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Portability – Examination of a Predeceased Spouse’s Estate Tax Return

Published on: January 12, 2018 | by Anne Marie Robbins

In a recent case that is a cautionary tale to preparers of federal estate tax returns, the Tax Court held that the IRS was permitted to examine the estate tax return of the first spouse to die in determining the deceased spousal unused exclusion amount (DSUE) available to the estate of the surviving spouse. The result was an increase to the federal estate tax in the estate of the second spouse.

A husband died in 2012 and his estate reported his DSUE on form 706, the federal estate tax return, and elected portability of the DSUE to the surviving spouse. The IRS sent the husband’s estate a federal estate tax closing letter reporting the return was accepted as filed. When the wife died in 2013, her estate claimed the DSUE reported by the husband’s estate. As part of the examination of the wife’s federal estate tax return, the IRS also examined the 706 filed by the husband’s estate. Without determining a deficiency against the husband’s estate, the IRS reduced the amount of the husband’s DSUE by the amount of taxable gifts given by husband during his life. This reduction in the DSUE reduced the total exclusion available in the wife’s estate and resulted in an increase of the estate tax.

Several holdings by the court are noteworthy:

Disposition of Estate Assets – Real Estate

Published on: November 7, 2017 | by David G. Hardin

Real estate is oftentimes one of the more valuable assets an individual may own, and thus can comprise a substantial asset in the estate following an individual’s death. Typically, it is the personal representative of the estate who has responsibility to dispose of a decedent’s real estate.¹ Real estate can either be conveyed directly to one or more of the estate beneficiaries or it can be sold. The disposition of real estate in an estate can be one of the more significant responsibilities for the personal representative. This article will address a number of issues facing a personal representative involved in the disposition of real estate through sale of the property following an owner’s death.²

The first issue generally faced by a personal representative is determining the fair market value of the property. For purposes of the federal estate tax law, fair market value is defined as “the price at which the property would change hands between a willing buyer and willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” Treas. Reg. §2031-1(b). For New Jersey estate and inheritance tax purposes, tax is “computed upon the clear market value of the property transferred.” N.J.S. 54:34–5. See also N.J.A.C. 18:26–8.10. In general, an appraisal of real estate prepared by a member of the Appraisal Institute will be recognized as an acceptable appraisal by taxing authorities.³ An arms-length purchase by an unrelated third party, if completed within a reasonable time period after death, is generally accepted by the taxing authorities as an alternative to an appraisal.

The actual process of selling real property owned by an estate can also present challenges to a personal representative. Oftentimes a personal representative will wish to minimize the expenditure of funds to “update” an estate property, preferring instead to enter into a contract selling the property in “as is” condition without addressing any repair issues. While this is often an attractive approach, particularly when a personal representative has never resided in the property or has limited or no knowledge concerning its condition, there are limitations to this approach in New Jersey, which a recent case points out.

NJ Law Journal Quotes Mary Pat Magee in Recent Article Regarding NJ Estate Tax Phaseout

Published on: July 25, 2017 | by Mary Patricia Magee

Mary Pat Magee discusses the increased NJ estate tax exemption and impending elimination in the New Jersey Law Journal article “NJ Estate Tax Phaseout Hasn’t Haunted T&E Practices”.

Mary Pat says “We’ve always been faced with a planning environment full of tax uncertainty” as she recalls her early days when she began her practice in 1982 and the exemption was then $225,000 and T&E practitioners were anxious over business. “We are really lawyers that advise families as to the dispensation of their assets, and taxes are just one aspect of that” she says.

Click here to view Mary Pat’s comments on the issue.

IRS Issues Revenue Procedure 2017-34, Announcing Simplified Method To Make A Late “Portability” Election

Published on: July 15, 2017 | by Anne Marie Robbins

In June of this year, the IRS published a revenue procedure that allows certain estates to make a late portability election if a timely election was not made. Rev. Proc. 2017-34. The portability election allows a decedent’s unused basic exclusion amount (known as the deceased spousal exclusion amount, or DSUE) to be transferred to the surviving spouse for his or her use during life or at death. In effect, this allows married couples to double the amount of assets they can shelter from federal estate and gift taxes.

In order to make a portability election, the personal representative of the estate of the first spouse to die must file a timely (including extensions) federal estate tax return (Form 706) following the death of the first spouse, even if the estate of the first spouse to die is not otherwise required to file Form 706. For example, if a decedent’s assets and lifetime adjusted taxable gifts do not exceed a certain amount (in 2017 the amount is $5.49 million), a 706 is not required. Many taxpayers, not knowing the rules and not otherwise required to file Form 706, fail to make the portability election timely.

In January of 2014 the IRS had issued Rev. Proc. 2014-18, which provided an automatic extension for certain estates of decedents dying after December 31, 2010 and on or before December 31, 2013 to elect portability of the DSUE by filing Form 706. However, after December 31, 2013, the only way to make a late portability election was to seek a private letter ruling from the IRS pursuant to Treasury Regulations. Despite the fact that private letter rulings can be time-consuming and expensive, the Service has issued many such rulings in the last few years by estates seeking to make a late portability election. Hence the new revenue procedure provides a welcome and lest costly method for preserving the DSUE.

Creditor Protection For Inherited IRA

Published on: January 11, 2017 | by Mary Patricia Magee

In Clark v. Rameker, the United States Supreme Court held that an inherited IRA does not fall within the definition of retirement funds under Federal Bankruptcy law and is, therefore, not exempt from claims in a bankruptcy proceeding. This decision had a considerable impact upon the estate planning world.

It has long been the law that IRA or other retirement accounts, as defined in 11 U.S.C. § 522(b)(3)(C) are exempt from the reach of a bankruptcy trustee. In the Clark decision, the Court was called upon to decide whether funds contained an inherited Individual Retirement Account (“IRA”) qualify as retirement funds “within the meaning of the bankruptcy exemption”. The Court found that an inherited IRA does not qualify for the bankruptcy exemption. In making its decision, the Court identified three independent characteristics which differentiate an IRA from an inherited IRA. Unlike traditional IRAs or Roth IRAs, where one can make an additional contribution to the IRA, the owner/beneficiary of an inherited IRA may never invest additional money in the account. Secondly, an individual owner of an inherited IRA is required to make mandatory required distributions from the account annually beginning in the year after the deceased owner’s death, based upon the life expectancy of the individual who has inherited the IRA account. This is in direct contrast to the owner of a traditional IRA who must withdraw funds without penalty only when he or she is close to retirement age, i.e. age 59 ½. Thirdly, the Court noted that one who has inherited an IRA account may withdraw the entire balance at any time and for any purpose without penalty. The owner of a traditional IRA or other retirement account will pay a ten percent (10%) penalty, subject to some very narrow exceptions, if he withdraws prior to age 59 ½. For these reasons, the Court held that an inherited IRA may not benefit from the protection afforded to the owner or participant in a traditional retirement account.

Interestingly, in New Jersey, however, it has been determined that an inherited IRA constitutes a “qualifying trust” under N.J.S.A. 25:2-1(b) and as such will be excluded from a debtor’s bankruptcy estate. In Re: Andolino, 525B.R.588. The New Jersey Bankruptcy Court found that the language of the New Jersey Statutes exempts the inherited IRA from the bankrupt’s estate. In that regard, N.J.S.A. § 25:2-1(b) provides that “any property held in a qualifying trust and any distributions from a qualifying trust, regardless of the distribution plan elected for the qualified trust, shall be exempt from all claims of creditors and shall be excluded from the estate in bankruptcy”. Id. A “qualifying trust” refers to a trust “created or qualified and maintained pursuant to Federal law, including but not limited to § 408 of the Internal Revenue Code of 1986. The Bankruptcy Court in New Jersey noted that the IRA’s “status as a qualifying trust remains unchanged, notwithstanding the debtor’s receipt of the IRA as a beneficiary”. Andolino supra, at 591.

Basis Considerations in Lifetime Gift Planning in New Jersey

Published on: January 11, 2017 | by David G. Hardin

A previous article appearing in Planning Matters discussed the use of lifetime gifts to reduce New Jersey estate taxes. The article pointed out that although there can be advantages to lifetime gifts, there are situations where embarking on a lifetime gifting program in New Jersey is ill-advised. This article will address some of those circumstances where lifetime gifts will not result in a tax benefit.

The starting point for this discussion is the income tax concept of basis. Basis is relevant for determining the gain realized from the sale or other disposition of property for capital gain tax purposes.[1] In general, the basis of property is the cost of the property to the taxpayer.[2] There are special rules with respect to basis where property is acquired by lifetime gift and where property is acquired from a decedent.

In the case of property acquired from a decedent’s estate, Section 1014 provides the general rule that the basis of property in the hands of a beneficiary is the fair market value of the property at the date of the decedent’s death. This concept is oftentimes referred to as “stepped-up basis” because the taxpayer receives a free step-up in basis to the value of the property at the time of the decedent’s death without being subjected to the payment of a capital gain tax.[3]

Recent Changes to New Jersey Estate Tax

Published on: October 31, 2016 | by Anne Marie Robbins and David G. Hardin

On October 14, 2016, Governor Christie signed a bill that raises the gasoline tax 23 cents per gallon, effective November 1, 2016. There will also be a reduction in the sales tax from 7% to 6.625%, to be phased in over two years.

Other provisions of the new law have an impact on New Jersey estate and income taxes. Specifically, the New Jersey estate tax exemption will increase, effective January 1, 2017, from its present $675,000 to $2,000,000, with a complete elimination of the New Jersey estate tax slated to be effective January 1, 2018. Note that these changes are to the New Jersey estate tax regime; the New Jersey inheritance tax, which applies to gifts to persons other than spouses, direct descendants, and direct ancestors, was not changed and remains effective at rates of 11% to 16%.

The effect of the change to the estate tax law is that New Jersey taxpayers will be able to shelter more of their assets from taxation. While gifts to spouses at death do not bear tax under either New Jersey or federal law because of the unlimited marital deduction (for U.S. citizens), the new law means that upon the death of the second spouse, with appropriate planning a married couple will be able to shelter from the New Jersey estate tax up to $4 million of assets for their descendants. The federal estate tax exemption, also called the Basic Exclusion Amount, is much higher and is indexed for inflation. That exemption stands at $5.45 million per taxpayer in 2016, increasing to $5.49 million in 2017.

Lifetime Gift Planning in New Jersey

Published on: October 13, 2016 | by David G. Hardin

New Jersey has been widely recognized as among the more onerous states in terms of transfers at death. While federal and state death tax laws have been loosened over the past many years so as to exempt more and more people from estate and inheritance taxes¹, New Jersey has not been among them. New Jersey’s estate tax exemption stands at $675,000 per person. By contrast, the federal estate tax exemption is currently $5,450,000 per person² ; the New York estate tax exemption is currently $4,187,500 (rising to the federal exemption level in 2019); the Connecticut estate tax exemption is $2-million; and Florida has no estate tax at all.

The federal estate tax regimen encompasses both lifetime gifts and death-time transfers. The federal estate tax exemption is reduced by taxable gifts made during lifetime. For example, an individual making a taxable gift of $100,000 in 2016 would reduce his or her federal estate and gift tax exemption by that amount, leaving a remaining federal estate and gift tax exemption of $5,350,000. An individual making a taxable gift during lifetime does not incur a gift tax liability for federal purposes until the entire federal exemption is exhausted. In 2016, that means one would have to make taxable gifts in excess of $5,450,000 before a gift tax becomes payable. This unified estate and gift tax structure for federal purposes does not differentiate between lifetime and death-time transfers, and consequently for gifts of equal value up to the maximum federal exemption amount there is no intrinsic benefit of a lifetime gift over a death-time transfer³.

In contrast to the federal estate and gift tax regime, New Jersey imposes a tax only on death-time transfers. For policy reasons that are not entirely evident, New Jersey does not impose a tax on lifetime gifts⁴. This anomaly between the federal and New Jersey tax structures offers a planning opportunity in a number of situations. An example will illustrate the point. Assume that an unmarried individual has a taxable estate with a value of $2-million and that the beneficiaries are children of the individual. Given the federal exemption of $5,450,000, there is no federal estate tax liability, regardless of the identity of the individual beneficiaries. For New Jersey death tax purposes, inasmuch as the beneficiaries are children of the individual, the New Jersey inheritance tax is inapplicable, and the only tax of concern is the New Jersey estate tax. The New Jersey estate tax on a taxable estate of $2-million is $99,600.

“Pet Trusts”: Providing For Your Pets After Death

Published on: October 12, 2016 | by Lindabury, McCormick, Estabrook & Cooper, P.C.

In today’s society, it’s becoming increasingly common for our pets to be treated as part of the family…but what happens to your pet or pets upon your death when you are no longer there to care for them? In the eyes of the law, animals are considered property…so you can’t leave money directly to your pet. On January 19, 2016, the legislature passed the New Jersey Uniform Trust Code (NJUTC), which became effective as of July 17, 2016. As part of the NJUTC revisions, modifications were made to the rules regarding the creation and use of “Pet Trusts.”

Under the new law:

a. A trust may be created to provide for the care of an animal alive during the settlor’s lifetime. The trust terminates upon the death of the animal or, if the trust was created to provide for the care of more than one animal alive during the settlor’s lifetime, upon the death of the last surviving animal.

Dealing With Digital Assets During Life and After Death

Published on: October 12, 2016 | by Anne Marie Robbins

We live in a digital age. The advent of the personal computer, the rise of social media, online access to financial accounts and commerce, and the development of increasingly efficient programs and applications affording easy access to our finances, shopping, entertainment activities, and communications, have helped to create a world in which each of us likely spends a portion of most days online. The result is often a trove of digital assets that we have created, communicated, and stored. Some of these assets may have substantial inherent financial value (for example, frequent flyer miles and other award programs), some may have value because they are the means of accessing other assets (e.g., your bank account user name and password), and some may have sentimental value (such as your e-mail account holding personal correspondence).

Digital assets can present a challenge for fiduciaries. Items that 30 years ago would have had a physical existence, such as bank account statements, may now only exist in the digital realm. Because digital assets are intangible, identifying them and gaining access to them on behalf of their owners can be time-consuming and often, because this is a relatively new asset class and the rules governing it are still evolving, unsuccessful. Through planning, it is possible for individuals to take steps to protect what matters in their digital lives.

Most service providers include their policies regarding deceased users’ accounts in the terms of service provided when a user establishes the account, including what happens when the account owner dies. However, few people in practice pay attention to the provisions to which they are agreeing. It is sometimes the case that a service provider’s terms of service will cause all access to terminate as a result of an account owner’s death. Service providers are beginning to address the probability that many users would want someone to have access to the content the user has created or stored. For example, Google has an “Inactive Account Manager” function that allows users to determine what happens to the digital assets stored on Google sites after a period of inactivity. The user can request that Google either notify a specified individual and share information with that person, or can request that Google delete an account and its contents.