Estate Planning Annotations (Agricultural Law and Tax)

This page contains summaries of significant recent court opinions, IRS developments and legislative action of relevance to the estate planning process, with emphasis on farm and ranch estate planning.

Posted January 20, 2018

Trust’s Charitable Deduction Limited To Adjusted Basis in Donated Property. The settlors created a dynasty trust in 1993 with terms authorizing the trustee to make charitable distributions out of the trust's gross income at the trustee's discretion. The trust wholly owned a single-member LLC and in 2004, the LLC donated properties that it had purchased to three charities. Each property had a fair market value that exceeded basis. The LLC received the funds to buy the properties from a limited partnership's distribution to the trust in which the trust was a 99 percent limited partner. The IRS claimed that the trust could not take a charitable deduction equal to the full fair market value, but rather that the deduction should be limited to the trust's basis in each property. The trust claimed a charitable deduction in excess of $20 million on Form 1041 for 2004, and later filed an amended Form 1041 increasing the claimed charitable deduction to just shy of $30 million, and seeking a tax refund of over $3 million. The IRS denied the refund, claiming that the charitable deduction was limited to cost basis. The trust paid the deficiency and sued for a refund. On the trust's motion for summary judgment, the parties agreed that the donated properties were acquired by the trust with funds coming from gross income from a pre-2004 tax year. Thus, according to the trust, I.R.C. §642(c)(1) allowed the charitable deduction to be computed based on the donated property's fair market value. The trial court agreed, noting that I.R.C. §642(c)(1) allowed a deduction without limitation contrary to the basis limitation contained in I.R.C. §170, and that charitable deduction provisions are to be construed liberally in the taxpayer's favor. The trial court noted that the donated properties were all acquired with distributions from the limited partnership to the trust, and each distribution was part of the LLC's gross income for the year of distribution. Thus, the donated properties were clearly bought with funds traceable to the trust's gross income and were donated under the terms of the trust. The trial court noted that the IRS admitted that there was no caselaw or other substantial authority that supported the government's position. The trial court granted summary judgment for the trust. On appeal, the appellate court reversed. The appellate court noted that the parties agreed that the trust had acquired the donated properties with gross income and that the charitable donation was made out of gross income. However, the IRS claimed that only the basis of the properties was traceable to an amount paid out of gross income. It was that amount of gross income, according to the IRS, that was utilized to acquire each property. The appellate court agreed. There was no realization of gross income on the appreciation of the properties because the underlying properties had not been sold. So, because the trust had not sold or exchanged the properties, the gains tied to the increases in market value were not subject to tax. The appellate court reasoned that if the deduction of I.R.C. §642(c)(1) extended to unrealized gains, that would not be consistent with how the tax Code treats gross income. The appellate court tossed the “ball” back to the Congress to make it clear that the deduction under I.R.C. §642(c)(1) extends to unrealized gains associated with real property originally purchased with gross income. Green v. United States, No. 16-6371, 2018 U.S. App. LEXIS 885 (10th Cir. Jan. 12, 2018), rev’g., 144 F. Supp. 3d 1254 (W.D. Okla. 2015).

Posted December 25, 2017

Failure to Appeal Trial Court Order Results in Loss of Option to Buy Farmland. The decedent died in early 2015 leaving a will that gave his son a one-third interest in his farmland, and the option to by the remaining two-thirds from the estate for $92,000. The will also specified that if the son elected not to buy the remaining two thirds of the farmland that “the gift shall lapse and the property shall be sold by my estate on the open market” with the proceeds divided equally between the decedent’s surviving spouse, his daughter and the son. Slightly over two months after the decedent died, the surviving spouse elected to take against the will, and almost three months after that the son filed notice to exercise his right to buy the remaining two-thirds of the farmland. The farmland was included in the decedent’s estate at a value of $767,314. The probate court appointed a referee to identify the surviving spouse’s elective share, provide direction as to the distribution of the proceeds and provide direction as to the allocation of farm income and expense. The referee’s report determined that the surviving spouse’s election to take against the will rendered the son’s option a legal impossibility because the fair market value of the surviving spouse’s election share as of the decedent’s date of death was valued much higher. The probate court adopted most of the referee’s findings and gave the son 60 days from the filing of a new appraisal to submit his intent to buy the remaining portion of the real estate. The son did not appeal. A new appraisal was filed and the son did not indicate his intent to buy. The probate court then entered a final order confirming that the surviving spouse was authorized to sell the real estate. The son appealed. The appellate court determined that it lacked jurisdiction to hear the son’s challenge to the trial court’s order authorizing the surviving spouse’s sale of the farmland because he had not appealed the probate court’s order adopting the referee’s report and file a new appraisal and submit a new intent to purchase. Thus, the court reasoned, the appellate court could not determine whether the son’s claim that his initial election to buy the farmland was still valid. In re Estate of Brehm, No. 17-0339 (Iowa Ct. App. Dec. 20, 2017).

Posted December 18, 2017

Inheritance Tax Exemption Has Rational Basis. The plaintiffs are the biological children of Joseph and Constance Alcorn who divorced in 1964. Their biological father died in 2007. In 1966 the plaintiffs’ mother married the decedent and the plaintiffs and their mother lived with the decedent on his family farm. The decedent treated the plaintiffs as his own children. He helped pay for them to attend college. Both of the plaintiffs moved to Texas but maintained a close personal relationship with the decedent. In 2001, the plaintiffs’ mother and the decedent divorced after 35 years of marriage. Yet the decedent remained close with the plaintiffs. In 2007, the decedent named the plaintiffs his agents under a power of attorney so they could assist him with financial matters. He also executed a medical power of attorney that named the plaintiffs as his agent. In 2008, the decedent executed a will and revocable trust leaving his estate to the plaintiffs and their mother, with the plaintiffs receiving larger shares than their mother. In 2012, the decedent passed away. The state inheritance tax return was originally filed in October of 2013 and reported tax due on all three bequests. However, the tax due on the plaintiffs’ shares was paid under protest. Approximately five months later, in March of 2014, the estate filed an amended inheritance tax return claiming no inheritance tax was actually due on the plaintiffs’ shares. The estate therefore sought a refund of approximately $203,000 for inheritance tax previously paid on the plaintiffs’ shares. Under state (IA) law, there is no inheritance tax imposed on bequests to stepchildren of a decedent who had not divorced the parent before the decedent’s death. Based on this definition the defendant denied the plaintiffs’ request for a refund. The plaintiffs administratively challenged that decision on the ground that the statute’s classification of stepchildren violated their equal protection rights under article I, section 6 of the Iowa Constitution. Following a contested hearing, an administrative law judge issued a proposed decision rejecting the equal protection challenge. The plaintiffs then sought judicial review. The trial court affirmed the defendant’s decision. The plaintiffs appealed. The State Supreme Court determined that when a divorce occurs, the parent and the stepparent no longer form a single-family unit. Thus, favorable tax treatment of transfers from stepparent to stepchild is no longer needed to promote or protect that family. In addition, the Court pointed out that the decedent could have avoided the inheritance taxes by arranging for the plaintiffs to be adopted before the decedent’s death. For these reasons the Court found that a rational basis existed for the legislature to exclude stepchildren post-divorce from the inheritance tax exemption for surviving spouses, lineal descendants, lineal ascendants and other stepchildren. Therefore, Iowa Coe §450.1(1)(e) did not violate article I, section 6 of the Iowa Constitution and the judgment of the district court was affirmed. Alcorn v. Iowa Department. of Revenue, No. 16-1731, 2017 Iowa Sup. LEXIS 100 (Iowa Sup. Ct. Nov. 17, 2017).

Posted November 18, 2017

Purchased Remainder Interest For Notes Payable Resulted in Gift and No Deduction For Liability on Notes. The donor formed an irrevocable trust for the benefit of himself and his issue. The trust paid an annuity to the donor for lie, with the remainder passing to the donor’s issue. However, the day before the donor died, he bought the remainder interest for two unsecured promissory notes. The IRS determined that the purchase of the remainder was a taxable gift. While the donor’s liability on the promissory notes depleted the donor’s taxable estate, the receipt of a remainder interest in the transferred property in which the donor had a retained interest did not increase the value of the donor’s taxable estate, because the value of the entire property would be included in the donor’s gross estate under I.R.C. §2036(a)(1). Consequently, the donor’s receipt of the remainder interest for the notes did not constitute full and adequate consideration under I.R.C. §2512(b). Thus, the value of the promissory notes transferred to the trust was a taxable gift, and the value of the gross estate was not reduced by the amount of the notes. C.C.A. 201745012 (Aug. 4,2017).

Kansas Non-Claim Statute At Issue In Estate Case. Seven years before the decedent died, her daughter (the plaintiff) transferred title to her of two classic cars—a 1963 Ford Thunderbird and a 1954 Crestline Crown Victoria – to the decedent. The decedent stored the cars in the plaintiff’s garage when the plaintiff wasn’t using them and they were in the plaintiff’s garage when the decedent died. The cars remained in the plaintiff’s garage post-death, even after the decedent’s husband, the defendant in this case, transferred the car titles to his name in the year after the year of the decedent’s death. Three years after the decedent’s death, the defendant told the plaintiff that he was coming to get the cars. The plaintiff sued, asking that the court to determine the rightful owner. The defendant claimed that title was only transferred to the plaintiff only so that she could obtain insurance on them and that there was never an intent to fully give the cars away. The trial court concluded that the decedent had been the presumptive owner of the cars. In addition, the trial court found that, in accordance with K.S.A. §59-2239, the plaintiff should have filed a petition within six months of the decedent’s death to contest the decedent’s ownership of the cars. Because the plaintiff didn’t file a claim to the cars within six months of the decedent’s death, the trial court found the defendant was the legal owner of the cars. The trial court also found that although the defendant had long had possession of certain furniture and household items, the plaintiff had merely loaned them to the decedent and was entitled to their return. Both the plaintiff and the defendant appealed. The appellate court held that the plaintiff’s giving the decedent legal title to the cars indicated a full transfer of ownership to the decedent. Therefore, the decedent’s possession of the cars at death didn’t allow the plaintiff to avoid the requirements of K.S.A. §59-2239. The appellate court held that had the plaintiff made a timely claim, an attempt could have been made to rebut the presumption of ownership given by the vehicle title. However, since the plaintiff did not comply with K.S.A. 59-2239, the claim was barred. In addition, the appellate court determined that the defendant was the bailee of a constructive bailment, of the furniture and household items, that began on the decedent’s death. Therefore, the plaintiff’s claim did not accrue, starting the statute-of-limitations clock, until the defendant refused the plaintiff’s request for return of the property. Accordingly, the plaintiff’s suit was not barred with regard to the furniture and household property and the trial court decisions were affirmed. Moulden v. Hundley, No. 116,415, 2017 Kan. App. LEXIS 77 (Kan. Ct. App. Oct. 27, 2017).

Posted November 7, 2017

Gifts To Trusts Were Incomplete With Result Of Estate Inclusion. The taxpayer sought guidance as to the estate and gift tax treatment of a trust. Under the facts of the ruling, property was contributed to a trust where the grantors retained the testamentary power to appoint the trust remainder to anyone other than their estates, creditors or creditors of the estates. The only exception to this was for distributions from the trust to the beneficiary at the time of the distributions that would be made one-half by each of the two grantors. Consequently, any distribution to the grantors would be a return of their contributed property. In addition, any distribution of trust property via the power of appointment to either grantor would not be a completed gift. In addition, upon the grantor’s death, the fair market value of the property would be included in a grantor’s estate upon death. Priv. Ltr. Ruls. 201744007-008 (Jul. 26, 2017).

Posted November 4, 2017

Undue Influence Claim Not Appealable. The decedent died at the age of eighty-nine, survived by her husband and their three children Dennis, the plaintiff in this case; Gary, the defendant in this case; and Cynthia. For thirty-one years before his mother’s death the defendant lived within five miles of his parents and saw them practically daily and farmed with them. The plaintiff, however, resided at various places around the country and became involved in a number of business ventures, several of which were unsuccessful. At death, the decedent owned approximately 200 acres of farmland, and had expressed pre-death concern about what would happen to this land at her passing, often discussing the issue with her family and her attorneys. From 1983 to 2008 the decedent altered her distribution plan through either will or codicil no fewer than ten times. Her initial will was executed in 1983 and provided a life estate for her husband in all of her personal property and the homestead. The farmland was to be divided into three parcels with her husband receiving forty acres and each son receiving eighty acres. In the event her husband predeceased her, the decedent’s daughter would inherit the forty acres that would have been her husband’s and the remaining 160 acres would go entirely to the defendant with the plaintiff inheriting none of the farmland. The next few wills made shifts in the property distribution, many of which benefitted the defendant. The final will, executed in 2007 passed the homestead to the Workman Family Trust, subject to a life estate for the decedent’s husband and a right of first refusal to purchase in favor of the defendant. In addition, the 2007 will distributed 160 of the 200 acres of farmland in life estate to her husband with the remainder passing to the defendant. The remaining forty acres went to the defendant’s other two children. In 2008, the decedent executed a codicil to the 2007 will adding a provision to prevent the sale of the farmland for a period of three years. Several months after the decedent’s death, the plaintiff filed a petition to set aside the 2007 will and 2008 codicil. The petition alleged both undue influence by the defendant and lack of testamentary capacity on the part of the decedent. The defendant filed a motion for summary judgment. The trial court granted in part and denied in part the defendant’s motion. It dismissed the testamentary capacity and constructive trust claims but denied summary judgment as to undue influence. The case then proceeded to trial on the undue influence claim. At the close of the plaintiff’s case, the defendant moved to amend the pleadings to conform the proof to allow the jury to consider undue influence for the entire series of wills and codicils the decedent made from 1983 to 2008. Ruling from the bench, the court denied the motion to amend. The jury was then instructed that “the law presumes a person is free from undue influence,” and to overcome this presumption, the plaintiff has to prove “the result was clearly brought about by undue influence.” The plaintiff never objected to theses instructions or requested alternate instructions. The jury returned verdicts in favor of the defendant finding no undue influence. The plaintiff appealed and the court of appeals upheld both rulings on the merits. The plaintiff again appealed. On appeal, the plaintiff claimed that the trial court’s allocation of the burden of proof in its summary judgement ruling and its subsequent jury instructions reflected an outdated distinction between inter vivos and testamentary transfers. The defendant asserted that the state Supreme Court should follow Restatement (Third) of Property, which treats both categories of donative transfers the same. The Supreme Court determined that to preserve error on the burden of proof issue, the plaintiff had to renew his position at trial by objecting to the jury instructions at the instruction conference. Consequently, the Supreme Court concluded that the plaintiff’s alleged error regarding the jury instructions had not been preserved for appeal. In addition, the plaintiff’s trial testimony specifically disclaimed a challenge to any will other than the 2007 will and 2008 codicil. At that point, the defendant’s attorney undercut the plaintiff’s litigation position by demonstrating that the 2007 will and the 2008 codicil did not leave the plaintiff materially worse off than he was before. Only after this weakness in his case was exposed at trial did the plaintiff seek to expand his suit from one will and codicil to all the wills and codicils. The court determined that this would have unfairly disadvantaged the defendant because it would have required a different line of questioning and proof than the defendant had already presented. Thus, the proposed amendment would have changed the issues and unfairly prejudiced the defendant. As a result, the court held that the district court did not abuse its discretion in denying the plaintiff’s motion at the close of his case to add the prior wills and codicils to his undue influence claim. In re Estate of Workman, No. 15-2126, 2017 Iowa Sup. LEXIS 89 (Iowa Sup. Ct. Oct. 20, 2017).

Posted November 1, 2017

Birth of Children Invalidates Will.  The testator executed a will in 1989 when he was twenty-years old and serving in the military. The will named his mother as sole beneficiary and personal representative of the estate and in the event his mother did not survive him he named his grandmother, the plaintiff in this case, as the successor beneficiary and successor personal representative. The testator’s mother predeceased him and the testator died in 2007. He fathered three children out of wedlock. However, the testator, before death, legitimated and supported each of the bastard children. The oldest child was born twelve years after he executed his will. In 2008, the plaintiff filed a petition to probate the will. The probate court found that the validity of the will was in question and that the assets of the estate may not have been properly protected. In addition, it declined to appoint Plaintiff as personal representative of the estate. Instead, the court appointed the County Administrator. The following day, the administrator filed a caveat to the will asserting that the will made no provision for the future birth of a child to the testator and that as a consequence of children being born, the will should be revoked pursuant to OCGA § 53-4-48 and should not be probated. The probate court entered an order in which it agreed with the administrator of the estate and found the will made no provision in contemplation of future children. It further found that because the birth of the testator’s children occurred years after the date the will was executed, the will was revoked, the testator was deemed to have died intestate, and the three children are the testator’s legal heirs. The plaintiff then filed a notice of appeal in the court of appeals and the case was transferred to the Georgia Supreme Court. Pursuant to OCGA § 53-4-48(a) the birth of a child to the testator after the making of a will “in which no provision is made in contemplation of such event shall result in a revocation of the will…”. The plaintiff contended that the probate court erred in finding the will was not made in contemplation of future children. She pointed to Item VI of the will, which stated: “I have served in the Armed Forces of the United States. Therefore, I direct my Personal Representative to consult the legal assistance officer at the nearest military installation to ascertain if there are any benefits to which my dependents are entitled by virtue of my military affiliation at the time of my death.” The plaintiff claimed that future-born children would fall within the definition of dependents who would be entitled as a matter of law to Social Security survivor benefits if they meet certain criteria and age dependency criteria at the time of the testator’s death. The Supreme Court however, held that the reference to dependents who may be entitled to government survivor benefits no more indicated that the testator contemplated future-born children, who would thereby be pretermitted from inheritance from the testator’s estate, than it indicated that he contemplated marriage, thereby excluding any future spouse form inheritance. In, addition the court pointed out that the language of Item VI of the will is a standard clause recommended for use in wills drafted by military assistance lawyers for service personnel. Therefore “my dependents” in the context of directing the personal representative to check on the availability of survivor benefits is insufficient to show the testator contemplated future-born children. Consequently, the probate court did not err in finding that the testator’s will was invalidated by the birth of children after its execution. Hobbs v. Winfield, No. S17A0720, 2017 Ga. LEXIS 763 (Ga. Sup. Ct. Sept. 13, 2017).

Posted October 30, 2017

Sale of Special Use Elected Land By Qualified Heir To Ancestor Doesn’t Trigger Recapture. The decedent’s estate elected special use valuation for a tract of farmland included in the estate. The decedent’s grandson held a remainder interest in the elected land and proposed to sell his remainder interest in one-half of the property to the decedent’s daughter during the 10-year post-death recapture period. The estate sought a private ruling from the IRS as to whether the sale would trigger recapture tax. The IRS noted that both the decedent’s grandson and daughter are lineal descendants of the decedent and the daughter was an ancestor of the grandson. Thus, the proposed sale would be to a “family member” of the decedent. Both the grandson and the daughter were also “qualified heirs” of the decedent and, under I.R.C. §2032A(e)(2), the daughter was a member of the grandson’s family as an ancestor. Thus, the grandson’s sale of one-half of his remainder interest to the daughter was not a disposition that would trigger recapture tax. However, the IRS did note that if the sale took place, the daughter would have to sign and execute an amended written agreement consenting to personal liability for additional estate tax under I.R.C. §2032A(c) reflecting the changed ownership of the property. Priv. Ltr. Rul. 201743013 (Jul. 26, 2017).

Posted October 22, 2017

Personal Representative Can Satisfy “Lawful Consent” Exception of Stored Communications Act. The decedent died intestate in 2006 as the result of a bicycle accident. The decedent had, at the time of death, an email account with the defendant. However, he didn’t leave any instructions regarding how to handle the account after his death. Two of his siblings were appointed the personal representatives of his estate, and sought access to the contents of the email account. But, the service provider refused to provide access on the basis that it was barred from doing so by the Stored Communications Act. 18 U.S.C. §§2701-2712. The defendant also claimed that the terms of service that governed the email account gave the defendant the discretion to reject the personal representatives’ request. The personal representatives sued, and the probate court granted the defendant’s motion to dismiss the case. On appeal, the appellate court vacated that judgment and remanded the case for a determination of whether the SCA barred the defendant from releasing the contents of the decedent’s email account to the personal representatives. On remand, the defendant claimed that the SCA prevented disclosure and, even if it did not, the terms-of-service agreement gave the defendant the right to deny access to (and even delete the contents of) the account. The appellate court granted summary judgment for the defendant on the basis that the SCA prohibited disclosure (but not on the basis of the terms of service contract). On further review at the Massachusetts Supreme Judicial Court, the personal representatives claimed that they were the decedent’s agents for purposes of the exception of 18 U.S.C. §2702(b)(1) which gave the defendant the ability to disclose the contents of the decedent’s email account to them. However, the Supreme Judicial Court did not buy that argument, determining instead that a person appointed by a court does not fall within the common law meaning of “agent” citing Restatement (Third) of Agency §1.01 comment f. As to whether the personal representatives “stepped into the shoes” of the decedent as the originator of the account and, thus, could lawfully consent to the release of the contents of the email account under 18 U.S.C. §2702(b)(3), the Supreme Judicial Court held that they could, reasoning that there was nothing in the statutory definition or legislative history that indicated an intent to preempt state probate and/or common law allowing personal representatives to provide consent on a decedent’s behalf. The Supreme Judicial Court vacated the appellate court’s judgment and remanded the case to the probate court, holding that “…the personal representatives may provide lawful consent on the decedent’s behalf to the release of the contents of the Yahoo email account.” Ajemian v. Yahoo!, Inc., 478 Mass. 169 (2017).

Posted October 6, 2017

Valuation Regulations Recommended To Be Withdrawn. The Treasury Secretary has issued a report recommending the elimination of the I.R.C. §2704 Proposed Regulations. While it is possible that the regulations could be reintroduced in the future with revisions, it is not likely that the present version will ultimately be finalized under the current Administration. Second Report to the President on Identifying and Reducing Tax Regulatory Burdens, October 2, 2017.

Posted October 1, 2017

Shed Built At Son’s Expense Not Included In Mother’s Estate. In 1966, the plaintiff moved to an acreage that his parents owned where he farmed with his father and operated a trucking business. In 1980, a large machine shed was constructed on the property. The plaintiff claimed that the construction, improvements and alterations made to the shed were made at his sole expense and his parents understood that the building was solely his property. The plaintiff’s mother died in September 2014 and her estate was opened. The estate made no claim on the shed. The estate planned to auction the acreage on August 20, 2016. The plaintiff was contacted by the auctioneer and asked whether the building could be sold along with the acreage because it would likely increase interest and the sale price. The plaintiff consented. The plaintiff participated in the auction and purchased the property including the shed for $240,000. On August 22, the plaintiff filed an action claiming that he was entitled to share of the proceeds of sale under the terms of his mother’s will, naming the closing and escrow agent as the defendant. The other beneficiaries of his mother’s will intervened in the action. The plaintiff filed a motion for summary judgment which the lower court granted. The intervenors appealed. The intervenors claimed that genuine issues of material fact remain about the ownership of the acreage, the ownership of the shed and the division of the proceeds of the auction. The court determined that there was no dispute that the plaintiff’s mother’s estate owned the acreage. In addition, the court pointed out that the evidence in the record and the affidavits of three people illustrated that the plaintiff owned the machine shed. Because there was no conflicting evidence from which a reasonable finder of fact could make a conclusion that the shed belonged to anyone other than the plaintiff, the court determined that the plaintiff owned the shed. With regards to the proper valuation of the acreage and shed, the court determined that because the combined selling price of both the acreage and the shed was $240,000, the fair market value of the shed will be self-explanatory once the court determines the fair market value of the acreage. The record showed that the auction company estimated that the acreage was worth $107,000. Because the intervenors offered only an unexplained print-out of the county assessor’s valuation, the court determined that the only credible evidence was the auction company’s estimation. As a result, the court held that a reasonable finder of fact could not conclude the value of the shed was anything other than $133,000. Consequently, the court affirmed the district court’s grant of summary judgment in favor of the plaintiff. Estate of Baker v. Nepper, No. 17-0011, 2017 Iowa App. LEXIS 937 (Iowa Ct. App. Sept. 13, 2017).

Posted September 13, 2017

Family Settlement Agreement Controls Asset Disposition For Purposes of State Inheritance Tax. The parents of the plaintiff executed a transfer-on-deed (TOD) for their brokerage accounts The TOD named their son as the beneficiary and his wife, the plaintiff, as the contingent beneficiary. The last of the parents died in 2007 and the son died in 2009, leaving the plaintiff and her stepchildren (grandchildren of the parents) as beneficiaries of the last surviving spouse’s estate. The stepchildren sued the plaintiff, challenging the validity of the TOD. While that action was pending, the estate of the last surviving spouse (estate) paid state (IA) inheritance tax of $18,988 to the defendant based on the TOD designation for the assets of the brokerage accounts. The suit was resolved by the execution of a family settlement agreement (FSA) that divided the brokerage account assets equally between the estate and the plaintiff. The estate then filed an amended return with the defendant seeking a $10,034 refund based on the revised distribution of brokerage account assets which now distributed one-half of the account assets to the grandchildren who are lineal descendants exempt from IA inheritance tax. The defendant denied the refund and the plaintiff filed a protest. On review, the Administrative Law Judge (ALJ) affirmed the denial concluding that the FSA, “has no bearing on whether a taxable event occurred when the accounts passed to” the plaintiff. On subsequent appeal to the defendant’s Director, the Director affirmed on the basis that the FSA caused the brokerage assets to pass to the grandchildren from the plaintiff rather than from the estate. On review, the trial court affirmed on the basis that the plaintiff had not proven that the last surviving spouse was incompetent at the time he executed the TOD. On appeal, the court reversed. The appellate court noted that the FSA resulted in one-half of the brokerage assets being distributed to the estate and then those assets would be distributed to the grandchildren – lineal descendants. The appellate court also noted that there was no evidence that the FSA was entered into as a device to avoid tax. The appellate court determined that the defendant’s decision was “irrational, illogical and wholly unjustifiable.” Nance v. Iowa Department of Revenue, No. 16,1974, 2017 Iowa App. LEXIS 930 (Iowa Ct. App. Sept. 13, 2017).

Posted September 11, 2017

IRS Can Examine Estate Tax Return of Predeceased Spouse to Determine DSUE. The decedent died in August of 2013 as the surviving spouse. Her predeceased spouse died in early 2012. His estate reported no federal estate tax liability on its timely filed Form 706. His estate also reported no taxable gifts although he had made $997,920 in taxable gifts during his life. However, his estate did include $845,420 in taxable gifts on the worksheet provided to calculate taxable gifts to be reported on the return. His estate reported a deceased spouse unused exclusion (DSUE) amount of $1,256,033 and a portability election of the DSUE was made on his estate’s Form 706 to port the DSUE to the surviving spouse. The decedent’s estate filed a timely Form 706 claiming the ported DSUE of $1,256,033 and paid an estate tax liability of $369,036, and then an additional $386,424 of tax and interest to correct a math error on the original return. The decedent’s estate also did not include lifetime taxable gifts (of which there were $997,921) on the return, simply leaving the entry for them blank. About two months later, the IRS issued an estate tax closing letter to the husband’s estate showing no estate tax liability and noting that that the return had been accepted as filed. In early 2015, the IRS began its examination of the decedent’s return. In connection with that exam, the IRS opened an exam of the husband’s estate to determine the proper DSUE to be ported to the decedent’s estate. As a result of this exam, the IRS made an adjustment for the amount of the pre-deceased spouse’s lifetime taxable gifts and issued a second closing letter and also reducing the DSUE available to port to the decedent’s estate of $282,690. The IRS also adjusted the decedent’s taxable estate by the amount of her lifetime taxable gifts and reduced it for funeral costs. The end result was an increase in federal estate tax liability for the decedent’s estate of $788,165, and the IRS sent the decedent’s estate a notice of deficiency for that amount and the estate disputed the full amount by filing a petition in Tax Court. The estate claimed that the IRS was estopped from reopening the estate of the predeceased spouse after the closing letter had been initially issued to that estate. The estate also claimed that the IRS was precluded from adjusting the DSUE for gifts made before 2010. The estate additionally claimed that I.R.C. §2010(c)(5)(B) (allowing IRS to examine an estate tax return to determine the correct DSUE notwithstanding the normal applicable statute of limitations) was unconstitutional for lacking due process because it overrode the statute of limitations on assessment contained in I.R.C. §6501. The Tax Court disagreed with the estate on all points. The court noted that I.R.C. §2010(c)(5)(B) gave the IRS the power to examine the estate tax return of the predeceased spouse to determine the correct DSUE amount. That power, the court noted, applied regardless of whether the period of limitations on assessment had expired for the predeceased spouse’s estate. This, the Tax Court noted, was bolstered by temporary regulations in place at the time of the predeceased spouse’s (and the decedent’s) death. I.R.C. §7602, the Tax Court noted, also gave the IRS broad discretion to examine a range of materials to determine whether a return was correct, including estate tax returns. The Tax Court also determined that the closing letter did not amount to a closing document under I.R.C. §7121, which required a Form 866 and Form 906, and there had been no negotiation between the IRS and the estate. The Tax Court also held that the decedent’s estate had not satisfied the elements necessary to establish equitable estoppel against the IRS. The IRS had not made a false statement or had been misleadingly silent that lead to an adverse impact on the estate. Also, the Tax Court noted that there had not been any second examination. No additional information had been requested from the pre-deceased spouse’s estate and no additional tax was asserted. The effective date of the proposed regulation was for estates of decedent’s dying after 2010 and covered gifts made by such estates irrespective of when those gifts were made. There was also no due process violation because adjusting the DSUE did not amount to an assessment of tax against the estate of the pre-deceased spouse. Consequently, the Tax Court held that the IRS properly adjusted the DSUE and the decedent’s estate had to include the lifetime taxable gifts in the estate for estate tax liability computation purposes. Estate of Sower v. Comr., 149 T.C. No. 11 (2017).

Posted September 6, 2017

Minnesota Department of Revenue Explains Its Position On Gross Estate Computation. Minnesota is one of the minority of states that retains a state-level estate tax. 2013 legislation modified the MN estate tax and also modified the phrase “situs of property” effective January 1, 2013. The MN Department of Revenue (DOR) has now provided guidance on the new phrase. According to the DOR, estates of nonresident decedents must file for and pay MN estate taxes if they owned real or tangible property having situs in MN, had a federal gross estate (including property in and outside of MN), exceeding the value of the “exclusion amount” provided for under Minn. Stat. §291.016, Subdivision 3 (presently $2,100,000). The DOR pointed out that Minn. Stat. § 291.005, Subdivision 1(10), requires that estates of nonresident decedents are to disregard the existence of “pass-through entities” in determining where real and tangible property has situs. Thus, estates of nonresident decedents dying after January 1, 2013 must include in MN gross estate the decedents' pro rata share of: (a) the value of any portion of real property physically located in MN, and included in the decedent’s federal gross estate, that is owned through an interest in a pass-through entity; and (b) the value of any portion of tangible that was normally kept in MN, and included in federal gross estate, owned through an interest in a pass-through entity. However, pass-through entities are not disregarded when determining the situs of property (both real and tangible) for a MN resident decedent. Thus, the estates of a MN resident decedent must include in the gross estate for MN state estate tax purposes, the value of all real property located in Minnesota and included in federal gross estate; the value of all tangible property normally kept in Minnesota and included in federal gross estate; and the value of all intangible property included in federal gross estate, including the value of interests in pass-through entities. Minnesota Department of Revenue Notice, No. 17-05 (Sept. 5, 2017).

Posted August 26, 2017

Trust Can’t Be Modified To Allow Removal and Replacement of Trustee. The decedent established a trust in 1928. It was amended later in 1928 and again in 1930. The trust was established for the care of the decedent’s daughter and her children alive at the time of trust creation. The trust is irrevocable and terminates in 2028. It originally allowed the corporate trustee to deplete the principal for the benefit of the the daughter and her children, but the 1930 amendment eliminated that power to provide only for the distribution of income. The Colonial Trust Company or its successors was named the corporate trustee, and the trust referred to the possibility that the corporate trustee position could become vacant by resignation, removal or inability to act. In that event, the decedent (if alive) or beneficiary could appoint a new corporate trustee who was a recognized banking institution in Philadelphia. The decedent died in 1929 and his daughter became the co-trustee along with the corporate trustee. The daughter died in 1971 and her son became the co-trustee, but renounced his appointment. In 2009, the corporate trustee sought to divide the trust into four separate and equal trusts, one for each of the daughter’s surviving grandchildren. The trial court approved, appointing each of the four grandchildren as the co-trustee of that grandchild’s separate trust. In 2013, three of the daughter’s surviving grandchildren sought to modify the truest to add a portability provision allowing them without court approval to remove the corporate trustee without cause and appoint a new corporate trustee of their choosing. The corporate trustee objected and moved for judgment on the pleadings, arguing that Pennsylvania law established the trustee removal procedure and required court approval. The trial court agreed with the corporate trustee, but the appellate court reversed noting the need for the beneficiaries to have the flexibility to remove and replace the corporate trustee. On further review, the state Supreme Court reversed. The Supreme Court noted that state law controlled the issue and required court approval for such a modification. The Supreme Court noted that the identity of a corporate trustee is a “material purpose” of a trust that, without explicit language in the trust providing for a right to remove and replace, cannot be modified without court approval. In re Trust Agreement of Taylor, No. 15 EAP 2016, 2017 Pa. LEXIS 1692 (Pa. Sup. Ct. Jul. 19, 2017).

Posted August 25, 2017

Farm Credit Bank Interest Rates Under I.R.C. §2032A for 2017 Deaths. For deaths in 2017, the Farm Credit Bank (FCB) average annual effective interest rates to be utilized under I.R.C. §2032A(e)(7) for determining the special use valuation of farmland/ranchland in the decedent’s estate by FCB territories are as follows: AgFirst – 5.08 percent; AgriBank – 4.34 percent; CoBank – 4.00 percent; Texas – 4.67 percent. The states included in each FCB territory are as follows: AgFirst – DE, D.C., FL, GA, MD, NC, PA, SC, VA, WV; AgriBank – AR, IL, IN, IA, KY, MI, MN, MO, NE, ND, OH, SD, TN, WI, WY; CoBank – AK, AZ, CA, CO, CT, HI, ID, KS, ME, MA, MT, NH, NJ, NM, NY, NV, OK, OR, RI, UT, VT, WA; Texas – AL, LA, MS, TX. Rev. Rul. 2017-16, 2017-35 IRB 215.

Posted August 23, 2017

Estate Can’t Deduct Unpaid Gift Tax on Net Gift. In the year of death, the decedent made gifts to his nieces that were subject to gift tax. The decedent died later the same year, and the nieces agreed to pay the gift tax on the gifts, thus creating “net gifts” in accordance with Rev. Rul. 75-72. As such, the amount of the gifts is reduced by the gift tax that the donee pays. A gift tax return, Form 709, was filed which reported the value of the net gift, and the same amount was claimed on the estate tax return, Form 706 as a deduction even though the nieces had not yet paid the gift tax as of the date of the decedent’s death. The estate claimed that Treas. Reg. §20.2053-6(d) allowed the deduction, but the Tax Court disagreed. The Tax Court determined that that assets used to pay the gift tax were transferred to the nieces before the decedent’s death. Thus, there was no unpaid gift tax that existed as of the decedent’s date of death, and no deduction was available. While the estate was ultimately liable for the gift tax if the nieces did not pay the gift tax, the estate, in that instance, would have had a claim against the nieces for reimbursement. Estate of Sommers v. Comr., 149 T.C. No. 8 (2017).

Posted August 19, 2017

IRS Blesses Aspects of Incomplete Non-Grantor Trust. The settlor created an irrevocable trust to benefit himself, his wife, charitable organizations, siblings, and children. The trust provided for a Distribution Committee to disperse income and principal from the trust to named beneficiaries for their health, education, maintenance, and support. The IRS concluded that the settlor’s trust contributions did not constitute gifts for federal gift-tax purposes, which meant that distributions from the trust would be included in the settlor’s gross estate upon death. The IRS also held that the transfers to the trust were not complete with respect to the trust’s income interest. The IRS determined that the relationship between the settlor and the committee allowed the settlor to retain too much power over distributions of income and principal. The ruling allows the trust to protect the settlor’s assets against creditors and state income taxes, by allowing the trust to be administered under the laws of a state without an income tax even though the settlor or certain beneficiaries live in a state that imposes state income tax. The asset protection feature is by virtue of the Committee who decides when/if the settlor will receive distributions. If the trust sells assets at a capital gain, the entire gain is not subject to state income tax. Also, assets can be placed into the trust with unlimited value because the transfers are not taxable gifts. The IRS noted that the above results are obtained if the trust doesn’t trigger I.R.C. §657. Priv. Ltr. Rul. 201729009 (Mar. 27, 2017).

Posted August 14, 2017

Non-Safe Harbor “Parking” Reverse Exchange Approved, But IRS Disagrees. The taxpayer (a drugstore chain) sought a new drugstore while it was still operating an existing drugstore that it owned. The taxpayer identified the location where the new store was to be built, and assigned its rights to the purchase contract in the property to a Q.I. in April of 2000. The taxpayer then entered into a second agreement with the Q.I. that provided that the Q.I. would buy the property, with the taxpayer having the right to buy the property from the Q.I. for a stated period and price. The taxpayer, in June of 2001, leased the tract from the Q.I. until it disposed of the existing drugstore in September of 2001. The taxpayer then used the proceeds of the existing drugstore to buy the new store from the intermediary, with the transaction closing in December of 2001. Because the new store was acquired before the existing store was disposed of, it met the definition of a reverse exchange. However, the safe harbor did not apply because the exchange was undertaken before the safe harbor became effective. If the safe harbor had applied, the transaction would not have been within it because the Q.I. held title for much longer than 180 days. Despite that, the IRS nixed the tax deferral of the exchange because it viewed the taxpayer as having, in substance, already acquired the replacement property. In other words, it was the taxpayer rather than the Q.I. that held the burdens and benefits of ownership before the transfer which negated income tax deferral. An exchange with oneself is not permissible. As a result, eliminated was the deferral of about $2.8 million of gain realized on the transaction in 2001. The Tax Court noted that existing caselaw did not require the Q.I. to acquire the benefits and burdens of ownership as long as the Q.I. took title to the replacement property before the exchange. The Tax Court noted that it was important that the third-party facilitator was used from the outset. While the safe harbor didn’t apply to the transaction, the Tax Court noted that 45 and 180-day periods begin to run on “the date on which the taxpayer transfers the property relinquished in the exchange,” and that the taxpayer satisfied them. The Tax Court also noted that caselaw does not impose any specific time limits, and supported a taxpayer’s pre-exchange control and financing of the construction of improvements on the replacement property during the time a Q.I. holds title to it. The taxpayer’s temporary possession of the replacement property via the lease, the court reasoned, should produce the same result. Because the facts of the case involved pre-2004 years, the Tax Court did not need to address Rev. Proc. 2004-51 and how the IRS tightened the screws on the safe harbor at that time. Estate of Bartell v. Comr., 147 T.C. No. 5 (2016). The IRS, in August of 2017, issued a non-acquiescence to the Tax Court’s decision. IRB 2017-33.

Posted August 9, 2017

Unsigned Will Can be Admitted To Probate. The decedent executed a will in 1986 and later executed codicils in 2009 and 2013. The decedent died in 2014 and one of the decedent’s children objected to the admission to probate of the 1986 will (and subsequent codicils) because the decedent had not signed the will. State (MI) law requires that a will be signed in order to be admitted to probate (MCL §700.2502), but an exception exists if the proponent of the will establishes by clear and convincing evidence that the decedent intended for the document to constitute the decedent’s will (MCL §700.2503). The probate court granted summary judgment to the child objected to admission of the will to probate. On appeal, the appellate court reversed. While the court noted that there were no prior MI cases on point, the NJ Supreme Court had construed nearly identical language and permitted an unsigned will to be admitted to probate upon the proponent establishing by clear and convincing evidence that the decedent intended for the document to constitute the decedent’s will. The appellate court also determined that the exception of MCL §700.2503 would be superfluous if the absence of a signature always barred an unsigned will from being admitted to probate. Thus, the appellate court reversed the probate court and remanded the case for a determination by the probate court of whether the proponent of the will established by clear and convincing evidence that the decedent intended the document to be the decedent’s will. In re Estate of Attia, No. 327925, 2016 Mich. App. LEXIS 2075 (Mich. Ct. App. Nov. 10, 2016).

Posted July 16, 2017

General Legacy Trust Funding Language Bars Beneficiary From Selecting Zero-Value Assets. The decedent created a trust in late 2006. The decedent died in early 2011, and his will left the residue of his estate is to the trust. The trust had been amended during the decedet’s lifetime and to fund a Family Trust with $1 million for the decedent’s son. The trust also allowed the son to select assets of his choice to fund the family trust and specified that the assets were to be valued as finally ascertained for estate tax purposes. The residue of the trust was for the creation of a marital trust with income payable to the decedent’s surviving spouse during her lifetime. After the decedent’s death, the son sent a letter to the co-trustees informing them that he selected four 50% interests in assets valued at $0 for estate tax purposes and $161.20 in cash along with $999,838.80 in other assets to fund his estate. The surviving spouse then sought a declaratory judgment to determine whether the trust funded the Family Trust as a general legacy based on the value of the assets, and whether the son could select certain assets valued at zero dollars for estate tax purposes. The court determined that because the trust language allowed the son to select from any asset in the trust to fund the Family Trust, that was highly indicative of a general legacy. Furthermore, the provision that the asset be chosen based on their estate tax valuation gives proof that the primary consideration was the value of the assets rather than the assets themselves. Consequently, the court determined that the bequest from the trust to the Family trust was a general bequest. The court also pointed out that the plain language of thetrust allowed the son to select assets that “fund” the Family Trust. The court determined that zero-value assets could not “fund” the Family Trust because they do not furnish money to the Family Trust. As a result, the court determined that the bequest to son was a general bequest, but he could not select assets with a zero-value to make up the $1 million in assets for his Family Trust. In re Estate of Zeid, No. 1-16-0744 2017 Ill. App. Unpub. LEXIS 1339 (Ill. App. Ct. Jun. 29, 2017).

Surviving Spouse Elected To Take Under Will – Waiving Dower Interest. Pre-death, the decedent received a life estate in certain property from her deceased husband, with the remainder to go to her husband's siblings. The decedent also received what remained of her husband's estate after making certain cash bequests. The decedent created a revocable living trust which specified that, upon her death, the trustee must distribute sums of cash to certain named beneficiaries and then divide the remaining trust property into separate shares and distribute them to a list of 17 named beneficiaries. On the same day, she also created her last will and testament providing that the residue of her estate would be distributed in accordance with the terms of the trust. Upon decedent’s death, only one of her late husband's siblings, Ramona, survived. Ramona was appointed executor of the decedent’s estate and served as trustee of the trust. The executor's final report was filed August 30, 2016. Children of the decedent’s deceased brother-in- law and the daughter of the decedent’s deceased brother challenged the report. The probate court held a hearing on the executor's final report and other motions filed by the family members, but none of them appeared at the hearing. The trial court denied all pending motions and approved the report. The family members appealed. They claimed that the court erred by closing the estate before ruling on all motions pending before it – specifically one captioned "Notice to the Probate Court of Incorrect Filings and Incomplete Inheritance Tax Returns for the Estate". However, the trial court denied the motion based on the family members’ failure to adduce the evidence to support the claim, and the fact that they did not appear at the hearing. The family members also claimed that the trial court erred in approving the final report because it did not include the decedent’s dower interest in the real estate her husband owned. Under, Iowa law, a surviving spouse may elect to take a distributive share of a deceased spouse's estate as opposed to receiving the amount provided under a spouse’s will. The trial court concluded that the decedent elected to take under her husband's will, which provided a life estate in the property at issue, meaning she waived her dower interest in the property. On further review, the appellate court affirmed. In re Estate of Heemstra, No. 16-1960, 2017 Iowa App. LEXIS 710 (Iowa Ct. App. Jul. 6, 2017).

Posted June 27, 2017

Family Settlement Agreement Valid To Transfer Title. Upon their mother’s death, the parties entered into a family settlement agreement (agreement) on November 19, 2012 in order to avoid probate. The agreement granted both tracts of property owned by the estate to the defendant with all mineral, oil and gas interests reserved in the plaintiff. On March 23, 2015, the plaintiff filed a petition which sought to quiet title in the properties in accordance with the decree of descent, which had declared that each of the siblings were entitled to an undivided one-half interest in the properties. The court determined that the agreement clearly identified the parties, there was ample consideration with each party promising to convey certain rights to the other, the property at issue was accurately defined, the agreement contained sufficient granting language, and the agreement was properly signed by the parties. For these reasons, the court held that the agreement was a valid contract that was sufficient to transfer title to the real estate to the defendant. The plaintiff claimed that the agreement was an executory contract, because the parties did not exchange deeds after the agreement was finalized, making the agreement unenforceable. However, the court determined that execution of the deeds was not an essential element of the parties' agreement, but rather were merely a formalization of the agreement. The plaintiff also claimed that the agreement was invalid because it was not approved by the district court, however the appellate court held that such approval is only necessary to obtain a decree of final settlement and an assignment of property. In this case, however, the parties obviously agreed beforehand that a decree of final settlement was not necessary as the agreement itself expressly and specifically provided that it did "not require the approval of ay court in order to be effective and binding on the parties." The plaintiff also claimed that the statute of limitations had expired because neither party attempted to enforce the agreement in a timely manner. The court determined that even if the statute of limitations had run it would not bar enforcement of the agreement because there was no breach of the agreement. Thus, the court held that the parties' entered into a valid family settlement agreement that was sufficient to transfer the title of the real estate to the defendant. Wise v. Bailey, No. 115,583, 2017 Kan. App. Unpub. LEXIS 466 (Kan. Ct. App. Jun. 16, 2017).

Posted June 12, 2017

Estate Executor Not Personally Liable For Corporate Debts. A dairy farmer placed ownership interests for the land and business operations of his farm in several corporate entities. He purchased feed on credit through one of these entities, in which he was the owner of 100 percent of the stock. When the farmer died, his son (the defendant) was the sole beneficiary of his estate and exercised control over the farm and its operations as the executor of the estate and as an employee of the entity. The son continued to order feed from the plaintiff, a dairy cattle feed supply company, through the entity. The plaintiff sued to claim the outstanding debts owed by the entity for feed already delivered. The trial court pierced the corporate veil to find that the son was individually liable for the debts incurred by the entity. However, on appeal the state Supreme Court found that the piercing of the corporate veil was improper because the defendant did not possess or exercise ownership interests as a shareholder of the entity. The Court acknowledged that as an executor of his father’s estate the defendant acted as an employee and exercised sole control over the entity. However, the Court determined that this did not transform the defendant’s status into a shareholder or equity holder. Therefore, the Court held that the corporate veil should not be pierced with the result that the defendant was not individually responsible for the entity’s debts. Mark Hershey Farms, Inc. v. Robinson, 2017 Pa. Super. LEXIS 376, No. 1070 MDA 2016, 2017 Pa. Super. LEXIS 376 (Pa. Sup. Ct. May 25, 2017).

Posted June 11, 2017

IRS Guidance on Making Late Portability Election. A decedent’s estate can make a portability election to allow the decedent’s unused exclusion amount (deceased spousal unused exclusion amount, or DSUE amount) for estate and gift tax purposes to be available for the surviving spouse’s subsequent transfers during life or at death. Before 2015, the IRS had provided a simplified method for an estate to obtain an extension of time to make the portability election which applied if the estate did not have to file an estate tax return. After 2014, an estate must submit a ruling request to be able to file a late portability election. Numerous rulings since that time have been issued that have granted estates an extension of time to elect portability where the estate was not required to file a return. In the recent guidance, IRS again provides a simplified method for an estate to receive an extension of time to make a portability election if the estate does not have a filing requirement under I.R.C. §6018(a). The guidance applies until the later of January 2, 2018 or two years from the date of the decedent’s death. To qualify for the relief, the executor must file a complete and properly prepared Form 706, and state at the top “Filed Pursuant to Rev. Proc. 2017-34 to Elect Portability Under I.R.C. §2010(c)(5)(A). The IRS notes that an estate that has an I.R.C. §6018(a) filing requirement is not eligible for the relief. However, for those estates that qualify under the new guidance, the IRS waives the user fee for a submission for relief. Once the two-year period is exceeded, relief may be sought by requesting a letter ruling. Rev. Proc. 2017-34.

Posted June 8, 2017

Estate Tax Collection Case Timely. The decedent died in late 1997 leaving her entire estate to her nephew and his wife. The nephew’s wife was the executor of the estate. The nephew, a CPA and tax attorney, filed Form 706 in July of 1998 reporting a gross estate of $2.9 million and a tax liability of $700,000 which was paid with the return. Upon audit, the IRS asserted that the taxable estate value was $4.7 million and an additional $1.2 million of federal estate tax was owed. The estate filed a Tax Court petition, and the court, in 2004, ultimately determined that the estate owed and additional $215,264 in estate tax. The amount remained unpaid and stood at $530,000 by March of 2015. The IRS placed liens on the some of the estate property in 2013 and 2014 and issued the estate a Notice of Intent to Levy in late 2013. The Notice included a statement that the estate could request a Collection Due Process (CDP) hearing. The estate made the request which the IRS claimed it never received, but then conceded due to the estate retaining a certified mail receipt. The IRS then sustained the levy amount and sued in district court to foreclose the liens and get a money judgment for the unpaid taxes, penalties and fees. The estate counterclaimed for damages under I.R.C. §7433. The estate claimed that an “improper” lien had barred the estate from refinancing the home at a lower interest rate. The estate executor claimed that the lien should only have been filed against the estate rather than against the executor personally. The estate also claimed that the IRS claim was untimely filed due to the 10-year statue of I.R.C. §6502(a)(1). The trial court granted the IRS summary judgment motion in part and rejected the statute of limitations claim. The appellate court affirmed on the statute of limitations issue noting that the nephew had represented to the IRS that the hearing request had been sent and received and that IRS relied on that representation. The appellate court also denied the estate damages. United States v. Holmes, No. 16-20790, 2017 U.S. App. LEXIS 10013 (5th Cir. Jun. 6, 2017).

Posted May 27, 2017

Transfers to Partnership Shortly Before Death Triggers Application of Retained Interest Rule. The decedent’s son, pursuant to a power of attorney, transferred the decedent’s assets to a newly formed partnership within a week of the decedent’s death in exchange for a 99 percent interest in the partnership. The transferred was followed the same day by an attempted gift of the partnership interest to a charitable lead annuity trust (CLAT). The court, agreeing with the IRS, held that the attempted dissolution of the partnership made the initial transfer subject to the retained interest rules of I.R.C. §2036(a)(2) and that the transfer was not bona fide. Accordingly, the value of the assets transferred were included in the decedent’s gross estate under either I.R.C.§2036(a) or I.R.C. §2035 as limited by I.R.C. §2043. Thus, the amount included in the decedent’s estate was the excess value as of the date of the decedent’s death over the value of the partnership interest issued in return on the transfer date. But, due to the attempted gift to the CLAT being invalidated due to the son not having the authority to make the transfer under the power of attorney, the date of death value of the partnership interest was included in the decedent’s estate under either I.R.C. §2033 or I.R.C. §2038. Because of full inclusion in the estate, no gift tax liability was triggered. Estate of Powell v. Comr., 148 T.C. No. 18 (2017).

Posted May 8, 2017

Market Value of Revocable Trust’s Interest in LLC Determined. The decedent, before death, created an LLC and transferred funds to it derived from the sale of stock in the decedent's closely-held business which was undergoing a buy-out from Pepsi, Corp. The LLC was worth $317.9 million (primarily cash) in net asset value. The decedent's children redeemed their interests in the LLC before the decedent's death resulting in the decedent's estate holding a 70.42 percent voting interest and a 70.9 percent equity in the LLC. The decedent's estate had liquid assets of over $19 million, and the anticipated estate and GSTT tax was $26 million. The estate borrowed $10.75 million from the LLC in return for an installment note with the initial payment deferred until 2024 (18 years) with interest set at 9.5 percent (at a time when the long-term AFR was 4.61 percent). The estate claimed a discount for the decedent's LLC interest of 31.7 percent which court rejected and allowed a 7.5 percent discount that the IRS conceded. The estate's expert based his analysis on companies that derived profits primarily from active business operations, unlike the decedent's LLC. The Tax Court noted that while an estate tax deduction for estate administration expenses is allowed, the court’s prior decision in Estate of Gilman v. Comr., T.C. Memo. 2004-286 was inapplicable. Gilman allowed an estate tax deduction for interest if a loan is necessary to raise money to pay estate tax without liquidating estate assets at forced-sale prices. In the present case, the court noted that the LLC was cash-rich and that the estate had the power to require the LLC to make pro-rata distribution to members. That, therefore, eliminated the need to sell assets. The Tax Court also noted that the loan would deplete the company's cash similar to a distribution. The Tax Court disallowed the $71.4 interest deduction. The Tax Court also noted that the case was also unlike Estate of Duncan v. Comr., T.C. Memo. 2011-255 and Estate of Kahanic, T.C. Memo. 2012-81 in which the deduction was allowed in cases where estates were much less liquid. On further review, the appellate court affirmed. The appellate court concluded that value reductions based on discounts were properly disallowed and that certain redemption were actually likely to occur due to existing offers. The appellate court also upheld the Tax Court’s disallowance of a $70 million deduction for interest to cover a loan to pay estate tax because the estate’s assets were liquid and loan repayment could be made from future distributions, if any. Estate of Koons v. Comr., No. 16-10646, 2017 U.S. App. LEXIS 7415, aff’g., T.C. Memo. 2013-94.

Posted April 29, 2017

Like-Kind Exchange Leads to Adeemed Bequest. A married couple created a trust and named themselves and one of their sons as co-trustees. Upon the last of the parents to die, the two sons were to be the co-trustees. The father died in 2011 and the wife died in 2013. The trust became irrevocable upon the wife’s death and the sons became co-trustees. At the time of the wife’s death, the trust contained various tracts of real estate – an 80-acre Minnesota tract, a 40-acre Iowa tract and another 80-acre Iowa tract. The trust provided that one son was to receive the 40-acre Iowa tract, and the other son would receive the 80-acre Iowa tract and have the first right to buy or rent the other 40-acre Iowa tract. The balance of the trust assets were to be split equally between the sons. In 2008, the trust exchanged the 80-acre Iowa tract for the 80-acre Minnesota property. Thus, when the trust became irrevocable upon the surviving spouse’s death, the trust held the 80-acre Minnesota tract and the 40-acre Iowa tract (and other non-real estate assets). The son with the purchase option gave notice to buy the Iowa tract, and the other son then filed a declaratory judgment action. The one son claimed that the option was only to rent the property from him while he continued to own it and that the Minnesota tract should be split between the two brothers, because the specific bequest of the 80-acre Iowa tract to his brother had been adeemed by the like-kind exchange. The other son claimed that the 80-acre Minnesota tract should be devised to him directly. The trial court held that the gift of the 80-acre Iowa tract had been adeemed and it was subject to the trust provision requiring it to be owned equally by the two sons. The trial court also held that the one brother merely had an option to rent the Iowa tract from his brother for the specified price in the trust for as long as the other brother owned it. On further review, the Iowa Supreme Court affirmed on the ademption issue, not recognizing any exception from ademption under Iowa law for property received in a like-kind exchange. The court refused to adopt UPC §2-606(a)(5) which states, “a specific devisee has a right to specifically devised property in the testator’s estate at the testator’s death and to any real property or tangible personal property owned by the testator at death which the testator acquired as a replacement for specifically devised real property or tangible personal property.” The court opined that it was up to the legislature to specifically adopt the UPC provision, as it has done with other selected UPC provisions. Thus, the court affirmed the trial court’s decision that the because of the 80-acre Iowa tract had been adeemed and the brothers owned the replacement property equally. While the court stated that its rule of interpretation for trusts was that “the testator’s intent is paramount,” the result the court reached most likely violated that precept by resulting in a co-owned tract of farmland which it appears that the trust provisions were trying to avoid. The court vacated the trial court’s ruling on the option provision and remanded the issue for consideration of extrinsic evidence as to its meaning. In re Steinberg Family Living Trust, No. 16-0380, 2017 Iowa Sup. LEXIS 44 (Iowa Sup. Ct. Apr. 28, 2017).

Posted April 25, 2017

IRS Guidance on Discharging Estate Tax Liens. Upon death, the assets in the decedent’s gross estate become subject to a federal estate tax lien under I.R.C. §6324(a). The line arises before any estate tax is assessed and is an unrecorded (“silent”) lien that exists for 10 years from the date of the decedent’s death. The lien is in addition to the regular federal estate tax lien of I.R.C. §6321, which arises upon the assessment of tax. The lien can be discharged by making a request via Form 4422. The lien is discharged if IRS determines that the lien has been fully satisfied or provided for. Form 792 is used to discharge the lien from particular property under I.R.C. §6325(c). Historically, the lien would be released within a few days, but beginning in June of 2016 all applications for discharge of the liens began processing through Specialty Collections Offers, Liens and Advisory (Advisory) in the Estate Tax Lien Group. Upon the IRS accepting a filed Form 4422, the net proceeds of estate asset sales are either to be deposited with the IRS or held in escrow until IRS issues a closing letter or determines that the federal estate tax return will not be audited. The amount deposited with IRS or held in escrow is the amount of proceeds remaining after the amount necessary to pay estate tax. IRS has issued guidance to the Special Advisory Group concerning how to handle lien discharge requests. Under applicable regulations, if the “appropriate” official determines that the tax liability for the estate has been fully satisfied or adequately provided for, a certificate that discharges the property from the lien may be issued. The interim guidance provides instruction on who inside IRS is to be consulted and provide assistance in handling lien discharge requests, and what Code sections apply. The interim guidance also notes that Letter 1352 is to be issued when an estate does not have a filing requirement. Also, the interim guidance notes the procedures utilized to substantiate facts for nontaxable estates. The interim guidance also notes the circumstances when an escrow/payment will or will not be required. Treasury Memo SBSE-05-0417-0011 (Apr. 5, 2017).

Posted April 22, 2017

IRAs Can’t Be Used to Pay Spousal Allowance of Surviving Spouse. The decedent died, leaving a surviving spouse and two daughters. The decedent’s will provided for the distribution of his personal property and established a trust for the benefit of his daughters. In addition, 90 percent of the residue of the estate was to be distributed to the daughters. The surviving spouse filed for an elective share of the estate and requested a spousal support allowance of $4,000 per month. The daughters resisted the surviving spouse’s application for spousal support, claiming that the decedent’s retirement accounts (two IRAs and a SEP IRA) were not subject to the spousal allowance as not part of the decedent’s probate estate. The probate court determined that the decedent’s probate estate would not have had enough assets to pay a spousal allowance without the retirement accounts included. The surviving spouse claimed that the retirement accounts should have been included in the probate estate for purposes of spousal support based on Iowa Code §633D8.1 that provides that “a transfer at death of a security registered in beneficiary form is not effective against the estate of the deceased sole owner…to the extent…needed to pay…statutory allowances to the surviving spouse.” The surviving spouse argued that because the funds in the accounts were likely mutual funds or index funds, that the accounts should be “securities” within the statutory meaning. The daughters disagreed on the basis that the Uniform Iowa Securities Act excludes any interest in a pension or welfare plan subject to ERISA. The probate court ruled for the daughters on the basis that the retirement accounts were not available for spousal support because they were not probate assets and became the personal property of the daughters at the time of their father’s death. The probate court also noted that the Iowa legislature would have to take action to make beneficiary accounts available to satisfy a spousal allowance. On appeal, the Iowa Supreme Court affirmed. The court noted that the accounts were traditional IRAs governed by I.R.C. §408 that pass outside of the probate estate under Iowa law and were not covered by Iowa Code §633D as a transfer-on-death security. The retirement accounts were not “security” accounts merely because they contained securities. Rather, it is a custodial account that does not actually transfer on death to anyone other than a spouse. In re Estate of Gantner III, No. 16-1028, 2017 Iowa Sup. LEXIS 40 (Iowa Sup. Ct. Apr. 21, 2017).

IRS Abused Its Discretion in Denying Hardship Waiver On IRA Rollover. The petitioner retired from the New York Police Department and subsequently suffered from depression. He started receiving IRA distributions, but left the checks on his dresser at his home for more than a month before depositing them into his bank account. The petitioner did not use the deposited funds and collected interest on the funds at 0.25 percent. He also failed to see his tax preparer until late in the next tax season. At that time, the preparer discovered the Forms 1099R and advised the petitioner to transfer those funds to an IRA account. The petitioner made the transfer well after the expiration of the 60-day period. The tax preparer did not suggest that the petitioner obtain an IRS private letter ruling to get a waiver from the 60-day rule so as to avoid having a penalty imposed. The petitioner received a CP2000 Notice from the IRS asserting a deficiency of approximately $40,000, and replied with a letter detailing his depression and his good faith transfer to an IRA account before the IRS discovered the problem. The IRS claimed that because the petitioner didn’t file a private letter ruling request in accordance with Rev. Proc. 2003-16, that it couldn’t grant relief. The court disagreed with the IRS. The court noted that the statute, I.R.C. §402(c)(3)(B), allows the Treasury Secretary the discretion to waive the 60-day requirement when the failure to do so would be against equity or good conscience, including events beyond the reasonable control of the individual. In addition, the court noted that Rev. Proc. 2016-47 (issued after the letter in question) noted that the IRS can determine qualification for a waiver under the statutory provision. The court noted that the IRS employee handling the petitioner’s exam could have granted the waiver based on the statute and that Rev. Proc. 2003-16 did not indicate that obtaining a private letter ruling was the only way in which relief could be granted. The court also noted that the Internal Revenue Manual provides that examining agents can consider all issues that a taxpayer might have. The court also dismissed the IRS argument that the court lacked jurisdiction on the basis that the statute did not indicate that the IRS decision was not reviewable. The court concluded that the IRS had acted in an arbitrary manner that was an abuse of its discretion. Trimmer v. Comr., 148 T.C. No. 14 (2017).

Posted April 18, 2017

Deeds Transferring Farmland Not Shown To Be Subject of Undue Influence. Shortly before his 87th birthday, a bachelor with no remaining family members executed two joint tenancy warranty deeds to about 1,000 acres of farmland to the defendant, the bachelor’s tenant farmer. After the transferor died, the administrator of his estate sued, claiming that the deeds were the product of undue influence and should be set aside. The defendant counterclaimed for the improvements made on the land after the transfer in the event the deeds were set aside. The trial court conducted a lengthy trial and concluded that the estate administrator had to show by clear and convincing evidence that the transferee had a confidential relationship with the transferor and that suspicious circumstances existed. The trial court determined that a confidential relationship existed before the execution of the deeds, but that the evidence was mixed as to whether the administrator had met his burden of proof by clear and convincing evidence. Thus, the trial court found in favor of the transferees on the undue influence claim and determined that their counterclaim was moot. The trial court also awarded mileage fees, witness fees and postage to the transferee of the deeds, but no deposition costs. On appeal, the appellate court affirmed. The appellate court noted that the standard for determining undue influence in an action to set aside a deed involves an examination of all of the evidence. Based on the evidence, the appellate court noted that the transferee had long been a part of the transferor’s estate planning and that the transferee had long contemplated giving or selling some of his land to the transferee. The transferee was represented by legal counsel who had no concerns that the transferee was being unduly influenced. The transferee also had no surviving family members and the transferees had farmed his ground for some time. The transferee also depended heavily on one the transferee for his care. Thus, the estate administrator failed to prove by clear and convincing evidence that the deeds at issue resulted from undue influence. Mark v. Neumeister, 296 Neb. 376 (2017).

Posted April 2, 2017

Trust Language At Issue Over Meaning of Term “Operate” In Context of Farming Activity. A father leased his farmland to his daughter beginning in 1988. Beginning in 1990, she had her husband farm the land. The father also suggested that his daughter buy adjacent farmland. The daughter and her husband divorced, and the father provided deposition testimony in the divorce action that his intent was that the land stay in the family and that he would continue to lease the land to his daughter and assist her. The father also testified that he wanted his daughter to turn over the farming operation to his grandson (her son), and that he would only renew the lease with the daughter if the grandson became the primary operator of the farming operation. The father’s will established a testamentary trust that gave all of the father’s farming interests to the daughter as trustee. The grandson was appointed the successor trustee, and the trust was to last “as long as there are family members willing and able to farm or manage the farming activity.” Income from the farm was to be distributed to the daughter as trustee, except that if the grandson “operates the farm at any time herein, then he shall be entitled to two-thirds of such income and [the daughter] shall be entitled to one-third.” The trust was to pay all expenses of the farming operation. The grandson took over the farming operation, but the daughter claimed that she was the “operator” of the farm and, as such, declined to pay the grandson any share of the farming profits while her father’s estate was being settled. She also wanted her son to sign an “at-will employment contract” to be able to continue farming. He refused, and his mother brought an unlawful detainer action to forcibly evict her son from the farmhouse. She then leased the farmhouse and farmland to third parties. Her son sued, and the trial court held that the term “operate” in the trust was ambiguous and therefore extrinsic evidence (deposition testimony of the decedent father in the dissolution action) could be used to divine its meaning. The trial court determined that the lease to third parties violated the decedent’s intent as did failing to pay the decedent’s grandson. The trial court removed the daughter as trustee and appointed the grandson to serve as trustee, calculated damages for the grandson at $340,000 and assessed attorney fees to the daughter (mother) to pay personally. On appeal, the appellate court affirmed. The court agreed that the term “operator” was ambiguous and susceptible to differing interpretations such as “manage” or “to farm.” As such, the trial court acted properly in considering extrinsic evidence such as the testator’s deposition testimony that he wanted his grandson to farm the land. The appellate court also held that the daughter was properly removed as trustee, damages were calculated properly, and attorney fees appropriately assessed against the daughter. In re Estate of Kile, No. 33613-1-III, 2017 Wash. App. LEXIS 556 (Wash. Ct. App. Mar. 7, 2017).

Posted April 1, 2017

Discretionary Trust Beneficiary Cannot Challenge Adoption. The defendant is the plaintiff’s son and was named the beneficiary of three irrevocable trusts established by his great-great grandparents. The trustees had the sole discretion to determine if and when eligible trust beneficiaries could receive trust distributions. In 2004, the plaintiff adopted a son which had the legal effect of making the adopted son an eligible trust beneficiary. The trustees disbursed thousands of dollars to the adopted son. The defendant claimed that he didn’t know about the adoption and challenged it upon learning of it. In 2014, the defendant filed a motion to set aside the final judgment of adoption, alleging fraud had been committed on the court because he had a right to notice of the adoption and the right to intervene in the proceeding. The defendant claimed that the adoption should be vacated because he didn’t receive notice despite his legal interest in preventing the trust benefits from flowing to the adopted son. The trial court agreed and vacated the order of adoption. On appeal, the appellate court reversed and remanded. The appellate court noted that adoption was a matter of state (FL) statutory law, and that the applicable statute specified when a third-party was entitled to notice of an adoption. Under FL law, the court noted that the defendant had to show that he had a direct, financial and immediate interest in an adoption to be entitled to notice, or to have legal standing to vacate the adoption order. The appellate court held that the defendant lacked standing because he was not entitled to notice as a contingent trust beneficiary. The trusts were discretionary trusts that gave the trustees sole discretion over distributions, both in amount and to whom. Thus, the defendant did not have a direct, financial and immediate interest in the trusts and had no right to receive notice about the adoption that added the adopted son as an eligible beneficiary. The court also noted that another case was inapposite because the adoption did not divest the defendant of his entire interest in the trusts. Edwards v. Maxwell, NO. 1D16-2168, 2017 Fla. App. LEXIS 4409 (Fla. Ct. App. Mar. 31, 2017).

Posted March 5, 2017

Battle of Experts – Value of Paintings Determined. The decedent died in 2005 owning two valuable paintings. The paintings were auctioned off after the decedent’s death, but the executor cleaned and reframed them before the auction. One of the paintings sold three years after the decedent’s death for $2.43 million. On the earlier-filed estate tax return that painting had been valued at $500,000 and the other painting at $100,000 based on an expert’s opinion. The IRS claimed that the paintings should have been valued at $2.1 million and $500,000 respectively. The court rejected the estate expert’s opinion as unreliable and unpersuasive. The executor was valuing the paintings and simultaneously soliciting the executor for exclusive rights to auction the paintings and, thus, had a conflict of evidence. The court also determined that the expert had placed too much emphasis on how dirty the paintings were and how risky it would be to clean them. In addition, no comparable sales were provided to support the expert’s valuations. Also, the court noted that the post-death sale of the one painting was highly conclusive of its value. The government’s expert provided comparable sales and discounted for the painting’s condition including dirtiness, etc. Estate of Kollsman v. Comr., T.C. Memo. 2017-40.

Posted February 12, 2017

Daughters Unduly Influenced Dad’s Estate Plan and Tortiously Interfered With Brother’s Inheritance. The parents had two daughters and a son. The son farmed with his father and the daughters married and moved away from the farm. Under a 1965 will, the father left his property to the three children in equal shares. In 1997, the parents executed a revocable trust under which one daughter disclaimed any interest in the trust (she already had over $1 million in net worth) and the other two children would each receive one-half of the trust’s income for 25 years, then they each would receive one-half of the trust assets. In 1999, the trust was amended such that the two children would split the trust income for ten years and the son would get all of the farm machinery and tools. The daughter that had originally disclaimed her interest was to receive one-third of the personal property. In 2001, the trust was amended to make sure that if the son predeceased his parents that his share would pass to his children in trust until the youngest child was 21. The parents moved off of the farm in 2001 into a nearby condo. The son moved into the farmhouse at his parents’ request and was told to keep the rent from a smaller home on the farm. The son paid his parents bills and arranged services for them and served as their agent under a medical power of attorney. The trust was again amended in 2002, revoking all prior amendments and again giving the two children each one-half shares, and the son having the right to buy his sister’s share of the farm. Due to a dispute over the parents’ medical conditions, in 2008, the parents executed medical powers of attorney making all three children co-agents with decisionmaking controlled by any two of them. The sisters then moved the parents to assisted living near them and approximately 100 miles from the farm. In 2009, the sister that stood to took nothing from the estate plan began paying the parents’ bills and handling their care. The trust was again amended to convert the son’s outright interest in one-half of the farm upon their death to a life estate. Upon the son’s death, the trust would terminate with the principal and income being distributed to the two girls. Even though the son was farming the land and helping his father make farming decisions, his sisters did not inform him of the amendment. The parents ultimately returned to the condo. The father began suffering from dementia in 2011. Later that year, the son was informed that his interest had been changed to a life estate. In the summer of 2011, the parents, at the urging of the daughters, terminated the trust and created mutual wills that effectively disinherited the son. The mother died in early 2012, and the son learned he had been disinherited. The father died a year later and the sisters made sure their brother was not informed of his death until after the private funeral. In May of 2013, the son sued to invalidate the 2011 will on the grounds that his father lacked testamentary capacity or was unduly influenced. The son also sought damages for tortious interference with a bequest. The sisters moved for summary judgment and the trial court rejected it on the will contest as well as the tortious interference claim. The jury set aside the father’s will and found in favor of the son on the tortious interference claim. The son was awarded $1,183,430.50 for loss of inheritance and consequential damages of $295,857.62. The jury also levied punitive damages against the sisters of approximately $178,000. The trial court denied the sisters’ motion for a judgment notwithstanding the verdict or for a new trial. On appeal, the court affirmed. While the father had testamentary capacity, the evidence showed that he was unduly influenced and had tortuously interfered with their brother’s inheritance. In re Estate of Boman, No. 16-0110, 2017 Iowa App. LEXIS 120 (Iowa Ct. App. Feb. 8, 2017).

Posted February 7, 2017

Payment Designation In Check to IRS Controls. The wife died in 2007 and her surviving husband died in 2012. Their son was the executor of both estates. In 2012, the wife’s estate filed a Form 709 for the 2007 tax year showing a total tax liability of $1.3 million. There was no “split-gift” election. Form 709 was also filed for the husband’s 2007 tax year on the same day in 2012. The Form 709 for the husband’s estate showed the same tax liability and also no split-gift election. Payments attributable to both Form 709s were remitted on the same day. In early 2013, IRS assessed the total gift tax of $1.3 million that was shown on the wife’s Form 709, credited her estate with the payment of that amount and assessed additions to tax of about $1 million of penalties and interest. The IRS sent Notice CP 161 to her estate of that total amount. Later in 2013, the IRS sent a similar notice of assessment to the son as executor of his father’s estate for approximately the same amount. In 2014, the IRS sent a letter to the executor of the wife’s estate stating that her 2007 tax liability remained unpaid. The estate sent the IRS a copy of the check that had been sent to the IRS with a letter from the husband’s estate with his Social Security number on it and where the enclosed check said the check “represented final payment pursuant to…the CP220 dated June 17, 2013.” In 2015, at a telephonic hearing, the attorney for the estates argued that the 2013 check was intended to pay the wife’s 2007 liability. A Notice of determination sustaining the levy notice was issued to the wife’s estate a few days later. The wife’s estate acknowledged that the check was to be applied against her husband’s estate, but that the intent was to apply it to her estate. The court rejected the argument on the basis that the IRS must honor a taxpayer’s designation of a voluntary tax payment, and the check clearly instructed the IRS to apply the payment against the husband’s gift tax liability. Estate of Beckenfeld, T.C. Memo. 2017-25.

Posted January 26, 2017

Undue Influence Not Present In Family Trust Dispute. This case arose in a family setting. Mom inherited about 400 acres in 1965 consisting of timber and 3,500 feet of shoreline. In 1976, Mom and Dad formed a corporation and put the land in the corporation including cabins and leasable sites for additional cabins. The corporation’s income is derived from leasing property and logging operations. The couple have five children, four of which were involved in the case. By 1998, the parents had gifted a 10 percent interest in the corporation to four of the children. In 1998, Mom created a trust to hold the couple’s remaining 60 percent corporate interest. In 2010, the bylaws were amended such that three of the children were no longer on the board. In addition, those three opposed giving another sibling, the defendant, (who remained on the board) a long-term lease of a cabin site on the tract for a reduced price as an unequal distribution to the shareholders. The three children then hired legal counsel to voice their concern about their parents’ competency and threatened legal action if a lease were entered into with the one child. The parents’ trust was amended several times and the three children sued claiming undue influence . The one child that would be the long-term tenant filed a motion for partial summary judgment which the trial court granted and dismissed the complaint. On further review, the appellate court affirmed. The appellate court found that there was insufficient evidence to trigger the presumption of undue influence. There was no relationship between the defendant’s position as a board member and the modifications to the trust. Green v. Green, No. 42916, 2017 Ida. LEXIS 10 (Idaho Sup. Ct. Jan. 23, 2017).

Posted January 21, 2017

Executor Personally Liable for Unpaid Estate Taxes. The decedent died in 2002, survived by his wife who was the executor of his estate. His four minor children also survived. At the time of death, the decedent had over $340,000 of unpaid federal income tax liabilities which exceeded the value of his estate. The estate was insolvent. The estate contained primarily stock of two corporations, each of which owned a fishing vessel as its only asset. One corporation was entirely owned by the estate and the other corporation was owned 50 percent by the estate and 50 percent by the surviving wife. The wife transferred all of the shares of both corporations that the estate owned to herself without consideration. At the time of the transfer, the wife knew of the unpaid tax debt. In 2003, the IRS submitted a claim for unpaid taxes, interest and penalties totaling over $342,000. The claim went unpaid and IRS served the wife with a formal notice of potential liability for unpaid tax by an estate under 31 U.S.C. §3713(b) and filed suit. For liability to attach under the statute, the government must establish that the estate fiduciary distributed estate assets, that the estate was insolvent at the time of the distribution (or the distribution rendered the estate insolvent), and that the distribution occurred after the fiduciary had either actual or constructive knowledge of the liability for unpaid tax. The trial court determined that the wife was liable up to the value of the assets that she had transferred -$125,938 (the selling of price of both fishing vessels less the value of a lien against one vessel). On appeal, the appellate court affirmed. The appellate court determined that the wife filed a faulty summary judgment motion which meant the facts as submitted by IRS were deemed admitted. The appellate court also held that the government had successfully established the requirements for liability to attach under 31 U.S.C. §3713(b). The appellate court also determined that the wife did not qualify for any “equitable exception” to the statute because she didn’t use the stock transfer to herself to pay the estate’s administrative expenses, but to maintain the income stream that the vessels provided. The U.S. Supreme Court denied to hear the case. United States v. McNicol, 829 F.3d 77 (1st Cir. 2016), cert. den., No. 16-627, 2017 U.S. LEXIS 403 (U.S. Sup. Ct. Jan. 9, 2017).

IRS Again Says That Transcripts Serve as Estate Closing Letters. Following-up on a Notice that it issued in mid-2015, the IRS has again issued guidance in which it reiterates that an estate and its authorized representative can request an accounting transcript from IRS in lieu of a closing letter in confirmation that the estate is closed. The IRS noted that a closing letter can still be obtained on specific request. A transcript is to be requested by filing Form 4506-T via mail or fax. The IRS points out that requests be made no earlier than four months after the filing of the estate tax return. When a closing letter is desired, the authorized representative on an estate can call the IRS at (866) 699-4083 no earlier than four months after the filing of the estate tax return. IRS Notice 2017-12, 2017-4 IRB.

Posted December 14, 2016

No Late Portability Election Waiver If Form 706 Had To Be Filed. The IRS view is that a late portability election cannot be made under I.R.C. §2010 if Form 706 was required to be filed. This is the case, according to the IRS even if the estate is non-taxable due to, for example, the marital or charitable deduction. In such situations, the statutorily prescribed time for filing Form 706 is nine months after death, and the IRS position is that in such situations they lack the authority to grant relief. If Form 706 is not required to be filed, relief for a late portability election can be granted upon issuance of a private letter ruling (and payment of the associated fee. C.C. Email Advice 201650017 (Oct. 14, 2016).

Posted December 7, 2016

No Charitable Deduction For Payments To Charity From Trust. The decedent created a testamentary trust under his 1955 will. Upon the decedent’s death in 1957, the trust became operative. ITEM IV provided that the residue of the estate was to make payments out of net income if available, and if not, then out of principal to each of the decedent’s brothers and sisters then living for life as the trustee deemed necessary, but not to exceed $100/month to each of them. There were other similar provisions for nieces and nephews, who were entitled to up to $50/month and another person who was entitled to $75/month. ITEM V of the will specified that the trust was to end on the death of the last person receiving benefits under the trust unless the trustees decided to continue the trust under specified terms. In that event, it could continue for up to 10 years and all unused income and the remainder of principal could be distributed if the distributions would be exempt from federal estate and state (OH) inheritance taxes. In 2009, the year in issue, only a niece and the person entitled to $75/month were still living. The will also created a marital trust that, if the decedent’s wife survived him, one-half of the decedent’s estate would fund the marital trust and the surviving wife would be entitled to the income from the trust for life. The decedent’s will also directed the trustees to pay the remainder of the trust assets to the surviving wife as she might direct in her will, and if she made no direction, the balance of the assets would be part of the trust created under ITEM IV of his will. She did not survive, and the marital trust did not come into existence. The trustees were given the power to create a foundation, but did not do so. In early 1960, the trust was valued at slightly over $2 million. Over the years, the trustees made charitable contributions along with making the required distributions. They did so in 2009 and the IRS disallowed the charitable deduction of $26,700 based on I.R.C. §642(c)(1) which requires that a charitable donation made by a trust to be made “pursuant to the terms of the governing instrument.” The court construed the terms of the trust to mean that charitable contributions could not be made until all of the annuitants had died and the trustee decided to continue the trust. The court believed this to be the correct result because the will also created a marital trust to receive one-half of the decedent’s property if she survived, and also because the annuity payments were to be paid out of net income, if available, and then out of principal, which indicated a concern that the trust income would not be enough to pay the annual annuities. Even though the trust had large amounts of taxable income and the monthly payment became only nominal over time, the drafting of the trust did not allow for charitable contributions until all annuitants were dead. Harvey C. Hubbell Trust v. Comr., T.C. Sum. Op. 2016-67.

IRS Lien Beats Out Estate Executor’s Claim for Unpaid Fees. An estate executor granted the IRS a special estate tax lien in accordance with I.R.C. §6324A in connection with an I.R.C. §6166 election to pay the estate tax in installments over 15 years. At the time the lien was granted, the executor’s fees had not been fully paid. During the 15-year period, the value of the estate property subject to the IRS lien dropped below the amount due the IRS for unpaid estate tax. The executor claimed that he had a priority claim against the estate assets for the amount of his unpaid fee. The IRS claimed that it had a priority claim on the estate assets for the amount of the unpaid estate tax. The trial court granted the executor’s motion for summary judgment on the basis that the operative statute was silent as to the payment of administrative expenses. Thus, the trial court gave the executor’s claim priority on a “first in time, first in right” theory. On appeal, the appellate court reversed. The appellate court reasoned that the executor’s claim for unpaid fees was not a lien and, as such, the trial court’s priority theory had no application. The appellate court then noted that I.R.C. §6324, the IRS general estate tax lien provision, does provide for administrative expenses to have priority over a government lien. However, the government’s lien in this case was a special lien under I.R.C. §6324A which did not contain provide any special rule for administrative expenses. The executor claimed that he should prevail on the basis that if his claim did not have priority that it would be hard to find executors to serve. The court disagreed on the basis that the executor could have planned for payment before granting the IRS the special lien (not putting the lien on all of the estate property, not making the I.R.C. §6166 election, or making other arrangements, for example). The appellate court also noted that if the IRS special lien were subject to administrative expenses then partially unsecured deferred payment obligations under I.R.C. §6166 could result. Also, the court noted that the executor’s claim for unpaid fees would not have priority over a any bond to secured the estate tax deferred under I.R.C. §6166 and, thus, should not be given priority over the IRS claim. United States v. Spoor, 838 F.3d 1197 (11th Cir. 2016).

Posted November 29, 2016

Court Deals With Burden of Proof in Gift Tax Case. This case involved the merger of two corporations, one owned by the parents and one owned by a son. The parents' S corporation developed and manufactured a machine that the son had invented. The son did not patent the invention, and the parents' corporation claimed the research and development credits associated with the machine. The sons' corporation sold the machine (liquid dispenser) to various users, but the intellectual property rights associated with the machine were never formally received. The two corporations were merged for estate planning purposes, with the parents' receiving less stock value than their asset ownership value. The lawyers involved in structuring the transaction "postulated" a technology transfer for significant value from the son to the parents that had occurred in 1987. The transfer was postulated because there were no documents concerning the alleged transaction executed in 1987. Instead, the lawyers executed the transfer documents in 1995. The IRS asserted that no technology transfer had occurred and that the merger resulted in a gift from the parents to the son of $29.6 million for which no gift tax return had been filed and no taxes paid. The Tax Court agreed with the IRS and the resulting gift tax (at 1995 rates) was $14.8 million. No penalties were imposed on the taxpayers. On appeal, the parents claimed that the Tax Court erred by not shifting the burden of proof to the IRS because the original notices of deficiency were arbitrary and excessive and/or because the IRS relied on a new theory of liability. The parents also alleged that the Tax Court incorrectly concluded that the parents’ company owned all of the technology and that the Tax Court erred by misstating their burden of proof and then failing to consider alleged flaws in the IRS expert’s valuation of the two companies. The appellate court reversed and remanded on the issue of the nature of the parents’ burden of proof and the Tax Court’s failure to allow them to rebut the IRS expert’s report. However, the appellate court determined that the parents bore the burden to prove that the deficiency notices were in error and that the burden of proving a gift tax deficiency didn’t shift to the IRS even though the IRS later conceded somewhat on the valuation issue because the initial conclusion of IRS on value was not arbitrary. The appellate court also determined that the parents could not shift the burden of proof on the grounds that the IRS raised a new matter because the IRS theory that their corporation was undervalued was consistently postulated throughout and the original notices that implied that undervaluation of the parents’ corporation allowed for a disguised gift transfer from the parents to their adult children. The Tax Court’s finding that the parents’ corporation owned the technology was also upheld. The appellate court did allow the parents to challenge the IRS expert’s valuation and how the Tax Court handled the objections to the valuation. Thus, the court remanded on that issue. Cavallaro v. Comr., No. 15-1368, 2016 U.S. App. LEXIS 20713 (1st Cir. Nov. 18, 2016), aff’g. in part, and rev’g. in part, and remanding, T.C. Memo. 2014-189.

Posted November 26, 2016

Evidence Insufficient to Establish Undue Influence. The decedent died about eight months after her husband. The husband had five adult children from a prior marriage, and the couple executed mirror wills in 1991, approximately 13 years before their deaths. The wills provided that upon the death of the first spouse the property of the surviving spouse (which included a farm) was to go pass to a specified son of the husband. Shortly after her husband’s death, the surviving wife revoked her 1991 will and executed a new will about five weeks before her death. The new will benefitted a different son of the pre-deceased husband to the exclusion of the son that benefitted from the earlier will. The disinherited son petitioned to admit an unsigned copy of the decedent’s 1991 will into probate and his brother objected and sought to petition the subsequently executed will. The disinherited son claimed that the decedent had been unduly influenced by his brother. The trial court determined that the son benefitting from the new will had set forth a prima facie case showing that the 1991 will should be denied admission to probate. On appeal, the court affirmed. The appellate court noted that the facts did not indicate that the decedent was susceptible to undue influence. While the decedent suffered from congestive heart failure, she was not in poor mental health and her physician testified that her diabetes was improving and that she was living an active life and doing her own finances. The court also determined that the evidence showed that the decedent had a strong personality and could handle her own affairs. The court also determined that the challenging son did not establish that his brother had a confidential or fiduciary relationship with the decedent and that suspicious circumstances were not present. As a result, the subsequent will was properly admitted to probate. In re Estate of Born, No. 2015AP2519, 2016 Wisc. App. LEXIS 660 (Wis. Ct. App. Oct. 6, 2016).

Posted November 6, 2016

No Extension of Statute for Assessment of Tax Due to Omission of Prior Year Gifts. On For 709, the taxpayer properly reported the amount of gifts made in the current year, but had omitted the amount of prior-year gifts. The omission resulted in the tax for the current year to be less than what it should have been (because the tax is computed based on lifetime transfers). The gifts for the earlier years were properly reported in those years. The IRS didn’t notice the omission of the prior year gifts until after the three-year statute of limitations for assessment of tax under I.R.C. §6501(a) had expired. While the statute contains an exception to the three-year rule, the omission of gifts made in prior years does not trigger the exception. The IRS Chief Counsel’s office noted that the exception only applies if the gift has not been reported on the gift tax return and does not apply where the gift was adequately disclosed. Thus, the only relevant gifts are those made in the current year. On the return, the current year gifts were reported and disclosed and the exception to the three-year statute applied. The only thing that keeps the statute open is the assessment of tax on the gift for the year in question. If that gift is subject to tax and is properly disclosed, then the exception to the three-year statute is inapplicable. C.C.A. 201643020 (Jun. 4, 2015).

Posted July 9, 2016

Without Sufficient Contact, State Can’t Tax Trust. The trust at issue, a revocable living trust, was created in 1992 with a situs of New York. The primary beneficiaries were the settlor’s descendants. None of the descendants lived in North Carolina at the time of the trust’s creation. The trust was divided into three separate trusts in 2002, one for each of the settlor’s children. The beneficiary of one of the sub-trusts was a North Carolina resident at that time. The trustee was replaced in 2005 with a successor trustee who resided in Connecticut. North Carolina tax returns were filed for tax years 2005-2008 for the accumulated trust income, that was distributed to the beneficiaries, including the non-North Carolina beneficiaries. In 2009, the trust filed a claim for a refund of North Carolina taxes in an amount slightly exceeding $1.3 million. The trust claimed that N.C. Gen. Stat. §105-160.2, which assesses tax on the amount of taxable income of the estate or trust that is for the benefit of a North Carolina resident, was unconstitutional on due process and Commerce Clause grounds. The defendant denied the claim, and the hearing officer later dismissed the case for lack of jurisdiction. The trial court dismissed the request for injunctive relief with respect to the refund claim, but denied the defendant’s motion to dismiss the constitutional claims. The trial court then granted summary judgment for the trust on the constitutional claim and ordered the defendant to refund the taxes paid on its accumulated income. On appeal, the appellate court affirmed. The court determined that the trust failed to have sufficient minimum contacts (as required by the Due Process Clause) with North Carolina to subject the trust to North Carolina income tax. The court cited both International Shoe Co. v. Washington, 326 U.S. 310 (1945) and Quill Corp. v. North Dakota, 504 U.S. 298 (1992) to support its position on this point. The trust did not have any physical presence in the state during the tax years at issue, contained no North Carolina property or investments, had no trust records that were created or kept in North Carolina, and the place of trust administration was not in North Carolina. Basing the imposition of state tax on a beneficiary’s domicile, by itself, did not establish sufficient minimum contacts with the state to satisfy the Due Process Clause and allow North Carolina to tax a non-North Carolina trust. The appellate court held that Brooke v. Norfolk, 277 U.S. 27 (1928) was controlling. In that case, a Maryland resident created a testamentary trust with a Maryland situs for a Virginia beneficiary. Virginia assessed tax on the trust corpus, but the Court held the assessment to be unconstitutional. As such, the North Carolina statute violated the Due Process Clause of the U.S. Constitution. Kaestner v. North Carolina Department of Revenue, No. COA15-896, 2016 N.C. App. LEXIS 715 (N.C. Ct. App. Jul. 5, 2016).

Posted May 10, 2016

IRS Lien Attaches to Trust Share. The decedent’s will divided her personal property and the residue of her estate into three shares, with one of the shares to be in trust to the extent the share exceeded $50,000. Under the terms of the trust (created under Arizona law) the trustee “shall” pay the beneficiary (her son) “so much or all of the net income and principal of the trust as in the sole discretion of the Trustee may be required for support in the beneficiary's accustomed manner of living, for medical, dental, hospital, and nursing expenses, or for reasonable expenses of education, including study at college and graduate levels.” Thus, the trustee was obligated to distribute income and principal in accordance with an ascertainable standard, but only in the trustee’s sole discretion. The beneficiary failed to meet his tax obligations for 2007 through 2011 and the IRS made assessments of over $700,000. The beneficiary made substantial payments before his mother’s death in 2013, but an unpaid balance remained. As part of the probate final accounting, over $175,000 was to be paid to the trust for the beneficiary. The IRS then served the trustee with a notice of federal tax lien and notice of levy asserting a balance due on the unpaid taxes of almost $500,000. The question before the court was whether the lien attached to the funds contained in the trust. The court first noted that the caselaw is mixed on whether such a trust clause creates a property interest to which a lien could attach. Ultimately, the court determined that the lien attached given the mandatory language (“shall pay”) in the trust clause with only the amount paid up to the trustee’s discretion. However, the court denied the IRS summary judgment on the issue of whether the lien attached to the trust corpus immediately. Duckett v. Enomoto, CV-14-01771-PHX-NVW, 2016 U.S. Dist. LEXI 51502 (D. Ariz. Apr. 18, 2016).

Posted April 30, 2016

Children of Deceased Parent Inherit Parent’s Share Because Grandma’s Conservators Engaged in Self-Dealing. The decedent had eight children, one of whom predeceased the decedent leaving children – grandchildren of the decedent. The decedent executed a revocable trust about 18 years before she died that provided that each of her eight children would receive an equal share of her estate upon her death, subject to a life estate in her husband and options to buy the family farm provided to three of the children. About 8 years before her death, and after her husband died, the decedent amended her trust to remove the language about her husband’s life estate (no longer relevant) and added language providing that if one her children predeceased her that a predeceased child’s surviving children would inherit their deceased parent’s equal share of the decedent’s estate. The provision providing the option to buy the family farm for three of the children was retained. The decedent, about six years before death, made four more amendments to the trust in order to disinherit two of her daughters that were causing family problems. She also added language that was favorable to two of her other children. For the disinherited children, the trust provided that the shares of those children would pass to their children equally. With one of the subsequent amendments during this timeframe, the decedent un-disinherited one of the daughters that she previously disinherited, again giving her an equal share of the estate. The other daughter remained disinherited. About four years before her death, the decedent again amended the trust, now reverting essentially to the original terms of the trust – all eight of her children inheriting equally. The trust specified that the share of any pre-deceased child would pass equally to that predeceased child’s children. If a predeceased child left no surviving children, then that child’s share would pass equally to the decedent’s other surviving children. Again, the bulk of the farm property was to pass to two of the children, one of whom predeceased the decedent, leaving children. The decedent then executed a pour-over will. The decedent was hospitalized about six months before her death and spent the remaining months of her life in and out of the hospital and nursing homes. During this time, the previously disinherited children had their mother’s lawyer prepare documents to get them appointed as co-guardians and conservators of their mother’s estate. No power of attorney was prepared. The court approved the two as co-guardians/conservators. They then executed an amendment to their mother’s trust via a different attorney while their mother was hospitalized. The mother did not see the amendment before it was signed. The pair named themselves as trustee and successor trustee in place of a brother, and disinherited the two siblings that were getting the bulk of the farm property – one of whom had already died. As a result, the two would now each receive a sixth of their mother’s estate. They also changed the name of the beneficiary of life insurance from the deceased sister to the trust the day before their mother died. The amendments were never approved by any court. Their mother died a month later. Ultimately, the children of the deceased child (grandchildren of the decedent) sued on four counts, only one of which was key to the case – self-dealing. The trial court determined that the pair had engaged in self-dealing by negating bequests to two of their siblings. The court also held that the one-year statute of limitations applicable to actions involving the validity of a trust did not apply because the claim was against the pair in their capacities as guardians and conservators. Thus, the five-year statute of limitations for unwritten contracts, injury to property and fraud (Iowa Code §614.1(4)). The appellate court affirmed. As a result, the deceased child’s grandchildren received one-seventh of their mother’s estate. Kerber v. Eischeid, et al., No. 15-1249, 2016 Iowa App. LEXIS 421 (Apr. 27, 2016).

Posted April 20, 2016

Strict Privity Rule Confirmed in Estate Planning Malpractice Case. The plaintiffs are children of the decedent husband. The defendants prepared the husband’s estate plan and set up a will and testamentary trusts as part of the plan. His will provided that each of the four children (his children and step-children) would each receive $10,000 and the surviving wife would receive his condominium, with the residue of the estate being divided equally between a marital and credit shelter trust established in the will. The surviving wife was the beneficiary of the trusts and had the right to income and principal from the assets of each trust. On the surviving wife’s death, the remaining trust assets were to be divided equally among the four children. The husband died in 2003, survived by his wife and the four children. Assets held in joint tenancy with the wife went to her as the surviving joint tenant, and each child received $10,000. The testamentary trusts were also funded. The credit shelter trust received $929,000 and the marital trust received $64,000. The same firm also prepared the defendants to prepare her estate plan. Her will was executed in 2004 and later executed two codicils. She died in 2009 survived by one of her children and the plaintiffs. Under the wife’s will, the condo passed to her daughter and the residue was split between her daughter and the plaintiffs. The plaintiffs claimed that the distribution of the probate and non-probate assets resulted in the plaintiffs receiving 30 percent of the wife’s assets and her daughter receiving 70 percent ($3.2 million for the daughter and $962,000 for each of the plaintiffs). The plaintiffs sued for breach of contract, negligence, fraudulent concealment and negligent misrepresentation. They claimed that the defendants did not advise their father of the impact of jointly held property at death and had failed to sever joint tenancies to further the estate plan. The claimed that the defendants’ negligence allowed the wife to defeat the husband’s estate plan and that they were the intended beneficiaries of the husband’s will. The defendants moved for dismissal for failure to state a claim on which relief could be granted because they didn’t owe any duty to the non-client beneficiaries. The court agreed and dismissed the claims for lack of privity. The court held that lawyers do not owe any duty to non-clients absent allegations of fraud, or malicious or tortious acts including negligent misrepresentation. The court rejected the approach of Lucas v. Hamm, 364 P.2d 685 (1961) and Schreiner v. Scoville, 410 N.W.2d 679 (Iowa 1987). The court pointed out that common law and statutory remedies were available to disappointed beneficiaries for claims involving fraud, malicious conduct or negligent misrepresentation). The court also rejected the fraudulent concealment claims. Baker v. Wood, Ris & Hames, P.C., 364 P.3d 872 (Colo. Sup. Ct. 2016).

Posted April 19, 2016

No Gift – Split-Dollar Life Insurance Governed By Economic Benefit Rule. The decedent’s revocable trust entered into two split-dollar life insurance arrangements with three separate trusts. The revocable trust later contributed $29.9 million to the separate trusts to fund the purchase of life insurance policies on each of the decedent’s three sons. The split-dollar arrangements specified that the revocable trust would receive the cash surrender value of the respective policy or the aggregate premium payments on that policy, which was greater, upon either the termination of the split-dollar life insurance arrangement or the decedent’s death. The IRS asserted the contribution to the revocable trust was a gift and asserted a gift tax deficiency against the decedent’s estate of almost $14 million plus an underpayment penalty of almost $3 million. The estate moved for partial summary judgment on the issue of whether the split-dollar life insurance arrangements were covered by the economic benefit regime of Treas. Reg. Sec. §1.61-22. The Tax Court agreed, noting the only economic benefit that the trusts received was current life insurance protection. Estate of Morrissette, 146 T.C. No. 11 (2016).

Posted April 4, 2016

Binding, Non-Judicial Settlement Can Make a Trust a QSST. The taxpayers sought IRS guidance on whether a non-judicial settlement that is binding under state law with respect to the language of a trust would make the trust qualified to hold the stock of an S corporation. The trust had a provision that the taxpayer believed violated the “one beneficiary” requirement of I.R.C. §1361(d)(3) because it required the trustee to consider the needs of the beneficiary’s descendants when invading corpus which could be construed to be indirect distributions to such persons. State law allowed all interested parties to enter into a binding, non-judicial agreement concerning the interpretation and construction of trust terms. Under the agreement, it was specified that any distribution would be for the beneficiary only and not for any other person during the beneficiary’s lifetime. The IRS determined that, in light of the agreement, the trust qualified for Qualified Subchapter S Trust status. Priv. Ltr. Ruls. 201614002-003 (Dec. 18, 2015).

IRS Doesn’t Necessarily Have an Unlimited Statute of Limitations For Assessing Gift Tax. The IRS normally has an unlimited statute of limitations to assess gift tax on a gift for which Form 709 was not filed and the gift reported on that form. However, IRS has determined that I.R.C. §6501(c)(9) only holds open the tax year the gift was omitted from and not any other years which may have had an underpayment of gift tax due to the omitted gift. In such a situation, the IRS is subject to the three-year statute of limitations (absent fraud, etc.). C.C.A. 201614036 (Mar. 10, 2016).

Posted April 1, 2016

Will Language Creates “Right to Reside” Rather Than Life Estate, But Surviving Spouse Still Responsible for Repairs and Maintenance. The decedent was survived by his wife and children. His will gave his wife the “right to reside” in his residence rent-free as long as she wanted to or until she cohabited with another male non-family member or remarried. Her right to reside was conditioned on her paying real estate taxes and insurance premiums attributable to the residence. A prenuptial agreement said essentially the same thing. Thirteen years after the decedent’s death, the surviving spouse sought a declaratory judgment that the children should pay for past and future repairs and maintenance on the $60,000 home. The repairs sought by the surviving spouse were substantial. The trial court held that the surviving spouse was a life tenant that did not obligate her to make and pay for repairs, but that the children bore that responsibility and cost. On appeal, the court reversed the finding that the surviving spouse was a life tenant. Instead, the court held that she merely had a right to reside. However, the court determined that old caselaw and logic indicated that she was responsible for repair and maintenance costs attributable to her occupancy. The children were responsible for capital improvements and major repairs that do not arise as a result of the surviving spouse’s occupancy. In re Estate of Culig, No. 1884 WDA 2014, 2016 Pa. Super. LEXIS 165 (Mar. 18, 2016).

Post-Death Events Impact Charitable Deduction. Before death, the decedent owned majority shares of voting and non-voting stock in a family C corporation that managed real estate. The decedent created trust that would receive all of the decedent’s property at the time of death. The decedent also created a charitable foundation that was designed to receive the decedent’s C corporate stock at death. The decedent’ estate filed a Form 706 that reported the fair market value of the stock at $14.1 million (a 5 percent discount was claimed on the non-voting stock) and claimed a charitable deduction for the payment to the foundation based on a date-of-death appraisal. Seven months after the decedent died and before the stock was transferred to the charitable foundation, the C corporation elected S corporate status. In addition, the C corporation redeemed all of the decedent’s stock from the trust. The corporation and the trust then amended and modified the redemption agreement with the corporation redeeming all of the voting shares and approximately 72 percent of the non-voting shares. In exchange, the trust received a short-term promissory note for $2,250,000 and a long-term promissory note for $2,968,462. Simultaneously, three of the decedent’s sons bought additional shares in the corporation. The charitable foundation later reported receipt of three non-cash contributions consisting of the short-term and long-term promissory notes plus nonvoting shares. The estate did not make an election to value the estate assets at six months after death under I.R.C. §2032, thus the estate claimed that the charitable deduction should equate to the date-of-death value of the decedent’s corporate stock interest. The IRS claimed that the post-death events had changed the nature of the contributed stock and reduced its value. The court, agreeing with the IRS, first noted that a charitable deduction does not necessarily always equal the date of death value of the contributed property because certain post-death events can impact the deduction. While the estate claimed that it had legitimate business reasons for the post-death events such as avoiding the built-in gains tax and freezing stock values via the promissory notes, and making the foundation a preferred creditor of the trust by means of the redemption, the court disagreed. The court noted that the evidence the post-death drop in the value of the stock was due to poor business decisions rather than the economy, and that the post-death appraisal for redemption purposes downgraded the stock value as a minority interest even though it was valued as a majority interest on the date of death appraisal. The court determined that the executor (one of the decedent’s children) had personally enriched himself at the expense of the foundation by redeeming the decedent’s majority interest as a minority interest. The court upheld the IRS imposition of the 20 percent accuracy penalty because the estate knew that a large portion of the stock value would not pass to the foundation as the decedent intended and that the decedent’s children acquired a majority interest in the corporation at a discounted value. Estate of Dieringer v. Comr., 146 T.C. No. 8 (2016).

Estate Executor Is Not Personally Liable for Estate Tax. The decedent died in 1990. The IRS filed a claim against the estate for unpaid income tax in the amount of $4 million in 1996 stemming from the decedent's unpaid income taxes throughout the 1980s. The estate ultimately settled the claim for $1 million. The IRS issued a closing letter concerning the estate in 1994 asserting that the estate owed estate tax of over $1.8 million. The executor had distributed property to named beneficiaries and sought contribution from them for payment of estate tax. In 1999, the estate paid over $440,000 to the IRS. In 2013, the IRS filed a claim against the executor for personal liability of the unpaid estate tax in the amount of $422,694. The court held that the executor was not personally liable under I.R.C. §6901(a) because the estate could have regained solvency by contributions from the heirs, thus the estate was not insolvent as required as a condition of I.R.C. §6901. Singer v. Comr., T.C. Memo. 2016-48.

Estate Must Pay Interest on 2003 Gift Tax Liability Despite 2010 Settlement of Estate Tax Liability. Before death, and at the age of 93, the decedent formed a family LLC and contributed cash, marketable securities and a 25 percent share in a holding company and a 10 percent share in another company. In exchange, the decedent received a 100 percent ownership interest in the LLC. Approximately a year and a half later, at the age of 95, the decedent sold 99 percent of his LLC interest to his daughter and two grandchildren for $2.8 million in exchange for an annuity. The annuity was to pay him just under $1 million annually for the balance of his life. The value of the decedent's retained 1 percent interest was valued at $28,100. The decedent's minority interests in the two companies that he contributed to the LLC were discounted substantially - 50 percent and 35 percent. The decedent died at age 96 in 2004 after having received one annuity payment. An estate tax return was filed reporting the decedent's one percent LLC interest at $28,100. The annuity was not included in the gross estate based on the executor's interpretation of Treas. Reg. §1.7520-3(b)(3). The IRS disagreed, claiming that the annuity should be included in the gross estate at a value of $4.4 million. In addition, the IRS challenged the level of the discounts claimed on the decedent's minority interests in the two companies. Consequently, the IRS asserted a deficiency of $2 million. The parties settled that matter with the IRS conceding that the decedent's life expectancy exceeded a year at the time the LLC was created, and the estate conceding that excessive discounts had been claimed. The parties also agreed that to the extent the value of the decedent's transferred LLC interest exceeded the annuity received in return a gift resulted to the decedent's daughter and grandchildren. In mid-2010, the estate motioned the court for entry of a decision to enforce the settlement, agreeing on a 25 percent discount for each of the decedent's minority interests. The estate sought an entry of a decision specifying an estate tax deficiency of $177,418 and a gift tax deficiency of $234,976. Statutory interest was applied. There was nothing specified in the settlement that interest on the gift tax deficiency would not apply. The fact that the estate was time-barred from claiming a deduction for that interest against the estate tax was immaterial. Estate of La Sala v. Comr., T.C. Memo. 2016-42.

Gift of Corporate Stock Complete and Sister Has No Grounds To Remove Brother As Executor of Father's Estate. A father died testate in 2012 and the will appointed his son as executor. The decedent named his son and his daughter as beneficiaries - the decedent's wife had died in early 2011. The estate was valued at just shy of $1.2 million and included farmland, livestock, farm implements, bank accounts, an unincorporated feed store, and stock in the family farming corporation. The son was the president of the corporation and the father, as director, ran the day-to-day operations. The son drove the grain truck and was paid 25 percent of the payment for each load delivered. The daughter was not involved in the farming corporation. When the will was admitted to probate, the daughter filed a petitioner to remove her brother as executor and also objected to the estate inventory. She claimed that the inventory should include all of the corporate stock rather than just 50 percent on the basis that her father's gift of half of the corporate stock to her brother was not a completed gift. A court-appointed temporary executor issued a report finding that the stock gift was complete, and the daughter objected claiming the report was invalid. The trial court refused to remove the brother as executor and determined that the gift was complete and only 50 percent of the corporate stock belonged in the estate. The daughter appealed and the appellate court affirmed. The court determined that the father had the present intent to make a gift and divested himself of dominion and control over the stock. The father told his lawyer and the son about the gift and had new stock certificates created and did not have the ability to rescind the transfer. The father acted on his donative intent by directing the transfer of 50 percent of the corporate stock to his son and the transfer were recorded on the corporate books. In addition, there was insufficient evidence to rebut the presumption of acceptance of the gift by the son. The fact that the father signed the stock certificates as corporate president (a position the son held) did not invalidate the intended gift. The court also upheld the trial court's refusal to remove the son as executor. The son did not mismanage or fail to self-deal or fail to perform any duty imposed by law. Simply paying himself a salary equal to what he was paid for hauling grain pre-death while he continued to haul grain post-death was not improper and generated no personal benefit to the son. It was also not improper for the son to have the estate pay the mortgage, taxes and other bills related to estate assets. While the son did not get court permission to continue the unincorporated feed store, there was no disadvantage to the estate in him doing so. The court also found no reason to believe that there was any risk to the estate in having the son continue as executor. In re Estate of Poths, No. 15-0343 (Iowa Ct. App. Mar. 23, 2016).

Court Upholds Surviving Spouse’s Consent To Take Under Deceased Spouse’s Will. A couple married in 1983 until the husband died in 2009. Each spouse had children from prior marriages. During their marriage, the wife maintained her own checking account and her own separate investment account, and the husband maintained a separate money market account that he used for his farming operations. The husband executed a will in 1992 that left the couple’s residence to his wife, all household goods, furniture, jewelry and personal effects and any automobile he owned at the time of his death. All other property of the decedent passed to his children. The same day he executed his will, the decedent also executed a revocable living trust where, upon his death, his wife would be paid the net income on a quarterly basis for life. Her children would receive $100,000 each of trust corpus. The balance of the trust property would pass to the decedent’s children. Also in 1992, the wife signed a consent to the decedent’s will which meant that she agreed to waive her right to take an elective share against the will rather than what the will provided for her. In 1995, the state (KS) legislature altered the computation of the elective share, moving to an augmented estate approach which would give the surviving spouse rights to more property. The surviving spouse claimed that the legislative change invalidated her 1992 consent to the will. The trial court upheld the consent on the basis that it was validly executed at the time and that the surviving spouse was of sound mind and memory at the time and executed it under her own free will. On appeal, the court affirmed. The court determined that the 1995 change to the elective share computation had no impact on the procedure to validly execute a consent to a will. The court also noted that invalidating the consent would produce an absurd result because of the provisions made for the spouse under the will. In re Estate of Cross, No. 113,266, 2016 Kan. App. LEXIS 6 (Kan. Ct. App. Feb. 5, 2016).

Appointed Guardian Removed For “Good Cause.” A mother had eighth children and executed a Health Care Durable Power of Attorney (POA) in 2004 that named one of her daughters as her agent and nominee for guardian and conservator in the event that the mother ever needed care. The mother became in need of care in 2014 and two other sisters also sought to be appointed as guardian. One of the sisters withdrew and the court took much testimony over several months on the issue of whether the sister named in the POA should be her mother’s guardian and conservator. The testimony revealed an acrimonious relationship among the siblings with the non-appointed children not being able to get updates on their mother’s health and the appointed child becoming estranged from her siblings. Testimony also revealed that the appointed child could not be trusted to handle her mother’s finances. The trial court appointed the other sister as guardian and a brother as conservator. On appeal, the court affirmed. The court found that the trial court had “good cause” to remove the appointed child from serving as guardian and conservator as being in the best interests of the mother under Kan. Stat. Ann. §59-3088(c). In re Burrell, No. 113,335, (Kan. Ct. App. Feb. 12, 2016).

Will Created “Floating” Royalty in Heirs. The decedent executed a will in 1947 at a time when she owned three tracts of land. Her will divided the property among her three children in fee-simple, with one daughter receiving 600 acres of a 1065-acre tract, another daughter the remaining 465 acres in that tract, and a separate 200 acres to a son along with the 150-acre homestead. The will also devised to each child a non-participating royalty interest of an “undivided one-third (1/3) of an undivided one-eighth (1/8) of all oil, gas or other minerals in or under or that may be produced from any of said lands, the same being a nonparticipating royalty interest…”. The will also stated that each child “shall receive one-third of one-eighth royalty” unless there has been an inter vivos sale or conveyance of royalty on land willed to that child, in which case the children “shall each receive one-third of the remainder of the unsold royalty.” The heirs of the children battled over the meaning of the will provisions and the amount of the royalty bequeathed to each child because some of the property became subject to mineral leases providing for royalties exceeding 1/8. The issue before the court was whether the 1/3 of 1/8 will language provided for a fixed 1/24 royalty which would allow the fee owner all of the benefit of any negotiated royalty that exceeded 1/8, or whether the decedent intended the children to share equally in all future royalties at 1/3 of whatever the royalty might be (a floating royalty). The trial determined that the decedent intended for equal sharing and held that each child was entitled to 1/3 of any and all royalty interest on the devised lands. On appeal, the appellate court reversed. The court held that the will devised all mineral interests in the 1065-acre tract, including royalty interests, to the surface-estate devisee subject to two 1/24 fractional royalty interests held by the non-fee-owning siblings, and a floating one-third of any future royalty on the 200 and 150-acre tracts. Thus, due to the decedent’s inter vivos royalty gifts to the children, the will created equal sharing of royalties on the son’s tracts, but greater royalty interests to the fee-simple owners of the daughters’ tracts (a fixed 1/24 plus any royalty exceeding two 1/24 royalty interests bequeathed to the non-surface owning siblings). On further review, the Supreme Court reversed. The Court determined that the 1/8 language in the will was synonymous with “landowner royalty” such that any new lease providing for a greater share to the royalty owner entitled the royalty owner to a floating 1/3 of the greater royalty rather than a fixed 1/24. The Court determined that the appellate court opinion was contrary to other appellate court opinions and did not account for the Supreme Court’s recent opinion involving grants that included the use or reference to a 1/8 royalty that was once common. In addition, the Court determined that the testator’s intent was to benefit the children equally by giving each of them an equal royalty interest. Hysaw v. Dawkins, No. 14-0984, 2016 Tex. LEXIS 100 (Tex. Sup. Ct. Jan. 29, 2016).

Transfers To LLC Were Bona Fide and Did Not Result in Inclusion in Decedent’s Estate. Before death, the decedent transferred marketable securities, a commercial building, a promissory note and a certificate of deposit to a family limited liability company. In return, the decedent received a proportional ownership interest in the LLC. While the decedent realized reduced transfer taxes as a result of the transfers, the court determined that a significant reason for the transfers was to consolidate various investments into a family vehicle that could be managed by one person. Accordingly, the court held that the transfers were bona fide sales for adequate consideration and, as a result, were excluded from the decedent’s gross estate. In addition, the court found it persuasive that, at the time of the transfers, the decedent was not financially dependent on LLC distributions, personal funds were not commingled with LLC funds, and the decedent was not in failing health at the time of the transfers. Thus, the transfers were not merely an attempt to change the form in which the assets were held before death. The court also held that the estate was entitled to a deduction for interest on loans made by other LLC members to pay the decedent’s estate tax under I.R.C. Sec. 2053(a)(2). The court determined that the loans were bona fide and were necessarily incurred in the administration of the decedent’s estate and were essential to the administration of the estate and its settlement. In addition, the court also held that gifts of the LLC interests to a family trust qualified as present interest gifts that were excludible from the decedent’s estate under I.R.C. Sec. 2503(b). While the rights of the trust beneficiaries were limited by virtue of not being able transfer their interests without the unanimous consent of other LLC members, the beneficiaries did receive an unrestricted income right associated with the interest, and that income right was not just illusory because the LLC generated income via lease of the commercial building and publicly traded marketable securities that paid dividends Estate of Purdue v. Comr., T.C. Memo. 2015-249.

IRS Says Account Transcripts Can Substitute For Estate Closing Letters. The IRS has announced on its website that for estate tax returns (Forms 706) filed on or after June 1, 2015 that account transcripts will substitute for an estate closing letter. Registered tax professionals that use the Transcript Delivery System (TDS) can use the TDS as can authorized representatives that use Form 4506-T, and requests will be honored if a Form 2848 (Power of Attorney) or Form 8821 (Tax Information Authorization) is on file with the IRS. The IRS provided instructions and noted that Transaction Code 421 on the website will indicate that the Form 706 has been accepted as filed or that the exam is complete. IRS also noted that a transcript can be requested by fax or by mail via Form 4506-T to be mailed to the preparer's address. Certain items are necessary to document that the preparer has the authority to receive the transcripts - letters testamentary (or equivalent), Form 56 (Notice Concerning Fiduciary Relationship), Form 2848 and any other documentation that authorizes the party to receive the information. The IRS noted that its decision whether or not to audit any particular Form 706 is usually made four to six months after the Form 706 is filed, and that the transcript should not be requested until after that time period has passed. IRS Webpage, "Transcripts in Lieu of Estate Closing Letters," (Dec. 4, 2015).

Petition for Issuance of Letters of Administration of Estate Filed Seven Months After Death Not Barred by Nonclaim Statute of Limitations. The decedent died in early 2014 survived by three children. Seven months after their mother's death, a daughter filed a petition for issuance of letters of administration (for which no statute of limitations applied) claiming that her mother died intestate and the value of her estate was approximately $250,000. A brother objected, asserting that his sister's petition was basically a claim against the estate that was barred by the 6-month non-claim statute of limitations contained in Kan. Stat. Ann. Sec. 59-2239. The brother also asserted that the mother's estate did not have any substantial assets because the mother's real estate had been deeded to him before death and the remaining bank accounts had passed to him via payable-on-death designations established before death, and the remaining tangible personal property had been split between the three children. The trial court denied the daughter's petitioner largely on the basis of its finding that the estate did not have any substantial assets. On appeal, the court reversed. The appellate court noted that the daughter's action was one seeking authority to marshal the estate's assets, if any, which did not trigger the non-claim statute. Furthermore, by waiting more than six months to file her petition, the daughter eliminated the need to notify creditors as well as the chance for creditors to file a claim against the estate. The court also noted that the brother's claims could not be verified unless an administrator was appointed. A dissenting opinion confused the need to administer the estate to verify the brother's claims (for which no statute of limitations applies) with a claim against the estate (for which the 6-month statute would apply) and asserted that there were no substantial assets in the estate. In re Estate of Brenner, No. 113,288, 2015 Kan. App. LEXIS 81 (Kan. Ct. App. Nov. 20, 2015).