The New Landscape? Treasury Issues Long-Awaited Proposed Regulations Designed to Eliminate Valuation Discounting of Family-Controlled Entities

If finalized, the proposed regulations will eliminate minority and marketability valuation discounts for transfers of interests in closely held family businesses. The proposed regulations are not effective immediately. Rather, they only apply to transfers made after the final regulations are promulgated, subject to a possible three-year lookback for estate tax purposes.

The new rules target high net worth families which conduct closely held businesses or have significant wealth concentrated in a family business; namely, those who have enough wealth to have federal estate tax exposure. Currently, the exemption amount from the federal estate and gift tax is $5,450,000 per individual. This means that an individual can leave $5,450,000 to their heirs and pay no federal estate or gift tax. A married couple can exempt a combined $10,900,000 from federal estate and gift taxes.  For those high net worth families who are over these thresholds, the next few months remain critical to revisit succession planning to use the current rules allowing for valuation discounts.

The cornerstone of estate and succession planning for closely held businesses has been the use of favorable valuation discounts. For example, an LLC is structured to include both managing membership interests (controlling) and limited membership interests (non-controlling, non-voting). The limited membership interests, when gifted or transferred at death, can be discounted for lack of marketability and lack of control.

In 1990, Congress enacted Section 2704 to curtail the perceived abuses with respect to this planning; however, several tax rulings and court cases narrowed the scope of these rules thereby undermining the ability of the IRS to enforce them. As detailed below, the newly proposed regulations essentially reflect the Revenge of the IRS and are designed close the loopholes.

Below please find a summary of the major changes.

 “Covered Entities” Subject to Section 2704

As originally enacted, Internal Revenue Code (“IRC”) § 2704 only referred to “corporations” and “partnerships.”  The proposed regulations expand this definition to include any entity or arrangement that is a “business entity” within the meaning of Reg. § 301.7701-2(a) that is controlled by the family immediately before the transfer.

Accordingly, LLC’s are now included in the definition.  LLC’s are included regardless of whether they are disregarded for federal tax purposes.

New Definition of “Control”

Section 2704 applies to entities subject to family control.  Under the existing regulations, “control” for corporations is defined as encompassing at least 50% of the stock by vote or value.  The proposed regulations expand the definition of control for LLCs and other entities.  “Control” in this setting means ownership of 50% of either the capital or profit interests or the ability to cause liquidation of the entity.

Lapse of Voting or Liquidation Rights

In general, Section 2704(a) addresses the “lapse” of voting or liquidation (control) rights.  A “lapse” of a voting or liquidation right occurs where the presently exercisable right is restricted or eliminated. If the lapse occurs during the holder’s lifetime, it is a transfer by gift. Conversely, if the lapse occurs at the holder’s death, it is includible in the holder’s gross estate.

Newly Proposed Regulation:  The lapse of a voting or liquidation right in a family owned entity (meaning the entity is controlled by the family immediately before and after the lapse) is a transfer by the individual holding the right immediately before its lapse.

New 3 Year Look-Back Rule:  In addition, any lapse of a voting or liquidation right within 3 years of death is treated as a lapse at death (and thereby included in the decedent’s estate under Section 2704(a)).

Example:   Father owns 51% of the stock in a closely held business. Within 3 years of death, Father gifts 2% of the stock to his son. Under the current existing rules, Father can claim a minority discount for the 2% gift and at death; furthermore, the remaining minority 49% interest can be discounted for estate tax purposes when Father dies.

However, and under the proposed regulations, if the 2% gift was made within 3 years of death, a lapse is deemed to occur at Father’s death. This results in a “phantom asset” included in the transferor’s gross estate equal to the value of the lapsed voting or liquidation right.  This asset presumably would not qualify for the marital or charitable deduction.

Disregarding Certain Restrictions on Redemption or Liquidation

Equally limiting, the proposed regulations provide that the transfer of an interest to a family member in a family business (entity where the transferor and family members control the entity immediately before the transfer) that is subject to a “disregarded restriction” will not be respected and therefore valued pursuant to the generally accepted valuation principles (as if the disregarded restriction simply does not exist).

The key requirement for treating a restriction as an “applicable restriction” and thus “disregarded” stems from the fact that following the transfer, the restriction will lapse or can be removed by the transferor or any members of their family.

Therefore, a “Disregarded Restriction” may be described as one that has the following effects:

  1. Limits the ability of the holder to compel liquidation or redemption of the interest; or
  2. Limits liquidation proceeds to less than the “minimum value” of the entity; or
  3. Defers payment of the liquidation proceeds for more than six months; or
  4. Permits payment of the liquidation proceeds in any manner other than in cash or other property.

State Law Exception – Virtually Eliminated

Furthermore, the Treasury seeks to curtail estate and succession planning by eliminating a pertinent State law exception which has been around for years. Congress added Chapter 14 to the Code (§§ 2701-2704) to curtail valuation discounts on intra-family transfers of family controlled stock.  Section 2704 exempts restrictions on the owner’s ability to liquidate the entity “imposed or required to be imposed” by Federal or State Law.  The current regulations state that “an applicable restriction is a limitation on the ability to liquidate the entity that is more restrictive than the limitations that would apply under the State law (often referred to as the “State Default Rule”).

Thereafter, and following the enactment of IRC § 2704, State legislatures substantially tightened their default laws to provide for many restrictions.  As the restrictions in the governing agreements were now consistent with the State default law, the restrictions were not considered “applicable restrictions.”

Newly Proposed Regulation: As the State law restriction is not a mandatory requirement (it’s a default rule), restrictions in an entity’s governing documents that are no more restrictive than those under State law will no longer be given effect in valuing the interest. In other words, the State law must be mandatory to be considered a “real restriction,” or the IRS will simply ignore the restriction.

For more information or if you have any questions about estate planning, please contact Judson M. Stein, Esq., Chair of the Trusts & Estates Practice Group, at 973-230-2080 or or John A. Grey, Esq., Associate in the Trusts & Estates Practice Group, at 973-230-2088 or

No IRA Rollover Relief for Taxpayer Who Used IRA Distribution as a Short-Term Loan

In PLR 201625022, the IRS refused to waive the 60-day rollover requirement for a taxpayer who used her IRA distribution as a short-term source of funds pending the sale of her vacation home.  In general, there is no immediate tax where the distributions from an IRA are rolled over to an IRA or other eligible retirement plan.  For the rollover to be tax-free, the amount distributed from the IRA generally must be recontributed to the IRA or other eligible retirement plan no later than 60 days after the date that the taxpayer received the withdrawal from the IRA.  A distribution rolled over after the 60-day period will be taxed (and also may be subject to a 10 percent premature withdrawal penalty tax).

However, the IRS may waive the 60-day rule if an individual suffers a casualty, disaster, or other event beyond their reasonable control and not waiving the 60-day rule would be against equity or good conscience.  The IRS will consider several factors in this analysis such as the time elapsed since the distribution and inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, postal error and errors committed by a financial institution.

In the present case, the taxpayer’s daughter’s home was in foreclosure.  As such, the taxpayer and her spouse put their vacation home up for sale in order to raise funds to purchase their daughter’s home.  Prior to the sale of their vacation home and in order to avert foreclosure, the taxpayer took a distribution from her IRA on April 24, 2015.  The distribution was used to purchase her daughter’s home on April 27, 2015.

The taxpayer intended to redeposit the distributed amount into her IRA within the 60-day rollover period which ended on June 23, 2015.  Nevertheless, the sale of the vacation home was not completed until July 1, 2015 and the taxpayer did not have sufficient funds available during the 60-day period to complete the rollover.  The taxpayer indicated that her spouse was willing to take a distribution from his IRA within the 60-day period to complete the rollover but that her medical condition prevented this from occurring.  She attempted to complete the rollover once she received the funds from selling the vacation home, but the 60-day period had expired.  Accordingly, the taxpayer requested a waiver of the 60-day requirement.

On balance, the IRS denied the taxpayer’s request for relief.  Although the taxpayer represented that her inability to complete a timely rollover was caused by her medical condition during the 60-day period, the IRS was not convinced in light of her continued work and travels.  Specifically, the IRS found that her failure to complete a timely rollover was instead due to her use of the funds as a short-term loan to purchase her daughter’s home which left her unable to recontribute the amount to her IRA until after the sale of her vacation home was completed.

For more information or if you have any questions about estate planning, please contact Judson M. Stein, Esq., Director of the Trusts & Estates Practice Group, at 973-230-2080 or or John A. Grey, Esq., member of the Trusts & Estates Practice Group, at 973-230-2088 or

IRS Clarifies “Grantor Trust” Definition in Bankruptcy and Insolvency Settings

       The IRS has issued final regulations clarifying the definition of grantor trusts within the context of the bankruptcy and insolvency exclusions for cancellation of debt (COD) income.   COD income is includable in gross income; however, the Code provides for a number of pertinent exclusions. For example, gross income does not include any amount which would otherwise be includible in gross income by reason of the discharge of indebtedness of the taxpayer if the discharge occurs during bankruptcy or to the extent the taxpayer is insolvent. The terms “indebtedness of the taxpayer,” “Title 11 case,” and “insolvent” are all defined using the term “taxpayer.” The Code broadly defines a “taxpayer” as any person subject to any internal revenue tax.

       Notably, a grantor trust is any part of a trust that is treated as being owned by the grantor or another person. All items of income, deductions, and credits attributable to the trust are includable in computing the owner’s taxable income and credits. For example, a parent may create a grantor trust for estate and succession planning. Where the parent is the grantor, the parent reports the grantor trust’s income on their own Form 1040. Stated another way, the grantor and their own trust are considered the same economic unit.

       Nevertheless, some taxpayers have taken the position that the bankruptcy exception is available if a grantor trust or disregarded entity is under the jurisdiction of a bankruptcy court, even if its owner is not. Similarly, some taxpayers maintain that the insolvency exception is available to the extent a grantor trust or disregarded entity is insolvent, even if its owner is not. The taxpayers argue that because, for Federal income tax purposes, the disregarded entity is disregarded and the “taxpayer” is the owner of the disregarded entity’s assets and liabilities, the owner is properly seen as being subject to the bankruptcy court’s jurisdiction, or being insolvent, even though, technically, they are not.

       The IRS has rejected this position and now clarifies in the final regulations that when applying the bankruptcy or insolvency exceptions to the discharge of indebtedness income of a grantor trust or a disregarded entity, the term “taxpayer,” refers to the owner(s) of the grantor trust or disregarded entity. The regulations provide that the insolvency exception is available only to the extent the owner is insolvent, and the bankruptcy exception is available only if the owner of the grantor trust or disregarded entity is subject to the bankruptcy court’s jurisdiction. Thus, the regulations provide that grantor trusts and disregarded entities themselves will not be considered owners for this purpose.

       With respect to partnerships, the regulations state that the owner rules apply at the partner level to the partners of the partnership to whom the discharge of indebtedness income is allocable. For example, if a partnership holds an interest in a grantor trust or disregarded entity, the applicability of the bankruptcy and insolvency exceptions to COD income of the grantor trust or disregarded entity is tested by looking to the partners to whom the income is allocable.

        For more information or if you have any questions about estate planning, please contact Judson M. Stein, Esq., Director of the Trusts & Estates Practice Group, at 973-230-2080 or or John A. Grey, Esq., member of the Trusts & Estates Practice Group, at 973-230-2088 or


Importance of Estate Planning for Business Owners and Executives

In our practice, we often come across two types of high net worth clients: Business Owners and Executives. The 40% estate tax can adversely impact each group without proper estate and succession planning.

Business Owners:  Many of our clients own local businesses. As noted, the estate tax is a 40% tax on inheritance. Where there is significant estate tax exposure, the Decedent’s family will need the appropriate liquid funds to satisfy the tax liability.  However, and unfortunately, many successful business owners leave estates which, while high in value, are mainly comprised of businesses ownership interests such as stock, S Corp. or LLC interests. These assets are considered “illiquid” and therefore not much help where the family needs immediate funds to pay the estate tax. Through proper planning, the estate can be structured in such a way as to avoid these pitfalls thereby ultimately saving taxes.  For example, a portion of the business can be transferred by sale or gift to an irrevocable trust for the benefit of family members with the use of valuation discounting.

Executives: Similarly, we consult with high level executives which have accumulated significant wealth during their lifetime. The majority of this wealth is typically in the form of “non-probate” assets.  “Non-probate” assets do not pass by one’s Last Will and Testament; rather, they pass by beneficiary designation or by right of survivorship.

To illustrate, the death benefit under any life insurance policies or qualified plan accounts (such as 401Ks and IRAs) will not pass by one’s Will, but by the beneficiary designations pertaining to each such policy or account.  Moreover, one’s bank and investment accounts that are jointly owned (other than as tenants in common) will pass to the surviving co-owner when the first co-owner dies by right of survivorship. Accordingly, care must be taken to ensure that all of these designations are properly in place and equally paramount, that they are consistent with the client’s final wishes. Only when all of these matters are addressed can the estate be disposed of in a timely and tax efficient manner.

For more information or if you have any questions about estate planning, please contact Judson M. Stein, Esq., Director of the Trusts & Estates Practice Group, at 973-230-2080 or or John A. Grey, Esq., member of the Trusts & Estates Practice Group, at 973-230-2088 or


New Jersey Court Admits Unsigned Last Will & Testament to Probate

In a recent and most thought provoking decision, the New Jersey Chancery Court admitted an unsigned Last Will & Testament to probate. See Matter of Anton, Superior Court of New Jersey (Ch. Div. 2015). By way of background, a valid New Jersey Last Will & Testament must generally be signed by the Testator in the presence of two witnesses.

In Matter of Anton, William Anton (the “Decedent”), was survived by his wife, with whom he was involved in divorce proceedings and by his three children. On June 24, 2015, the Decedent, along with his son-in-law Keith Riley, met with an estate planning attorney. During this meeting, the Decedent explained to the attorney that he could not locate his Will and as such, the attorney noted that if he died intestate during the pending divorce proceeding, his wife would inherit his entire estate. Accordingly, the Decedent asked the attorney to prepare a new Will, leaving his estate to his children; namely, one-third to his daughter, one-third to his son and one-third to be held in a grandchildren’s trust.

Shortly thereafter, on June 25, 2015, the attorney sent the Decedent a letter care of Mr. Riley confirming the parties’ understanding along with the fee arrangement. On June 30, 2015, Mr. Riley contacted the attorney and informed him that the Decedent had changed his mind with respect to the disposition of property; specifically, he wanted all beneficiaries to receive their inheritance outright. One week later, the attorney sent the Decedent a draft Will, Proxy Directive and Instruction Directive. Mr. Riley later contacted the attorney and in doing so, confirmed that the Decedent reviewed the drafts and had no changes whatsoever. Therefore, an appointment was scheduled for July 15, 2015. On July 14, 2015, the Decedent called Mr. Riley to confirm the appointment. The Decedent died on July 15, 2015, the very day of the appointment without having signed any of the documents.

In support of the Order to Show Cause to admit the unsigned Will to probate, the Decedent’s attorney certified that the Will presented for probate was identical to the drafts forwarded to the Decedent. The Decedent’s son-in-law Mr. Riley provided a supporting affidavit confirming that the Decedent had reviewed and expressly approved the draft Will. No opposition was filed and the matter was decided based on the paper submissions.

Upon hearing the submission, the Honorable Robert P. Contillo, P.J.Ch., granted the application. In so doing, the court cited N.J.S.A. 3B:3-3, which allows for the admission of an unsigned Will in limited situations where there is “clear and convincing evidence” that the decedent intended the document to constitute a Will. In its analysis, the court highlighted the scrivener’s affidavit attesting that the final copy of the Will, while never actually seen by the Decedent, mirrored that of the draft sent to him. Moreover, the court noted the son-in-law’s affidavit further establishing that the Decedent reviewed the draft without reservation thereby approving it. On balance, the court admitted the unsigned Will to probate.

An analysis of this recent decision indicates that New Jersey Chancery Courts may probate unsigned Wills under certain limited circumstances. The traditional rule has always been that a Will must be signed and witnessed. However, and pursuant to existing New Jersey law, a document may qualify as a “writing intended as a will” whether or not witnessed, if the signature and material provisions are in the Testator’s handwriting. Furthermore, even providing the document is not signed, it may still qualify as a Will if the Testator’s intent is clearly established. As noted, the criterion for maintaining such an argument is “clear and convincing evidence” which is notably a high standard. The rationale is to safeguard the probate process and ensure that the proposed document clearly expresses a Decedent’s final wishes. Matter of Anton is unique in that the court opined that it had uncontested ample evidence of the Decedent’s mindset in light of the supporting testimony and affidavit, all of which were consistent in nature. The absence of such evidence, however, would have likely resulted in the court applying the traditional rule requiring a signed writing.

Matter of Anton should not be relied upon as alternative guidance to probating a Will in New Jersey. As noted, this decision is from the New Jersey Trial Court and as such, it is not binding. In addition, the Executor in Matter of Anton had to file a lawsuit and apply formally for probate given the defects in the Will. Formal probate involves the filing of a lawsuit which can be time consuming and expensive. Such formality is generally not required however, as New Jersey allows for informal probate. The vast majority of cases involve informal probate whereby the Executor presents a duly executed Will to the Surrogate Court. If the facts of Matter of Anton were different in that the proposed Will had no defects, the Executor would not have had to even pursue the formal probate process.

Moreover, the dissenting opinion from a recent New Jersey probate case provides guidance. See Matter of Ehrlich, Superior Court of New Jersey (App. Div. 2012). There, the decedent, a trusts and estates attorney who practiced law for over fifty years in Burlington County passed away without having a fully executed Will. The decedent’s next of kin sought to admit a draft unsigned Will to probate. The draft Will was typed on legal paper; however, it was not signed nor witnessed. Nevertheless, the draft did contain the decedent’s own handwriting in a notation on the front cover. Upon reviewing all of the evidence, the court admitted the unsigned Will to probate. The court noted that the decedent had left a handwritten notation on the cover page of the draft evidencing that the original was intended to be sent to the Executor. Despite not being signed or witnessed, the court held the draft nonetheless qualified as a “writing intended as a will” under the New Jersey statute. The court relied upon Matter of Macool, which interpreted the New Jersey statute as permitting admission in cases where there is evidence that the decedent actually reviewed the Will and thereafter gave their final assent to it. See Matter of Macool, 416 N.J. Super. 298, 310 (App. Div. 2010). In other words, the court held that the New Jersey statute was meant to excuse harmless error which includes within such definition the failure to sign a Will.

In the dissenting opinion, Judge Skillman disagreed and found that the governing statute does not broadly authorize the probate of an unsigned Will. Rather, and by its plain terms, the New Jersey statute was only meant to admit into probate a defectively executed Will, not an unexecuted Will. Judge Skillman examined the legislative history and concluded that the statute was designed to excuse only harmless errors such as where the testator misunderstands the attestation requirements and perhaps neglects to obtain one witness. However, and as per the dissent, harmless error in this setting does not include the failure to actually sign a Will which is clearly more significant.

Finally, it is noteworthy that the Decedent in Matter of Anton could have changed his mind leading up to his appointment with the estate planning attorney. Indeed, there was evidence that the Decedent had already changed his mind once before the final draft was sent out regarding the bequests. Therefore, it certainly begs the question whether the draft admitted to probate truly reflected his final wishes. It will be interesting to see whether Matter of Anton is appealed and the ultimate outcome.

For more information or if you have any questions about estate planning, please contact Judson M. Stein, Esq., Director of the Trusts & Estates Practice Group, at 973-230-2080 or or John A. Grey, Esq., member of the Trusts & Estates Practice Group, at 973-230-2088 or

Protecting Tax Benefits for Estates Holding S Corporation Stock

Today, S corporations represent the most common type of corporate tax filing. Planning for an estate, which includes closely held business interests held through an S corporation requires careful planning so as to ensure that the flow-through tax benefits are not jeopardized. An S corporation affords significant income tax benefits as the owners are only subject to one level of taxation as compared to two layers imposed upon a traditional C corporation. Qualification for S corporation treatment requires certain elements such as having no more than 100 shareholders and one class of stock. If this criterion is not satisfied, the corporation will no longer be taxed as an S corporation to the tax detriment of the shareholders.

In estate and succession planning for closely held businesses, high net worth clients often establish an Intentionally Defective Grantor Trust (hereinafter “IDGT”) to hold S corporation stock. Thereafter, the S corporation stock can either gifted or sold to the IDGT during the grantor’s lifetime as consistent with their long-term succession goals. The transfer of S corporation stock to the IDGT has significant tax benefits.

Death of the Grantor

One of the primary issues practitioners must address is planning after the death of the grantor. At the death of the grantor of an IDGT, the IDGT ceases to have such status. However, the IDGT will generally continue to be treated as a qualified S corporation shareholder for two years; thereafter, the trust will cease to be an eligible S shareholder unless it otherwise qualifies as another type of trust permitted to be an S shareholder and an election is timely filed. The potential loss of tax saving S corporation status can undermine years of successful planning thus defeating the very purpose of a large estate plan. However, this unfortunate result can be prevented through proper planning.

QSST Election Option

One option is to elect to be treated as a QSST which can be a permitted S corporation shareholder providing the beneficiary makes the election. A QSST is a trust which: (1) distributes or is required to distribute all income to a citizen or resident of the United States; (2) has certain trust terms including the requirements of only one beneficiary; (3) does not distribute any portion of the trust corpus to anyone other than the current income beneficiary during their lifetime; and finally, (4) the income interest of the current income beneficiary ceases on the beneficiary’s death or the termination of the trust. Providing the QSST satisfies this criterion, the QSST may qualify as an S corporation shareholder; consequently, the shareholders will only be subject to one level of taxation.

ESBT Option

The ESBT is an equally attractive option for holding S stock and is less restrictive than a QSST. Specifically, an ESBT is any trust which: (1) does not have as a beneficiary any person other than an individual, estate, or organization defined in Section 170(c)(2) through (5); (2) no interest in the trust was acquired by purchase; and (3) an election has been made with respect to the trust. To qualify as an ESBT, the trustee of the trust must make the election by signing and filing an election statement with the IRS Service Center. An ESBT is treated as two separate share trusts for tax purposes, an S portion that consists of all of the S corporation stock and a non-S part, which encompasses of all of the other trust assets.

Advantages and Disadvantages of the ESBT

The ESBT allows for multiple income beneficiaries among whom the trustee can distribute income and principal at their discretion. This allows the client to make transfers to several beneficiaries through a sprinkle trust, affording control over the timing and the amount of the distributions. Nevertheless, the ESBT can produce a potentially higher tax cost.


In summary, estate and succession planning for clients who own closely held businesses requires careful attention to S corporation stock. Only certain kinds of trusts under an estate plan may hold S corporation stock; accordingly, estate practitioners must carefully evaluate whether a particular trust qualifies for this tax friendly status following the grantor’s death.

For more information or if you have any questions about estate planning, please contact Judson M. Stein, Esq., Director of the Trusts & Estates Practice Group, at 973-230-2080 or or John A. Grey, Esq., member of the Trusts & Estates Practice Group, at 973-230-2088 or

How to Reduce Gift Taxes Transferring Wealth Parent to Child

Parents can transfer substantial amounts of wealth, free of gift taxes, to their children every year through the use of “annual exclusion gifting.”

For 2015, the annual exclusion amount is $14,000. It follows that an individual can gift free of tax, up to $14,000 per donee, per year. To illustrate, a parent with three children can transfer a total of $42,000 to them, free of federal gift taxes. However, if the annual gifts exceed $14,000, the excess amount over the exclusion is taxable.

Gift-Splitting by Married Taxpayers

Married couples can transfer even more money, tax-free. Gifts to children made during the year can be treated as “split” between the husband and wife, even if the gift is only given by one of them.

Accordingly, and by “gift-splitting,” a married couple can presently transfer to each child up to $28,000 a year ($14,000 per spouse). Indeed, the more beneficiaries that qualify for the annual exclusion, the more opportunity to consistently remove wealth from the taxable estate. To illustrate, a married couple with two married children can currently transfer tax-free a total of $112,000 to their children and the children’s spouses.

Gifting to a Trust: The “Present Interest” Requirement
As an alternative to making gifts directly to a child, parents may gift to a Trust designed for the benefit of their children. In general, Trusts provide a myriad of tax and asset protection benefits; moreover, they protect against inexperience.

To qualify a gift for the annual exclusion, it must constitute a transfer of a “present interest.” This means that the donee’s enjoyment of the gift must be immediate (as in the present) and not delayed until a date in the future. When gifting to a Trust, the Trust must allow each beneficiary a limited right of withdrawal for a reasonable period of time. Typically, 30 days is sufficient in this setting.

Lifetime Credit for Taxable Gifts
Finally, it is noteworthy that gifts which exceed the annual exclusion amount of $14,000 may not ultimately result in any tax liability. This is because, in addition to the annual exclusion, each individual has a lifetime credit from the federal gift tax of presently $5,430,000 which mirrors that of the federal estate tax exemption. The federal exemption amount is adjusted annually for inflation.

In conclusion, parents can transfer significant amounts of wealth to their children by the use of regular annual exclusion gifting. Such gifting, while relatively easy to set up and administer, requires periodic attention to the tax rules as taxation pervades much of estate planning.

For more information about annual exclusion gifting, or if you have any questions about estate planning, please contact Judson M. Stein, Esq., Director of the Trusts & Estates Practice Group, at 973-230-2080 or or John A. Grey, Esq., member of the Trusts & Estates Practice Group, at 973-230-2088 or

IRS Issues Final Portability Regulations

On June 12, 2015, the Treasury issued Final Portability Regulations (TD 9593, IRB 2012-28) which clarifies previous regulations, as well as responds to comments made to the Treasury by the American Bar Association’s Real Property, Trust, and Probate Law Section.  The final regulations substantively address a few of the inquiries made.  The regulations remove the earlier temporary regulations and provide guidance on portability rules for estates of married decedents dying on or after January 1, 2011 and the surviving spouses of those decedents.

The guidance under the final regulations applies only to estates of decedents dying after the date that the regulations were issued.  The temporary regulations will continue to apply to estates of decedents dying between January 1, 2011 and June 12, 2015.  Treas. Reg. §§ 20.2010-1(e), 2(e), and 3(f).  Therefore, guidance has not changed for those decedents dying prior to the issuance of the final regulations.

The concept of “portability” refers to an election that may be made on a decedent’s estate tax return, which permits a decedent’s surviving spouse to inherit the unused Federal estate tax exemption of their predeceased spouse (this inherited amount is referred to as the Deceased Spousal Unused Exemption Amount or “DSUEA”).  Portability was initially a temporarily relief for married persons dying after 2010 and was made permanent by the American Taxpayer Relief Act of 2012 (“ATRA”).

The fundamental portability qualification requirements remain unchanged including: (1) the decedent must be a U.S. citizen or resident alien; (2) the election must be made on a timely estate tax return (filed within 9 months of date of death or within 15 months with an automatic extension); and (3) the estate tax return must be complete (unless simplified reporting applies, in which substantiation of valuation is not necessary when the estate passes under an estate tax marital or charitable deduction and the value is not needed to compute any non-deductible transfer).  Only the DSUEA from the last deceased spouse may be used by the surviving spouse against otherwise taxable gifts or on death.

In the final regulations, the IRS provided some guidance on what is considered a “complete and properly prepared” estate tax return sufficient to make the portability election.  Advisors sought clarification on this topic, as a variety of simple technical deficiencies on a return that could otherwise be easily rectified caused concern that the election would be lost. Advisers were also concerned that a return mistakenly prepared using the simplified requirements could later materialize into situation in which a complete return was required.  Declining to elaborate on specific circumstances that would render a return deficient and incomplete, the IRS stated that it “consider[s] the issue of whether an estate tax return is complete and properly prepared to be determined most appropriately on a case-by-case basis.”  The IRS offered a glancing reassurance that a taxpayer can cure any defects by acknowledging that some “errors or omissions [on] an estate tax return will be considered minor and correctible.”

The Treasury also addressed the tax consequences under circumstances in which a non-citizen spousal beneficiary of a Qualified Domestic Trust (“QDOT”) later becomes a United States citizen.  Prior to the issuance of the final regulations, it was clear that a United States citizen decedent may pass his or her DSUEA amount to his or her surviving spouse who is not a United States citizen, assuming that the estate is left to the surviving spouse in a QDOT.  The DSUEA amount of the deceased spouse would not be “ported” over to the surviving spouse at death, but rather, the transfer would be delayed until the assets of the QDOT are fully subject to estate tax, i.e. at the surviving spouse’s death.  The predeceased spouse’s DSUEA amount would thereafter be reported on the surviving spouse’s estate tax return.  The final regulations clarify that the deceased spouse’s available DSUEA amount will be automatically transferred to the surviving spouse in the event he or she becomes a United States citizen during the QDOT term.  See Treas. Reg. § 20.2010-3(c)(2) and Treas. Reg. § 25.2505-2(d)(3)(ii).

The final regulations also confirm that discretionary extensions of time may be available for estates that only had to file a Federal estate tax return in order to elect portability and that no protective portability election is required when the amount or even existence of a DSUEA amount is uncertain.  The Treasury declined to include any provisions indicating the release of an abridged estate tax return to be utilized solely for making a portability election.

These final regulations on the portability election provide some guidance and clarification for concerns taxpayers had under the temporary regulations.  For more information about the portability election, or if you have any questions about estate planning, please contact Judson M. Stein, Esq., Director of the Trusts & Estates Practice Group, at 973-230-2080 or This blog post was written with the assistance of Ryann M. Aaron.

Year-End Qualified Charitable Distribution Opportunity

H.R. 5771, otherwise known as the “Tax Increase Prevention Act of 2014” (TICA) was signed into law on December 19th. TICA gives those individuals who take action before the end of 2014 a short window of opportunity to take advantage of several beneficial income tax extensions.

One such extension provision, the individual retirement account charitable distribution, permits philanthropically-inclined individuals to exclude up to $100,000 from their gross income. Those individuals with IRAs that presently force the payment of required minimum distributions (RMDs), i.e. those who are over 70 ½ years of age, may exclude up to $100,000 of income from RMDs distributed by their IRAs by having their RMDs distributed directly to a qualifying public charity. By accepting an RMD directly rather than taking advantage of the direct charitable distribution extension, individuals who itemize their deductions will increase their adjusted gross income, thereby reducing or eliminating deductions that are calculated or phased-out based upon adjusted gross income levels.

Those individuals who may have already made distributions to qualifying charities from their IRAs prior to the passage of TICA may still elect before year-end to have those distributions qualify for the income exclusion. However, individuals that have already deposited their required minimum distribution checks may not retroactively elect to qualify their RMD for the charitable income exclusion.

One should note that in order to take advantage of the qualifying charitable distribution, the distribution must be made by the IRA custodian before year-end. As such, one should contact their plan custodians as soon as possible to make sure that their requests are processed and completed before the year-end deadline expires.

Year-end Tax Planning Update

Year-end tax planning is especially challenging this year because Congress has yet to act on a host of tax breaks that expired at the end of 2013. Some of these tax breaks may be retroactively reinstated and extended, but Congress may not decide the fate of these tax breaks until the very end of this year (and, possibly, not until next year).

These breaks include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70- 1/2 or older; and the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence.  For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include: 50% bonus first year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year writeoff for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.

Higher-income-earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare (hospital insurance, or HI) tax that applies to individuals receiving wages with respect to employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).

The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his or her estimated MAGI and net investment income (NII) for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

The additional Medicare tax may require year-end actions. Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward year end to cover the tax. For example, an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year. He would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000. Also, in determining whether a taxpayer may need to make adjustments to avoid a penalty for underpayment of estimated tax, one also should be mindful that the additional Medicare tax may be overwithheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple’s income won’t be high enough to actually cause the tax to be owed.

We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

 Year-End Tax Planning Moves for Individuals

•           Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes.  You can give present interest $14,000.00 gifts in 2014 to each of an unlimited number of individuals, but you cannot carry over unused exclusions from one year to the next.  The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.  Also, be mindful of the basis rules when giving appreciated property or property that has declined in value.  Consider selling loss property and gifting the proceeds.  Keep in mind that unused annual exclusions cannot be carried over and are forever lost.  If you are making a gift by check near the end of 2014 and you would like to take advantage of this year’s exclusion, you should urge the recipient to deposit the check before year-end so that there is no doubt as to when the gift was made.

•           Make gifts sheltered by the lifetime gift tax exemption before the end of the year and thereby save gift and estate taxes.  You can give up to $5,340,000.00 of taxable gifts in 2014 (reduced by prior taxable gifts) without incurring gift taxes (or generation skipping transfer taxes).  Although such gifts will subsequently reduce your federal estate tax exemption, the post gift appreciation and cash flow from the property gifted will escape estate taxation, and there are gifting strategies that can significantly leverage the value of the gifts.  Note that the $5,340,000.00 exemption is up from 2013’s $5,250,000.00 exemption.  As such, if you have maxed out your gifting based on the 2013 exemption amount, consider making additional taxable gifts of up to $90,000.00.  In 2015, the lifetime gift tax exemption will increase to $5,430,000.00, as adjusted for inflation; although, the $14,000.00 annual gift tax exclusion will remain unchanged.

•       Gifts to non-citizen spouses qualify for an increased annual gift tax exclusion of $145,000.00 for 2014.  Therefore, consider making lifetime gifts to a non-citizen spouse before the end of the year.  A couple can avoid U.S. estate tax on the gifted property if the non-citizen spouse possessing the property has established a residence outside of the United States before the date of his or her death and the gifted property is not otherwise sitused in the United States. In 2015, the annual exclusion on gifts to non-citizen spouses will increase to $147,000.00.

  • Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later.
  • Postpone income until 2015 and accelerate deductions into 2014 to lower your 2014 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2014 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2014. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year or where lower income in 2015 will result in a higher tax credit for an individual who plans to purchase health insurance on a health exchange and is eligible for a premium assistance credit.
  • The “Pease limitations” limit the amount of various itemized deductions that one can use in any given tax year.  More specifically, the limitation reduces the use of itemized deductions by 3% of amounts in excess of an individual’s threshold amount (up to a max of 80% of those reduced deductions), for 2014, the threshold for single individuals was an adjusted gross income (AGI) of $254,200 (or $305,050 for married couples filing jointly).  One can reduce the effect of the Pease limitations by reducing their AGI or by spreading out their charitable deductions (one type of itemized deduction) over several years.  There are many other planning techniques that can be used to effectuate this time of deduction planning, such as making gifts of income-producing property to non-grantor trusts. For 2015 the threshold amount for individuals is increases to $255,250.00 (or $309,900 for married couples filing jointly).
  • If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. While you will benefit from tax-free appreciation into the future, keep in mind, however, that such a conversion will increase your adjusted gross income for 2014.
  • If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the conversion; that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA, if doing so proves advantageous.
  • It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2015.
  • Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2014 deductions even if you don’t pay your credit card bill until after the end of the year.
  • If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2014 if doing so won’t create an alternative minimum tax (AMT) problem.
  • Take an eligible rollover distribution from a qualified retirement plan before the end of 2014 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding isn’t viable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2014. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2014, but the withheld tax will be applied pro rata over the full 2014 tax year to reduce previous underpayments of estimated tax.
  • Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2014, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes in the case of a taxpayer who is over age 65 or whose spouse is over age 65 as of the close of the tax year. As a result, in some cases, deductions should not be accelerated.
  • You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions (i.e., certain deductions that are allowed only to the extent they exceed 2% of adjusted gross income), medical expenses and other itemized deductions.
  • You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
  • You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
  • Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70- 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70- 1/2 in 2014, you can delay the first required distribution to 2015, but if you do, you will have to take a double distribution in 2015-the amount required for 2014 plus the amount required for 2015. Think twice before delaying 2014 distributions to 2015-bunching income into 2015 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2015 if you will be in a substantially lower bracket that year.
  • Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
  • If you are eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2014. This is so even if you first became eligible on Dec. 1, 2014.
  • Be cognizant of reporting requirements for foreign income and holdings; including Form 8938 – Statement of Specified Foreign Financial Assets.
  • If you have moved your residence, update your address with the IRS by filing a Form 8822.

Year-End Tax-Planning Moves for Businesses & Business Owners

  • Businesses should buy machinery and equipment before year end and, under the generally applicable “half-year convention,” thereby secure a half-year’s worth of depreciation deductions for the first ownership year.
  • Although the business property expensing option is greatly reduced in 2014 (unless legislation changes this option for 2014), do not neglect to make expenditures that qualify for this option. For tax years beginning in 2014, the expensing limit is $25,000, and the investment-based reduction in the dollar limitation starts to take effect when property placed in service in the tax year exceeds $200,000.
  • Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of inexpensive assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Section 263Auniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit-of-property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $500. Where the UNICAP rules aren’t an issue, purchase such qualifying items before the end of 2014.
  • A corporation should consider accelerating income from 2015 to 2014 where doing so will prevent the corporation from moving into a higher bracket next year. Conversely, it should consider deferring income until 2015 where doing so will prevent the corporation from moving into a higher bracket this year.
  • A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small corporation alternative minimum tax (AMT) exemption for 2014. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.
  • A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2014 (and substantial net income in 2015) may find it worthwhile to accelerate just enough of its 2015 income (or to defer just enough of its 2014 deductions) to create a small amount of net income for 2014. This will permit the corporation to base its 2015 estimated tax installments on the relatively small amount of income shown on its 2014 return, rather than having to pay estimated taxes based on 100% of its much larger 2015 taxable income.
  • If your business qualifies for the domestic production activities deduction for its 2014 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2014 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2014, even if the business has a fiscal year.
  • To reduce 2014 taxable income, consider deferring a debt-cancellation event until 2015.
  • To reduce 2014 taxable income, consider disposing of a passive activity in 2014 if doing so will allow you to deduct suspended passive activity losses.
  • If you own an interest in a partnership or S corporation consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you. We also will need to stay in close touch in the event Congress revives expired tax breaks, to assure that you do not miss out on any resuscitated tax saving opportunities.

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