen spouse, if the spouse transfers or irrevocably assigns
the property interest
to a QDOT. The transfer or irrevocable written
assignment must be made: (i) before the estate tax return is filed; and (ii) before the
last date prescribed by law that the QDOT election may be made. Section
2056(d)(2)(B); Treas. Reg. §20.2056A-4(b).
Reverse QTIP Election – Section 2652(a)(3)
Allows the decedent
to be treated as the “transferor” of all of the assets
in a QTIP Trust for GST
purposes, as if the QTIP election has not been made. IRC §2652(a)(3).
Without the reverse QTIP election, the surviving
spouse would be treated as the “transferor” of the assets in the QTIP Trust at his or her later death, (IRC
thereby wasting or not utilizing the decedent’s unused GST exemption at his or
A reverse QTIP election is made on the return on which
the QTIP election is made. Reg. Sec. 26.2652-2(b).
The election is irrevocable; it is not effective unless it is made with respect to all of the
assets in the trust to which the QTIP applies. Reg. Sec. 26.2652-2(a).
The election is made by listing the QTIP Trust
to which the election relates
on Line 9 of Part 1 of Schedule R of the Form 706.
In planning stages,
consider creating two or more QTIP Trusts,
one of which would be funded with the decedent’s unused GST
exemption to take full advantage of the reverse QTIP election.
In the absence
of appropriate language
authorizing the creation
of two or more QTIP Trusts, determine whether the
personal representative has
the authority under
local law to sever a trust with or without a judicial proceeding for GST planning
purposes. Reg. Sec.
Consider not making the reverse QTIP election, if the
decedent has other assets that can be sheltered by his or her unused GST
exemption and the surviving spouse does not have sufficient assts to use his or
her unused GST exemption.
Deferral of Estate Tax on Closely Held Business
Interests – Section 6166
If certain conditions are met, an executor may elect
to defer the payment of the portion of estate tax attributable to the value of
a closely held business interest for up to five years (paying interest only)
and pay the tax in up to ten equal annual installments.
The maximum payment period is 14 years because the due
date of the last interest payment coincides with the due date for the first
installment of tax. §6166(a)(3).
If the election is made, the estate must pay interest
at a special rate of two percent per year on the portion of the deferred estate
tax, herein the “two percent portion”, attributable to the first $1,000,000 (as
adjusted annually for inflation; in 2003, this amount is $1,120,000; in 2004,
this amount is $1,140,000; in 2005, this amount is
in 2006, this amount is $1,200,000; in 2007, this amount is $1,250,000; in
2008, this amount is $1,280,000; this amount is $1,330,000 in 2009; this amount
is $1,340,000 in 2010; in 2011, this amount is $1,360,000; this amount is
in 2012; in 2013, this amount is $1,430,000; this amount is $1,450,000 in 2014;
this amount is $1,470,000 in 2015) in taxable value of the closely held
business interest in excess of the applicable exclusion amount (currently
$5,430,000) and any other exclusions. §6601(j).
The interest rate imposed on the amount of the
deferred estate tax attributable to the taxable value of the closely held
business exceeding the two-percent portion is imposed at a rate equal to 45% of
the rate generally applicable to underpayments of estate tax. §6601(j)(1)(B).
Consequently, since the normal estate tax underpayment rate is 3% for the
quarter beginning April 1, 2015, the interest rate charged on the estate tax
deferred under Section 6166 that does not qualify for the 2% rate is 1.35% (.45
X 3%) during this quarter.
The interest paid on the deferred estate tax is not
deductible for income or estate tax purposes. §§163(k); 2053(c) (1)(D).
In order for an estate to qualify for the benefits of
IRC Section 6166, the decedent must have been a citizen or resident of the
United States at the date of death. In addition, the value of the interest in a
closely held business must exceed 35 percent of the adjusted gross estate.
§6166 (a). The term “interest in a closely held business” is defined in the Code
An interest as a proprietor in a trade or business carried on as a proprietorship;
An interest as a partner in a partnership carrying on
a trade or business, if (1) 20% or more of the capital interest in the
partnership is included in the decedent’s gross estate, or (2) the partnership
had 45 or fewer partners; or
Stock in a corporation carrying on a trade or
business, if (1) 20% or more of the value of the corporation’s voting stock is
included in the decedent’s gross estate, or
(2) the corporation had 45 or fewer shareholders. §6166(b)(1).
The maximum amount of estate tax which is eligible for
the five year deferral and the ten year installment provisions of Section 6166
is computed under §6166(a)(2) as follows:
Value of closely held business interest
Adjusted gross estate
estate minus allowable deductions under §§ 2053 and 2054)
federal estate tax due
The remaining estate tax is due nine months after the decedent’s death.
The election provided under Section 6166 must be made
on a timely filed estate tax return, including extensions. §6166(d). It is made
by checking the “Yes” box on line 3, page 2, Part 3 of the Form 706. The
executor must also attach to the Form 706 a Notice of Election containing the
The decedent’s name and taxpayer identification number
as they appear on the estate tax return;
The amount of tax to be paid in installments;
The date selected for payment of the first installment;
The number of annual installments, including the first
installment, in which the tax is to be paid;
The properties shown on the estate tax return that
constitute the closely held business interest (identified by schedule and item
The facts supporting the executor’s conclusion that
the estate qualifies for deferral and for payment of the estate tax in
installments. Treas. Reg. §20.6166-1(b).
If there is uncertainty whether the estate will
qualify for the deferral provisions of Section 6166, the executor should
consider making a protective election pursuant to Treas. Reg. §20.6166-1(d).
A protective election may be made to defer payment of
any portion of tax remaining unpaid when values are finally determined and to
any deficiencies attributable to the closely held business interest. Treas.
It does not extend the time for payment of any amount of tax. Id.
It is made by filing a Notice of Protective Election
with a timely filed estate tax return stating the election is being made and by
checking “Yes” to box 3, page 2, Part 3 of the Form 706. Id.
Within 60 days after it is determined that the estate
qualifies for the election, the executor must file a final notice setting forth
the information required in Treas. Reg.
The executor can request that the Section 6166
election be treated alternatively as a request for an extension pursuant to
Section 6161, if the estate fails to qualify for Section 6166. Treas. Reg.
Section 6166(g) of the Code provides specific events
which will accelerate the payment of unpaid installments of tax deferred under
If 50% or more of the aggregate value of the closely
held business interest is distributed, sold, exchanged or otherwise disposed
If any payment of principal or interest due under
Section 6166 is not paid on or before its due date. §6166(g)(3). However, the
Code provides an expensive exception to this rule, if the estate tax
installment or interest payment is made within 6 months after its due date.
Here, the estate will lose eligibility for the 2% interest rate for the payment
and will incur a penalty charge equal to 5% of the payment due, multiplied by
the number of months the payment was overdue.
If the executor fails to pay an amount equal to the
estate’s “undistributed net income” in liquidation of the unpaid portion of the
tax payable in installments in each taxable year after the due date of the
first installment of estate tax.
The Service may require the posting of a bond pursuant
to Section 6165, as a condition to granting an extension under Section 6166.
§6166(k)(1). However, if the estate does not wish to post a bond, the Service
may agree to a special lien for estate tax deferred under Section 6166 as an
appropriate alternate method of security. §6324A.
Determine whether the estate qualifies for a similar
election to defer the payment of estate taxes under local law. For example, see
New York Tax Law §997.
Portability Election – Section 2010(c)(5)(A)
Portability of the unified credit was first introduced
under Section 303(a) of the Tax Relief, Unemployment Insurance Reauthorization,
and Job Creation Act of 2010 (2010 Tax Relief Act) but was slated to expire
after December 31, 2012.
The provisions were made permanent on January 1, 2013
under the American Taxpayer Relief Act of 2012.
What is Portability?
Portability is the ability of a surviving spouse to
apply a deceased spouse’s unused estate and gift tax exclusion amount against
transfers made by the surviving spouse during his or her lifetime or at death.
A decedent’s unused exclusion amount is referred to as
the Deceased Spousal Unused Exclusion Amount
The DSUE amount is added to the surviving spouse’s unused exclusion amount.
Portability applies to decedents who die on or after January 1, 2011.
Portability only applies to a deceased spouse’s estate
and gift tax exclusion amount. The generation-skipping transfer (“GST”) tax
exclusion amount is not portable and any unused amount will be lost at the
first spouse’s death.
Making the Election
Executors or administrators who have filed a complete
and timely Federal estate tax return (Form 706) are deemed to have elected
portability (provided there is a surviving spouse). There are no affirmative
boxes to check or statements to be made. Treas. Reg. §20.2010-2T(a)(1)-(7).
If an estate is not otherwise required to file a
Federal estate tax return, the fiduciary must nevertheless complete and file
the return in order to elect portability. Treas. Reg. §20.2010-2T(a)(7)(ii).
i. Special reporting rules exist for certain
property of estates under the filing threshold. For property qualifying for a
marital or charitable deduction, a fiduciary is permitted to report only the
description, ownership and beneficiary of the property, and estimating the fair
market value of the estate. Treas. Reg. §20.2010-2T(a)(7)(ii).
If no executor or administrator has been appointed,
any individual in actual or constructive possession of any property of the
estate (referred to as a “non- appointed executor”), may elect portability by
completing and filing the Federal estate tax return. Treas. Reg.
Relief for Estates of Decedents Dying Before January 1, 2014. Rev.
Executors and administrators of estates of decedents
who died in 2011, 2012 or 2013 and were not otherwise required to file and did
not file a Federal estate tax return, may obtain an extension of time to make
the portability election.
i. The extension is obtained by filing the
return on or before December 31, 2014, including “FILED PURSUANT TO REV. PROC.
2014-18 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A)” at the top of page 1 of the return.
This relief is also available to the non-appointed executor.
Opting-Out of Portability
In order to opt out of portability, the individual
filing the return must affirmatively state that the estate is not electing
portability. Treas. Reg. § 20.2010-2T(a)(3)(i).
i. Form 706 includes a box under “Section A. Opting Out of Portability”
of “Part 6 – Portability of Deceased Spousal Unused Exclusion (DSUE)” on page 4
of the return, which the executor must check in order to opt-out of
For estates of decedents dying after January 1, 2014,
an executor, administrator or non-appointed executor who fails to file a timely
return will be treated as having opted out of portability. Treas. Reg. §
Election is Irrevocable
The portability election becomes irrevocable once the
final filing date for the Federal estate tax return has passed. Treas. Reg. § 20.2010-2T(a)(4).
i. An executor or administrator who files a
supplemental return prior to the final due date of the return may change a
The election by a court-appointed executor or
administrator cannot be changed by a non-appointed administrator.
The election of a non-appointed executor cannot be
changed by the filing of a subsequent return by a separate non-appointed
executor; the first to file controls. Treas. Reg. § 20.2010-2T(a)(6)(ii).
Portability is available for assets passing to a
Qualified Domestic Trust (“QDOT”) for the benefit of a non-citizen surviving
i. Special rules for determining the DSUE
amount available to the surviving spouse will apply at the termination of the QDOT.
Treas. Reg. § 20.2010- 2T(c)(4) & Example
Portability is unavailable for the estate of a
non-resident, non-citizen decedent. Treas. Reg. § 20.2010-2T(a)(5).
The DSUE amount is the lesser of 1) the exclusion
amount available in the year of the decedent’s death or 2) the excess of the
decedent’s exclusion amount over the sum of the decedent’s taxable estate plus
adjusted taxable gifts on which no gift tax has been paid. Treas. Reg. §
The DSUE amount must be computed and reported on the estate tax return.
i. Until such time as Form 706 is amended to
include a computation of the DSUE, a complete and timely filed return is deemed
to include the computation. Treas. Reg. § 20.2010-2T(b)(2).
Using DSUE Amount
DSUE amount can be applied against transfers made by
the surviving spouse during his or her lifetime or at death.
The DSUE amount may be applied to lifetime taxable
transfers by the surviving spouse by filing a United States Gift and
Generation-Skipping Transfer Tax Return (Form 709) and checking “Yes” on Line
19 and completing Schedule C of the return.
DSUE amounts applied against transfers at death
require disclosure and calculation under Section D of Part 6 on Form 706.
Multiple Predeceased Spouses
A surviving spouse with multiple predeceased spouses
will be limited to the DSUE amount of the most-recently deceased spouse, even
if the most- recently deceased spouse did not have any exclusion amount
remaining or the fiduciary did not make the portability election. Treas. Reg. §
Remarriage alone does not affect DSUE amounts received
from a prior deceased spouse. Only the death of a subsequent spouse will affect
which DSUE amount a surviving spouse may apply against a transfer. Treas. Reg.
A surviving spouse with multiple deceased spouses may
utilize the DSUE amounts from prior spouses in succession, utilizing each DSUE
amount of a prior spouse before the
death of a subsequent spouse Treas. Reg.