IRS Rules Gift Splitting Differs for Gift and GST Tax Purposes

In PLR 201811002 the IRS has ruled that gift splitting works differently when applied to Gift taxes and Generation Skipping Transfer (GST) taxes.  Gift splitting is authorized by IRC Section 2513(a)(1) and states, generally, that, if elected, a gift made by one spouse to a person other than that donor’s spouse is considered, for gift tax purposes, as made one-half by the donor and one-half by the donor’s spouse.  Many people may encounter gift splitting in the context of annual exclusion gifts.  For example, assume Husband gifts $30,000 to Child in 2018.  On her 2018 Form 709, Wife consents to have gifts made by Husband treated as having been made one-half by Husband and one-half by Wife for gift tax purposes.  Consequently, Husband is treated as having made a gift to Child of $15,000 and Wife is treated as having made a gift to Child of $15,000; thus, each remains within the annual gift tax exclusion for 2018.

The facts of PLR 201811002 state that, in Year 1, Husband formed and funded four (4) irrevocable trusts for the benefit of each of his four Children.  Child was to receive all the trust income for life and, upon Child’s death, Grandchild was to receive the trust principal at the age of thirty-five (35) years.  Husband and Wife each filed a Form 709 for Year 1 in which Wife consented to having gifts made by Husband treated as having been made one-half by Husband and one-half by Wife.  However, for undisclosed reasons, Husband was allocated three-fourths (3/4) of the total value transferred in Year 1, and Wife was allocated one-fourth (1/4) of the total value transferred in Year 1 for gift tax purposes.  No GST tax allocation was made on such Forms 709.

Sometime after the expiration of the time period within which gift tax may be assessed by reason of the transfer, it became apparent that no GST allocation had been made on the Form 709 which had been filed for such transfer, and Husband was advised to make a late GST allocation.  A second Form 709 was prepared for Year 2 which, erroneously, reported Husband as transferor of one hundred percent (100%) of the total value transferred in Year 1.  A late allocation of Husband’s GST exemption was made, and Husband claimed the trusts had an inclusion ratio of zero (0) as a result.

The IRS ruled that since the time period within which gift tax may be assessed under Code Section 6501 had expired, the amount of the taxable gift is the amount that is finally determined for gift tax purposes, and such amount may not thereafter be adjusted.  Essentially, the value of Husband’s taxable gift for gift tax purposes will equal three-fourths (3/4) of the total value transferred and cannot be adjusted.  However, the IRS further ruled that the GST regulations state that Husband is treated as transferor of one-half (1/2) the total value transferred for GST tax purposes, despite the allocation of three-fourths (3/4) of the total value transferred to Husband for gift tax purposes.  Effectively, the IRS has ruled that the gift splitting rules are applied differently for gift tax and GST tax purposes.  Practically, this means that since Husband’s GST exemption is allocated only to one-half (1/2) the total value transferred to the trusts, the trusts will not be considered entirely GST exempt and may be subject to GST tax in the future.

This PLR is a reminder that gift tax returns are an important part of estate planning, not only for gift tax purposes, but also for GST tax purposes.  Any such return must be carefully and completely prepared to avoid unintended future tax consequences.

For more information or if you have any questions about gift tax returns or estate planning, please contact Judson M. Stein, Chair of the Trusts & Estates Practice Group, at 973-230-2080 or jstein@genovaburns.com or Lauren M. Ahern, Associate in the Trusts & Estates Practice Group.

Federal Death Tax Repeal – Not So Fast

Much has been written and speculated about the fate of the Federal Gift, Estate and Generation Skipping Taxes under the current efforts of the Administration and of Republican Congressional leaders to overhaul Federal tax laws.  The common view has been that the days are numbered for these wealth transfer taxes, commonly referred to as the “Death Tax”.  However, it seems that this may not be the case.

The tax proposals of the Ways and Means Committee of the House of Representatives include provisions that would double the exemptions for each of the Federal Gift, Estate and Generation Skipping Taxes to $10,000,000 (indexed for inflation) for those who die after 2017; and, would repeal the Estate and Generation Skipping Taxes for those who die after 2023.  In addition to keeping the Federal Estate and Generation Skipping Taxes for six more years, the House proposal keeps the Federal Gift Tax indefinitely, with a lowered tax rate of 35% (as compared to the current 40%).

Note, however that, although the plan issued by the Senate Finance Committee with regard to the Federal Gift, Estate and Generation Skipping Taxes is similar, there is the significant difference that it provides for no repeal of the Estate and Gift Taxes…after 2023 or otherwise.

Tax legislation, as is the case for all Federal legislation, needs to pass both the House of Representatives and the Senate, and then be signed by the President.  Although Republicans represent a majority of both chambers, the margin in the Senate is particularly thin.  It is becoming increasingly apparent that a full repeal of the “Death Tax” may not make it through the Senate.  Of course, an increase in the exemptions to $10,000,000 (indexed for inflation) will make such Federal taxes of concern to only the most wealthy; yet, maybe surprisingly, a continuing concern.

Stay tuned…

For more information or if you have any questions about the New Jersey estate tax, please contact Judson M. Stein, Chair of the Trusts & Estates Practice Group, at 973-230-2080 or jstein@genovaburns.com or Lauren M. Ahern, Associate in the Trusts & Estates Practice Group.

Governor Christie Signs Uniform Fiduciary Access to Digital Assets Act into Law

On September 13, 2017, Governor Chris Christie signed into law New Jersey Assembly Bill A-3433, otherwise known as the Uniform Fiduciary Access to Digital Assets Act (“UFADAA”).  The Act becomes effective ninety days after the Governor’s enactment and applies to those persons who are residents of the State of New Jersey or who resided in the State of New Jersey at the time of their death.  The Act permits certain fiduciaries to access the “digital assets” of the user for whose estate the fiduciary is administering.

The Act defines “digital assets” as “…an electronic record in which an individual has a right or interest.  The term does not include an underlying asset or liability unless the asset or liability is itself an electronic record.”  The term “fiduciary” as used in the Act is defined as “…an original, additional, or successor personal representative, guardian, agent, or trustee.”

The Act permits a user (who, in practical application, will be a decedent, the ward of a legal Guardian, the Principal of a grant of authority under a Power of Attorney, or a settlor or beneficiary of a Trust) to direct a custodian of a digital asset (for example, an email provider) either through the use of a custodian provided online tool or through a Will, Trust, Power of Attorney, or other similar record, to disclose or not to disclose to a designated recipient some or all of the user’s digital assets, including the content of electronic communications.

A fiduciary can gain access to the content of a user’s electronic communications (such as email) via express consent by the user in their Will, Power of Attorney, Trust Agreement, or similar writing, or by Court Order.  A fiduciary can gain access to a catalogue of electronic communications sent or received by the user and digital assets, other than the content of electronic communications, if the user has not prohibited such disclosure or if the Courts have not directed otherwise.  The fiduciary is obligated to maintain a duty of loyalty, care, and confidentiality in the management of a user’s digital assets and, among other restrictions, may not use his or her authority to impersonate the user.

The adoption in New Jersey of UFADAA is an important step in recognizing the significance of the use of technology in our everyday lives and modernizing the administration of estates in this State.  Individuals and practitioners would be wise to include a discussion about the administration of digital assets as part of their broader estate planning conversations, and adopt language granting, restricting, or prohibiting access by a fiduciary to digital assets as appropriate.

For more information or if you have any questions about the New Jersey estate tax, please contact Judson M. Stein, Chair of the Trusts & Estates Practice Group, at 973-230-2080 or jstein@genovaburns.com or Lauren M. Ahern, Associate in the Trusts & Estates Practice Group.

What the Governor’s Race Could Mean for the New Jersey Estate Tax

New Jersey is one of two states that impose both an inheritance tax and a State estate tax upon death (Maryland is the other state). According to a bill signed into law by Governor Chris Christie in October 2016, the estate tax exemption amount in New Jersey is $2 million for individuals dying in 2017, and the New Jersey estate tax will be eliminated for those dying after January 1, 2018. Prior to this law, New Jersey had been designated “the most expensive state in which to die,” with an estate tax exemption of just $675,000 (in addition to the inheritance tax). Now, decedents who die in 2017 will not be subject to the State estate tax unless their taxable estate exceeds $2 million and those who die after 2017 will not be subject to the State estate tax regardless of the value of the estate (although, there still is a federal estate tax which has a current exemption amount of $5,490,000). Although the New Jersey Estate tax is seemingly on its way out, the State will remain one of six to impose an inheritance tax on transfers from a decedent to a non-exempt beneficiary.

However, given New Jersey’s poor financial circumstances, there is skepticism as to whether the New Jersey estate tax will really be eliminated. With Governor Christie’s term ending mid-January 2018, Democratic gubernatorial candidate, Phil Murphy has expressed his opposition to the estate tax phase-out. “[G]iving in to the governor’s demand to provide a nearly $500 million tax break to 4,000 wealthy New Jersey families ensures that the middle class, again, is left holding the bag.” Murphy wishes to restore middle class property tax relief programs and views the elimination of the State estate tax as depriving the State of money that can be used to implement these programs as a well as cut the cost of college, assist small businesses, expand job training, pay down the State’s debt, etc. Murphy has expressed his belief that “[t]he standards by which Trenton operates need to change, and as governor, [he] will see that they do.” His opponent, current Lt. Gov. Kim Guadagno, has not specifically commented on the elimination of the New Jersey estate tax, but has criticized Murphy as being too willing to impose taxes.

Stay tuned…

For more information or if you have any questions about the New Jersey estate tax, please contact Judson M. Stein, Chair of the Trusts & Estates Practice Group, at 973-230-2080 or jstein@genovaburns.com or Lauren M. Ahern, Associate in the Trusts & Estates Practice Group.

Making Use of a Deceased Spouse’s Unused Estate Tax Exemption Simplified

The election for married couples to elect portability of the Federal Estate Tax Exemption was introduced in late 2010 when the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act (“TRUIRJCA”) was signed into law. Portability allows a surviving spouse to possibly make use of their deceased spouse’s unused federal estate tax exemption by adding it to their own exemption. The estate tax is a tax on the amount of a decedent’s taxable estate (pus adjusted taxable gifts). Under federal law, a certain amount of each estate is exempted from taxation. The exemption amount for 2017 is $5.49 million.[1] This means that estates valued above this amount are subject to a 40% estate tax for the amount exceeding the exemption. A little over two years following the signing of the TRUIRJCA, the American Taxpayer Relief Act (“ATRA”) was signed into law, making portability a permanent election for married couples.

However, the unused applicable exemption amount does not automatically transfer to the surviving spouse upon the death of the predeceased spouse. In order to elect portability, the executor must, on or before nine months following the death of the predeceased spouse, file a United States Estate (and Generation-Skipping Transfer) Tax Return (IRS Form 706). On or before that due date, an Application of Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes (IRS Form 4768), can be filed to request an automatic six-month extension.

In the event that the estate missed the nine-month deadline, there were two separate processes in place to elect portability at a later date, depending on the decedent’s date of death. Where the decedent died after December 31, 2010, and on or before December 31, 2013, the IRS, in Rev. Proc. 2014-18, provided for a simplified method of filing so long as the estate met certain qualifications. The decedent must have been a citizen or resident of the United States at the time of death, and the estate must have been one not required to file an estate tax return under Sec. 6018(a) because the value of the gross estate (plus adjusted taxable gifts) did not exceed the basic exemption amount in effect for the year of death. If these qualifications were met, and the estate tax return was filed before the December 31, 2014 deadline, stating that the form was being filed pursuant to Rev. Proc. 2014-18, the estate tax return would be considered timely filed and a valid portability election. No filing fee was required.

However, if the decedent died on January 1, 2014 or later, the process was more difficult and more expensive. Estates that did not qualify for Rev. Proc. 2014-18 relief were required to seek an extension to file the estate tax return to elect portability under Regs. Secs. 301.9100-1 and 301.9100-3 for an estate not required to file an estate tax return under Sec. 6018.[2] Accordingly, the executor looking to elect portability was required to submit a private letter ruling request providing evidence to the IRS’s satisfaction that the executor acted reasonably and in good faith and that granting relief would not prejudice the interests of the government. Regs. Sec. 301.9100-3(c)(1)(i) lists the ways in which an executor can be deemed to have acted reasonably and in good faith. The private letter ruling request had to be submitted in accordance with applicable procedures, contain affidavits and declarations from the parties, and be accompanied by a filing fee ($10,000 for requests received after February 1, 2017).

But recently the IRS, in Rev. Proc. 2017-34, 2017-26 (effective June 9, 2017) eliminated the requirement that an executor seek a private letter ruling to file a late estate tax return electing portability. So long as the decedent was a citizen or resident of the U.S., the estate was not required to file an estate tax return under Sec. 6018, and the estate tax return is filed before the second anniversary of the decedent’s death, or (if later) January 2, 2018, stating that the return is being “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER §2010(c)(5)(A),” the executor may elect late portability without seeking a private letter ruling. No fee is required. However, the private letter ruling request procedure is still available to an executor who fails to file under Rev. Proc. 2017-34 within the applicable time constraints.

The IRS has made it easier and less expensive for executors to file late estate tax returns electing portability. For letter rulings pending on the effective date of Rev. Proc. 2017-34, 2017-26, the file will be closed and the user fee refunded. The estate may then obtain relief granted by Rev. Proc. 2017-34, 2017-26, by complying with the above procedure. However, it should be noted that this relief is only available for estates where the gross estate (plus adjusted taxable gifts) do not exceed the exemption amount applicable as of the decedent’s year of death and that the late return must be filed no later than two years after the decedent’s date of death or, if later, January 2, 2018.

[1] Some states have their own estate tax, some of which exempt estates at the federal level, and others which have lower exemption levels. In New Jersey, the current exemption is $2 million.

[2] No relief is available for estates large enough to be required to file an estate tax return under Sec. 6018 that failed to timely file.

For more information or if you have any questions about estate planning and taxation, please contact Judson M. Stein, Chair of the Trusts & Estates Practice Group, at 973-230-2080 or jstein@genovaburns.com or Lauren M. Ahern, Associate in the Trusts & Estates Practice Group.

21st Century Cures Act Remedies Longstanding Special Needs Trust Issue

On December 13, 2016, President Obama signed the 21st Century Cures Act.  One of the more relevant aspects of the law to estate and special needs planning is found in Section 5007 of the Act, which is called “Fairness in Medicaid Supplemental Needs Trusts.”  The purpose of this section is to amend 42 U.S.C. Section 1396p d(4)(a) to add the words “the individual” to the list of persons who may establish a first party or self-settled special needs trust (SNT) for a disabled individual.

In 1993 Congress enacted the Omnibus Budget Reconciliation Act of 1993 (commonly referred to as OBRA 93).  As part of this larger Medicaid overhaul, 42 U.S.C. Section 1396p d(4)(a) was enacted which allowed a parent, grandparent, guardian or a Court to establish a first party, or self-settled, SNT for a disabled individual under the age of 65 to be funded with that individual’s own assets.  The self-settled SNT has since become an important estate planning tool by allowing disabled individuals to receive certain government assistance while still enjoying the benefit of their own assets to supplement their living expenses.  The tradeoff being that upon the death of the disabled individual or the termination of the trust, the benefits received during the disabled individual’s lifetime must be repaid from trust assets.  Curiously, though, the OBRA 93 language did not provide a mentally competent disabled person the ability to establish his or her own self-settled SNT.  This became particularly onerous when a disabled person had no parent or grandparent to establish such a trust for them, forcing them to petition a Court for approval of their SNT; a costly and time consuming process.

With the passing of the 21st Century Cures Act, however, this issue is rectified.  Now, disabled persons with the requisite mental capacity may establish their own self-settled SNTs without the need for assistance from other parties or Court approval.  It is important to note that the disabled individual must still be under the age of 65 when creating the trust and the trust must still contain a payback provision for government assistance.  Also, it is important to distinguish the self-settled SNT from the third party SNT, a different type of special needs trust which is established and entirely funded by a third party but exists for the benefit of a disabled individual.  These third party SNTs do not require a payback provision and are not affected by the new law.  Special Needs Trusts are an important and powerful tool when considering estate planning for the disabled or individuals with disabled beneficiaries.  Care should be taken to receive appropriate advice regarding the use of special needs trusts as part of a broad, comprehensive estate plan.

For more information or if you have any questions about estate planning and taxation, please contact Judson M. Stein, Chair of the Trusts & Estates Practice Group, at 973-230-2080 or jstein@genovaburns.com or John A. Grey and Lauren M. Ahern, Associates in the Trusts & Estates Practice Group.