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Form 706 Compliance Issues for Estates Anticipating Challenges With Includable Property, Tax Calculations, Valuation Elections and More

TUESDAY, MAY 7, 2013, 1:00-2:50 pm Eastern

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Form 706 Compliance Issues for Estates Seminar

Jerome Deener, Fox Rothschild

[email protected]

May 7, 2013

Yahne Miorini, Miorini Law

[email protected]

Today’s Program

Overview Of Federal Estate Tax Concepts

[Yahne Miorini]

Determining Includable Property

[Jerome Deener]

Deductions And Credits

[Yahne Miorini]

Portability Elections

[Jerome Deener]

Impacts Of State Laws And Death Taxes, Wills And Trusts

[Yahne Miorini]

Frequent Estate Tax Audit Red Flags

[Jerome Deener]

Non-Resident/Non-Citizen, And Non-Citizen 706 Issues

[Yahne Miorini]

Slide 8 – Slide 18







Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

6

OVERVIEW OF FEDERAL ESTATE TAX CONCEPTS


The American Taxpayer Relief Act Of 2012

The American Taxpayer Relief Act of 2012 (the Cliff Bill) ends the

worries of clawback risk.

The American Taxpayer Relief Act avoids draconian automatic

sunset provisions that were scheduled to take effect after 2012

under the Bush-era tax cuts in the Economic Growth and Tax

Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and

Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) (both as

extended by subsequent legislation, including the Tax Relief,

Unemployment Insurance Reauthorization and Job Creation Act of

2010 (2010 Tax Relief Act).

8

The American Taxpayer Relief Act of 2012 (Cont.)

• Permanent

• Unification of the estate and gift tax

• Portability

• Tax rate is increased from 35% to 40%.

• Repeal of the surcharge on estates larger than $10

million

• Exclusion is made at $5 million in 2011, indexed with inflation

• 2013: $5.25 million

• Same exclusion for GST tax

9


• Deduction for state death taxes remains the same = a deduction

• Before 2005, a credit was allowed against the federal estate

tax for state estate, inheritance, legacy, or succession taxes.

EGTRRA repealed the state death tax credit for decedents

dying after 2004 and replaced the credit with a deduction.

• Extensions of provisions for:

• Qualified conservation easements: The modifications to the

exclusion for qualified conservation easements are

permanently extended.

• Qualified family owned business interests (QFOBIs):

Permanent repeal of the estate tax deduction

• Installment payment of estate tax for closely held businesses

10

Qualified Conservation Easements

• Exclusion is available to any otherwise qualifying real property

without regard to the distance requirement IRC Sect.

2031(c)(8)(A)).

• The date to be used for determining the values to calculate the

exclusion is the date of contribution. IRC Sect. 2031(c)(2)

11

QFOBI

• A qualified family owned business interest is an interest in

trade or business with a principal place of business in the U.S.,

the ownership of which is held:

(1) At least 50% by one family,

(2) 70% by two families, or

(3) 90% by three families.

• If the interest was held by more than one family, the

decedent’s family must have owned at least 30% of the trade or

business.

12

QFOBI (Cont.)

Recapture events (IRC Sect. 2057(f)(2) – Watch out!

• Recapture tax provisions are still applicable if a specified recapture

event occurs within the 10-year period following the decedent’s death

and before the death of the qualified heir.

• Last day of entitlement to elect QFOBI as 12/31/2004 (DOD).

• Recapture tax means that an additional tax is imposed if there is a

recapture event.

• Recapture events are that the qualified heir:

• Ceases to meet the material participation requirements

• Disposes of any portion of his or her interest in the family-

owned business outside of family members

• Loses citizenship

• Moves the principal place of business outside of the U.S.

13

Installment Payments

• Deferred payment of estate tax for closely held business is

made permanent.

• Closely held business: Number of partners or

shareholders does not exceed 45 (prior to EGTRRA, the

maximum number was 15).

― IRC Sect 6166(b)(1)(B)(ii); 6166(b)(1)(C)(ii);

6166(b)(9)(B)(iii)(I);

• Entity must be engaged in an active trade or business.

• Election is not available for passive assets.

• If decedent has several closely held businesses, it will

be treated as one if 20% or more of the total value of

each one is included in the decedent’s gross estate.

14

Installment Payments (Cont.)

• Stocks of the holding company must be non-readily tradable to

qualify for purposes of the installment payment rules has been

made permanent.

• Installment payments:

• Five years

• 2% interest

15


• GST tax: Extension of number of GST tax–related provisions scheduled

to expire after 2012

• GST deemed allocation and retroactive allocation provisions

• Clarification of valuation rules with respect to the

determination of the inclusion ratio for GST tax purposes

• Provisions allowing for a qualified severance of a trust for

purposes of the GST tax

• Relief from late GST allocations and elections

(See

http://www.plantemoran.com/perspectives/articles/2012/Page

s/congress-approves-eleventh-hour-agreement-to-avert-fiscal-

cliff.aspx)

16

http://www.plantemoran.com/perspectives/articles/2012/Pages/congress-approves-eleventh-hour-agreement-to-avert-fiscal-cliff.aspx




























New Tax Rates For 2013

• 2013 annual exclusion: $14,000

• 2013 non-citizen spousal exclusion: $143,000

• 2013 foreign gifts reporting obligation: $15,102

• Gifts of a value exceeding $15,102 in 2013 received from

foreign corporations or foreign partnerships must be

reported on IRS Form 3520.

17

DETERMINING INCLUDABLE PROPERTY


19

Gross Estate

• Sect. 2031 generally defines the “gross estate” to include the value of

all property, real or personal, tangible or intangible, to the extent

provided by sections 2033 et. seq.

20

Sect. 2033: Property In Which The

Decedent Had An Interest

• Decedent’s beneficial interest in property

• Beneficial interest in life insurance on others’ lives is included.

Slide Intentionally Left Blank

22

Sect. 2035: Adjustments For Certain

Gifts Made Within Three Years Of Death

• 2035(a): Interest transferred by the decedent that, if it had been

retained by the decedent as of his/her death, would have been

includible in the decedent’s gross estate under sections 2036,

2037, 2038 or 2042. Sect. 2035(a)(2)

– Excluded: Bona fide sale for an adequate and full consideration

in money or money's worth

23

Sect. 2035: Adjustments Fr Certain Gifts

Made Within Three Years Of Death (Cont.)

• 2035(b): Requires the federal gift tax paid by the decedent or the

decedent's estate on any transfers made after 1976 by the

decedent or the decedent’s spouse within three years of the

decedent’s death to be included in the decedent’s gross estate.

24

Sect. 2036: Transfers With

Retained Interests

• 2036(a)(1): Decedent retains “the possession or enjoyment of” or

“the right to the income from” the transferred property or property

interest.

• Excluded: Bona fide sale for an adequate and full

consideration in money or money's worth

25


Retained Interests (Cont.)

• 2036(a)(2): Decedent retains the right for life (or for any similarly

prescribed period) to say who may enjoy transferred property or the

income therefrom, even if the decedent has put it beyond the power

to claim enjoyment or income for the decedent’s own benefit.

26



• 2036(b): Decedent directly or indirectly retains voting rights in a

“controlled corporation”; deemed a retention of the “enjoyment” of

transferred property so as to trigger Sect. 2036(a)(1).

– “Controlled corporation” is defined as a corporation in which the

decedent owns, directly or by attribution under Sect. 318, stock

possessing at least 20% of the combined voting power of all

classes of stock of the corporation; or if the decedent has a

right to vote (either alone or in conjunction with any other

person) at least 20% percent of the combined voting power.

27



• Transfer can be made directly by the decedent, or indirectly as in a

deemed transfer under the reciprocal trust doctrine.

• Amount includible in gross estate is the value of the transferred

property upon death (not the value of the retained interest).

28

Sect. 2037: Transfers Taking

Effect At Death

• Sect. 2037 includes property in a decedent’s taxable estate if the

decedent has made a transfer of the property to take effect only at or

after the decedent’s death, and has retained a reversionary interest

in such property (perhaps expressly) that has a value just before the

decedent’s death in excess of 5% of the value of the property

transferred.

• Excluded: Bona fide sale for an adequate and full

consideration in money or money's worth

29

Sect. 2038: Revocable Transfers

• Sect. 2038 applies to include the value of an interest in property

when the decedent has transferred such property, but “enjoyment

thereof was subject at the date of his death to any change through

the exercise of a power (in whatever capacity exercisable) by the

decedent alone or by the decedent in conjunction with any other

person (without regard to when or from what source the decedent

acquired such power), to alter, amend, revoke, or terminate, or

where any such power is relinquished during the 3-year period

ending on the date of the decedent’s death.”

– Excluded: Bona fide sale for an adequate and full consideration

in money or money’s worth

30

Sect: 2038: Revocable

Transfers (Cont.)

• Unlike Sect. 2036, which taxes the entire property transferred by the

decedent, Sect. 2038 only taxes the value of the interest over which

the decedent maintains the power to alter, amend, revoke,

terminate, etc. …

31

Sect. 2039: Annuities (With

Survivorship Proceeds)

• Sect. 2039 generally includes the value of annuities that are payable

to the decedent during lifetime and continue after the death of the

decedent, or that provide for proceeds to be paid to beneficiaries.

– Excluded: Life insurance contracts (covered by Sect. 2042)

32

Sect. 2039: Annuities (With

Survivorship Proceeds), Cont.

• Sect. 2039(b) restricts the inclusion of an annuity in a decedent’s

estate to the proportionate value of the annuity paid for by the

decedent.

33

Sect. 2040: Joint Interests

• Sect. 2040(b): As to spousal joint property interests (with right of

survivorship) created after 1977, Sect. 2040 includes one-half (1/2)

of the value of such property in the decedent’s estate.

– Inapplicable when the surviving spouse is not a U.S. citizen

34

Sect. 2040: Joint Interests (Cont.)

• Sect. 2040(a): Other joint property is fully includible in the

decedent’s taxable estate, except to the extent that the surviving

tenant or tenants contributed to the cost of the acquisition of the

property.

35

Sect. 2041: Power Of Appointment

• Sect. 2041 includes property over which the decedent holds a

general power of appointment.

• Excluded:

1. Powers subject to ascertainable standards

2. Pre-1942 powers

3. Powers held with adverse party or creator

36

Sect. 2042: Proceeds Of Life Insurance

• Sect. 2042 includes life insurance proceeds in the decedent’s

taxable estate if:

1. Proceeds are receivable by the decedent’s executor, or

2. Proceeds are receivable by other beneficiaries and the

decedent has any incidents of ownership in the policy at death.

37

Sect. 2043: Transfers For

Insufficient Consideration

• Sect. 2043(a) applies to a transfer under sections 2035, 2036, 2037,

2038 or 2041 for some consideration; but not a bona fide sale for

adequate and full consideration.

– Includible amount is “the excess of the fair market value at the

time of death of the property otherwise to be included on account

of such transaction, over the value of the consideration received

therefor by the decedent.”

38

Sect. 2043: Transfers For

Insufficient Consideration (Cont.)

• 2043(b) states that the relinquishment of marital rights is generally

not consideration.

DEDUCTIONS AND CREDITS Yahne Miorini, Miorini Law

Introduction

There are five parts to Form 706, nine schedules to determine the gross

estate and seven schedules to determine the applicable deductions.

Schedules A through I are used to determine the gross estate.

Schedules J through O plus Schedule U are used to determine

applicable deductions.

Schedules P and Q are used to determine applicable tax credits.

It is good practice to include all of the schedules and mark “0” on those

schedules that do not show any assets, exclusions or deductions.

40

Schedule J

• Schedule J – Funeral and administrative expenses

― Funeral: Allowable "reasonable expenses"

― Tombstone, burial lot, cost of body transportation

― “Reasonable expenses” based on the decedent’s wealth and standard

of living

― Administrative expenses can be allocated as the fiduciary’s discretion

between Form 706 and the estate’s income tax return.

― No double deductions allowed

― Interest: Federal estate tax deficiency interest is includable

― Executor’s commission, attorney and accountant fees closely

monitored by IRS

― Actually paid or reasonable expected to be paid

― Do not include attorney fees incidental to litigation incurred by

a beneficary

41

Schedule K

• Schedule K – Debts, mortgages and liens

― Part 1: Decedent’s debts, tax liabilities, obligations to

spouse at time of death

― In case of difficulty, a computation can be requested

to the IRS.

― Part 2: Mortgage for which the decedent is liable and

contingent liabilities

42

Schedule L

• Schedule L – Net losses during administration and expenses

incurred in administering property not subject to claims

― Casualty losses incurred during the settlement of the

estate

― Theft, fire, storm, shipwreck

43

Schedule M: Unlimited Marital Deduction

• The Economic Recovery Tax Act (ERTA) of 1976 has created an unlimited

marital deduction. The assets bequeathed to the spouse are treated as

deductions and are reported under Schedule M of the federal estate tax

return.

• One of the objectives of the act was to correct the discrepancy in tax

treatment between the community states and the non-community state.

• Community states are Arizona, California, Idaho, Louisiana, Nevada, New

Mexico, Texas, Washington and Wisconsin.

• A homemaker surviving spouse in a community state would always keep half

of the assets of the community, and it’s only the other half of the community

assets that would be reported in the decedent gross estate.

• ERTA was to help unify the IRS treatment of husband and wife. The IRS

already treated the husband and wife as “one economic unit,” for income tax

purposes. ERTA expanded this concept for estate and gift taxes.

44

Schedule M (Cont.)

• Schedule M – Unlimited marital deduction

― Property interests passing to a surviving U.S. citizen

spouse may qualify for the marital deduction under IRC

Sect. 2056.

― A QTIP election can be made either for the entire value of

the trust or for a portion of it.

― The portion not reported on Schedule M should be

included in the gross estate.

― Deduction available to non-U.S. citizens through a QDT

(qualified domestic trust)

― Funding of marital deduction should be carefully reviewed

(audits).

45

Schedule M (Cont.)

• Property interests that you may not list on Schedule M

― The full value of a property interest that passes to the

surviving spouse subject of a mortgage, or other

encumbrance or an obligation of the surviving spouse

― Non-deductible terminable interest: Interest that will

terminate or fail after the passage of time, or on the

occurrence or nonoccurrence of a designated event. IRS

e.g.: file estate, annuities, estate for terms of years, and

patents

― Any property interest disclaimed by the surviving spouse

46

Schedule M (Cont.)

• IRS example of description:

One-half the value of a house and lot, 256 South West

Street, held by decedent and surviving spouse as joint

tenants with right of survivorship under deed dated July

15, 1975 (Schedule E. Part I. item 1) …

Proceeds of Metropolitan Life insurance Company policy

No. xxx, payable in one sum to surviving spouse (Schedule

D. item 3) …

Cash bequest under Paragraph Six of Will …

47

Schedule M: QTIP Election

• Election needs to be made by the executor.

• Election can be partial. If in a trust, you need a defined

fraction or percentage of the entire trust. The fraction or

percentage may be defined by means of a formula.

• The election is irrevocable. If you don’t make the election in

your filed Form 706, you cannot file an amended return to

make the election unless the amended return is filed on or

before the due date for filing the original Form 706.

• Election makes the property/interest as passing to the

surviving spouse as deductible interest.

• Presumption that you made the election when the

property/interest is listed on Schedule M.

48

Schedule M: QTIP Election (Cont.)

• Requirement of IRC Sect. 2056(b)(7)

― Surviving spouse is entitled to all of the income from the

property, payable annually or at more frequent intervals.

― During the life of the surviving spouse, nobody has a

power to appoint any part of the property to any person

other than the surviving spouse.

49

Schedule O

• Schedule O – Charitable deductions

― All interests qualifying for charitable deductions under IRC

Sect. 2066:

― Outright transfers to charitable organizations

― Qualified split interest charitable remainder trusts

― Property passing to charities by court decree

― Qualified conservation easements

― Outstanding charity pledge, if enforceable, is reported on

Schedule K, not on Schedule O.

― No limit on the amount of charitable deductions

50

Schedule U • Schedule U – Qualified conservation easement exclusion

― Maximum amount: $500,000

― Enable fiduciary to exclude a portion of the value of the land subject to

a qualified conservation easement

― Criteria to be met:

― Three-year ownership ending on the date of decedent’s death

― No later than the date of the election, a QCE has been made.

― The land is situated in the U.S. or one of its possessions.

― Conservation purposes are:

― Preservation of land for outdoor recreation, education or the public

― Protection of a relatively natural habitat/ecosystem

― Preservation of open space for scenic enjoyment or yielding

significant public benefit as determined by the government

51

Schedule P: Credits

• Schedule P – Credit for foreign death tax

― Applicable if decedent owned property overseas

― If the decedent is a non-resident U.S. citizen, the

following documents are required:

― Copy of property inventory

― Including schedule of liabilities claims against the

estate

― Copy of the return filed under the foreign inheritance,

estate legacy, succession tax or other death tax act

52

Schedule Q

• Schedule Q – Credit for tax on prior transfers

― Applicable when transferee receives property from a

transferor who died within the previous 10 years or died

two years after the transferee

― Property: Any interest which the transferee received the

beneficial ownership

― A credit may be allowed for property received as the

result of the exercise or non-exercise of a power of

appointment, when the property is included in the gross

estate of the donee of the power

54

Schedule Q (Cont.)

• Spouses don’t qualify unless the spouse was not a citizen of

the property passed outright to the spouse or to a qualified

domestic trust.

55

Schedule Q (Cont.)

Period Of Time Exceeding

Not Exceeding Percent Allowable

……. 2 years 100

2 years 4 years 80

4 years 6 years 60

6 years 8 years 40

8 years 10 years 20

10 years ….. None

56

Schedules R And R-1

• Generation-skipping transfer tax history:

The first generation-skipping transfer tax was enacted by the

1976 Act. This tax was created in order to prevent the avoidance

of transfer taxes over a period of successive generation. The tax

was tremendously complex. The 1986 act repealed it and

replaced with a new transfer tax applicable to all generation-

skipping transfers whether by way of a trust, trust equivalent, or

direct transfer. The generation-skipping transfer (GST) tax applied

to estate tax and gift tax. This tax was created for people dying

after Oct. 22, 1986. The tax is imposed only on the value of the

interests in property that actually pass to certain transferees,

who are referred as “skip persons.”

57

GST: Generation-Skipping Transfers

The GST tax brings new concepts such as “transferor” and “generation.”

Under IRC Sect. 2652(a), the transferor is the donor or the decedent. The

generation is defined among the family lines. There is the generation of

the transferor, which includes the transferor, the transferor’s spouse and

the transferor’s siblings. The children are part of the next generation;

the grandchildren are part of the generation following. If the transfer is

made outside the family, generations are determined by ages. A person

who was born not more than 12½ years after the decedent is in the same

generation of the decedent. A person born more than 12½ years, but not

more than 37½ years, after the decedent is in the first generation

younger than the decedent. A similar rule applies for a new generation

every 25 years. Therefore, a skip person is a natural person who was born

more than 37 ½ years after the decedent.

58

GST Skipping Transfers (Cont.)

• There are three types of generation-skipping transfers:

― taxable terminations,

― taxable distributions, and

― direct skips.

59

GST Skipping Transfers (Cont.)

• A taxable termination occurs upon the termination of an interest in

a trust. After the termination event, the skip person holds all interest

in the trusts. For instance, dad created a trust, giving the income for

life of his daughter and the remainder to his granddaughter.

• A taxable distribution exists when there is a distribution of principal

or income from the trust to a skip person. For instance, mom created

a trust providing payment of income and principal to her children and

grandchildren. What is collected by the grandchildren is subject to

GST tax.

• A direct skip is when property is transferred without compensation

to a skip person. Among family members, a skip person would be a

grandchild. For a non-family member, a skip person is a person of two

or more generations below the transferor.

60

GST (Cont.)

• A married couple may elect to treat generation-skipping

transfers as being made one-half by each spouse. The QTIP

election used for estate tax purpose is separate and ignored

for GST tax. The fiduciary may allocate part or all of the

decedent’s GST exemption to the property. Because each

person is entitled to a GST exemption, indexed for inflation,

the GST election on a QTIP trust allows using two times the

GST exemption. This is a reverse QTIP election. See IRC Sect.

2652(a)(3)

61

GST: Tax Allocation

• The amount of tax imposed on any generation-skipping

transfer is determined by multiplying the “taxable amount” by

the “applicable rate.”

• See IRC

2602

62

GST: Taxable Amount

• The taxable amount varies depending on the transfer.

• For a taxable distribution transfer, the taxable amount is the transfer

received by the transferee, reduced by the expenses incurred in the

determination, collection or refund that Chap. 13 tax imposed.

• For a taxable termination transfer, the taxable amount is the value of

property received at the termination reduced by deductions similar

to Sect. 2053.

• For a direct skip transfer, the taxable amount is the amount

received. The taxable distribution transfer and the taxable

termination transfer are tax-inclusive transfers, while the direct skip

transfer is a tax-exclusive transfer. In a tax-inclusive transfer, the tax

is calculated on the amount of the transfer.

63

GST: Applicable Tax Rate

• The applicable rate of tax is defined as the maximum transfer

tax rate then in effect, multiplied by the inclusion ratio.

• See IRS

264(1a)

64

Inclusion Of Prior Gift Tax

• On Line 4 of IRS Form 706, you need to lists the cumulative

amount of adjusted taxable gifts (IRC Sect. 2503). The

computation of gift tax payable uses the IRC Sect. 2001(c)

rate schedule in effect as of the date of death, rather than

the actual amount of gift taxes paid with respect to the gifts.

― PB: Top bracket tax rates decreased from 55 % (2001) to

35% (2010). There are situations in which the gift tax paid

was greater than the tax calculated using the rate in

effect at the date of death.

― IRS Web site warns about software used by practitioners

that will require manual input of the gift tax payable line,

and errors resulting in underpayment of estate tax due.

65

PORTABILITY ELECTIONS


Portability

• What is portability?

– The Sect. 2056 estate tax marital deduction allows spouses to

deduct unlimited amounts for property that passes from a

decedent to his or her surviving spouse.

67

Portability (Cont.)

• Made permanent by ATRA, a surviving spouse is entitled to a total

estate tax exemption (“applicable exclusion amount,” or “AEA”)

consisting of two components:

• The “basic exclusion amount” (BEA), currently $5.25 million, as

indexed for inflation; and

68

Portability (Cont.)

• The “eeceased wpouse’s unused exclusion amount” (DSUE), which

is defined as:

– The lesser of (a) the BEA and (b) the “Applicable

Exclusion Amount” (AEA) of the surviving spouse’s last

deceased spouse over the combined amount of the last

deceased spouse’s taxable estate plus adjusted taxable

gifts. Code §2010(c)(4), as amended by ATRA, and

Treas. Reg. §20.2010-2T(c)(1)(ii)(A).

69

Portability (Cont.)

• Example:

– First spouse dies with $2 million, $1 million outright, to surviving

spouse and $1 million in a credit shelter trust (CST).

– First spouse has used $1 million of $5.25 million exemption,

leaving $4.25 million unused exemption.

– Surviving spouse dies with $9 million and the credit shelter trust

of $1 million.

• Surviving spouse’s estate pays no federal tax.

70

Portability (Cont.)

Gross estate: $ 9M

Less: BEA of surviving spouse (5.25M)

unused exemption of first

spouse (DSUE) (4.25M)

Total 0

Plus: Credit shelter trust Not included

71

Portability (Cont.)

• Variation: If first spouse has $5.25 million, and surviving spouse

has $5.25 million, and first spouse leaves his $5.25 million to

surviving spouse outright:

– No estate tax in first estate and no exemption used

– Surviving spouse has a taxable estate of $10.5 million but has

her own $5.25 million BEA and a $5.25 million DSUE, so the

surviving spouse’s estate pays no federal estate tax.

72

Portability (Cont.)

– In all, a husband and wife together have $10.5 million of exemption. This is accomplished without shifting assets during spouses’ lives, without credit shelter trust and no matter which spouse predeceases the other.

– Portability also applies for purposes of the lifetime gift exemption. The applicable credit for gift tax purposes under Sect. 2505(a) refers to the estate tax credit amount under Sect. 2010(c), “which would apply if the donor died as of the end of the calendar year.” The 2010(c) credit includes the DSUE, so the gift tax exemption also includes the DSUE.

73

Portability (Cont.)

• Example, H-1 used $2,000,000 of exemption by leaving it

in a credit shelter trust. Wife has $3,250,000 DSUE plus

$5,250,000 basic exclusion amount. If she makes lifetime

gifts of $3,250,000, do they come from DSUE or basic

exclusion amount, or pro rata?

– From the DSUE. Treas. Reg. §25.2505-2T(b)

– If W-1 remarries and she predeceases second spouse,

she has her full exemption of $5,250,000 to give H-2.

74

Portability (Cont.)

• In order to utilize portability, a specific election must be made on

the federal estate tax return (Form 706) of the deceased spouse.

Further, despite the running of the statute of limitation on the

decedent’s estate tax return or gift tax return(s) with respect to the

computation of the DSUE, the IRS may examine the returns of the

deceased spouse to determine the amount of the DSUE for

purposes of computing the surviving spouse’s applicable exclusion

amount. See explanation of Treasury regulations later

75

Portability (Cont.)

• Portability does not apply to the GST exemption.

• However, this does not necessarily preclude the concurrent use of portability and both spouses’ GST exemptions.

• In the case of a bequest to the surviving spouse in a trust that is eligible for the QTIP election, the executor can make both (i) the QTIP election (making the trust qualify for portability) and (ii) the Code Sect. 2652(a)(3) “reverse QTIP election” (permitting GST exemption of the deceased spouse to be allocated to the trust).

76

Portability (Cont.)

• Upon the death of the surviving spouse, the surviving spouse will be able to apply his/her DSUE against the value of the QTIP trust, and the QTIP trust will be partially or fully exempt from generation-skipping transfer tax (depending upon whether the first deceased spouse’s GST exemption was sufficient to attain a zero GST inclusion ratio).

• Election of portability can have adverse New Jersey and New York estate taxes in the estate of the first spouse to die.

77

Tax And Non-Tax Reasons Not To Rely Upon

Portability In Lieu Of Trust Planning

• If the surviving spouse remarries, the DSUE can potentially

disappear.

• Reason: The DSUE is only available from the last deceased

spouse.

• If a surviving spouse remarries and then outlives the second

spouse, the DSUE from the first deceased spouse is gone.

78


Portability In Lieu Of Trust Planning (Cont.)

• Example: H1 dies with a taxable estate of $1 million, leaving a $4.25

million DSUE for W. W marries H2, who has a taxable estate of

$5.25 million and leaves it all to H2’s children, thus using his entire

$5.25 million exemption and leaving W with no DSUE. W’s $4.25

million DSUE from H1 is gone.

79



• Appreciation on property placed in a CST is excluded from the

estate of the surviving spouse, but appreciation is not sheltered if

instead assets pass outright and portability is relied upon.

• Portability does not apply to the GST exemption. Therefore, in order

to take advantage of the GST exemption of the first spouse to die, it

is advantageous to continue to fund a CST. If a deceased spouse

leaves everything to the surviving spouse outright, the family will

lose $5.25 million of $10,500,000 potential GST exemption.

80



• Hard-to-value assets held in a CST (LLC, FLP or closely held

stock) will not be subject to estate tax in survivor’s estate.

However, if DSUE is elected, such hard-to-value assets can be

subject to the IRS scrutiny in the estate of the surviving spouse.

81



• Portability does not apply to state estate taxes.

– States like New York and New Jersey have decoupled

from the Federal $5,250,000 exemption. New York:

$1,000,000 exemption and New Jersey: $675,000

– Both states take the position that if a federal 706 is filed

for any reason, and a QTIP election is made on the

federal return, then the state QTIP election must be

consistent with the federal QTIP election.

– This has an impact if portability is considered.

82



– H and W are New Jersey residents. H has $3,250,000

and W has $3,250,000. H’s will provides that all of his

estate passes to W, and H’s estate elects portability.

– W gets $5,250,000 DSUE from H.

– On W’s death, she has her own $5,250,000 exemption,

plus DSUE from H to shelter her $6,500,000 from

federal tax. No New Jersey tax is imposed in first

spouse’s estate. No QTIP election is made, and nothing

on New Jersey return is inconsistent with the federal

return.

83



– On survivor’s death, the New Jersey tax on the $6,500,000

taxable estate = $574,000 (New Jersey will not recognize

DSUE from first spouse’s estate).

– In the alternative, if H’s assets consist of $3,250,000 in his

name and instead pass into a CST, H’s DSUE is $2,000,000.

Even though estate is under the $5,250,000 federal filing limit,

H’s executor files a 706 to elect DSUE. No QTIP election is

made on the federal 706, since QTIP is not necessary. New

Jersey (and New York) positions are that QTIP for state

purposes only may not be made, because that election is

inconsistent with the federal return filed. herefore, on death of

H, the estate owes state estate tax on a taxable estate of

$3,250,000 = $205,200.

84



– If H’s estate did not elect DSUE, H’s estate would not file a

federal 706, and New Jersey and New York positions are that his

estate can make a state-only QTIP election to bring the state tax

to zero.

85



– Executor’s conundrum:

• Elect DSUE and pay $205,200 to protect $3,250,000 (plus

appreciation) from future federal tax?

• Or, don’t elect DSUE, forego state tax in H’s estate and

hold onto $205,200, but without protection against federal

estate tax on future appreciation

86



• Alternative:

– Consider leaving an amount equal to the state exemption (for

New Jersey, $675,000) in a credit shelter trust (thereby using the

deceased spouse’s state exemption), with the remainder of the

federal exemption amount (for New Jersey, $4,575,000 in 2013)

in a “QTIP-able” trust for the surviving spouse’s benefit. The trust

would provide all income is payable to surviving spouse for life,

plus principal for surviving spouse’s needs of health,

maintenance and support. No state estate tax upon the death of

the first spouse, and the surviving spouse can elect QTIP and

therefore take advantage of portability (in the case of New

Jersey, the surviving spouse’s DSUE would be $4,575,000).

87



• The surviving spouse can then gift away his/her income interest in the QTIP trust, which is subject to the ascertainable standard, retaining his/her interest in the principal of the QTIP trust. Under Code Sect. 2519, this is considered a gift of the surviving spouse’s entire interest in the trust ($4,575,000, if no appreciation). Surviving spouse may apply his/her $4,575,000 DSUE against this $4,575,000 gift, making it tax-free and removing the QTIP trust assets from his/her New Jersey taxable estate. In all, no state estate tax will have been paid on the first deceased spouse’s $5,250,000. At the same time, the surviving spouse still has some access to the QTIP trust assets via his/her beneficial interest in the QTIP trust principal.

88



• An outright disposition to the surviving spouse in lieu of a CST

forgoes many non-tax benefits such as creditor protection, asset

management, the ability for the deceased spouse to control the

ultimate disposition of the assets upon the death of the surviving

spouse, and the ability for the surviving spouse surviving spouse to

control disposition if beneficial interests to family members during

surviving spouse’s lifetime.

89

Best Situations To Utilize

Portability – Income Tax Benefits

• Retirement assets

– Prior to DSUE, if a married taxpayer had a large IRA but

insufficient non-retirement assets to fully fund a CST, a decision

had to be made as to whether:

91

Best Situations To Utilize Portability –

Income Tax Benefits (Cont.)

– To take advantage of: the income tax benefits of

leaving an IRA to a surviving spouse (i.e., the

spouse’s ability to roll the IRA into his/her own IRA

using favorable required distribution rules, convert to

a Roth IRA, etc. …), at the risk of potentially wasting

estate tax exemption; or

– To maximize the estate tax benefits of fully funding a

credit shelter trust, but accelerate payout to the

surviving spouse

92



• Now, with portability, the taxpayer may name the spouse as the

IRA beneficiary without wasting any of the deceased spouse’s

estate tax exemption. The surviving spouse may take the IRA, roll

it over, name new beneficiaries to get a longer stretch-out and/or

convert to a Roth IRA, either all at once or over a number of years.

» Example: Taxpayer has a $3 million IRA and $2

million of other assets. Taxpayer names spouse as

the IRA beneficiary and leaves the rest of his assets

in a CST. Upon death, spouse receives the $3

million IRA, $2 million is placed in the credit shelter

trust, and taxpayer’s estate elects to transfer

taxpayer’s unused exemption ($3.25 million) to

spouse.

93



• Note: While the $3.25 million estate tax exemption is not wasted,

the income and growth of the IRA will not excluded from the

spouse’s taxable estate.

• Paying IRA proceeds to a CRT for New Jersey/New York

exemption purposes may still be considered, in some cases.

94



• Asset basis step-up

– Assets passing pursuant to portability will receive an income tax

basis step-up in the estate of the surviving spouse, whereas

assets held in a CST would not be entitled to such a basis

adjustment.

– Now that income tax rates are increasing as expected, the

income tax value of a basis step-up will increase relative to the

transfer tax value of removing assets’ appreciation from the

taxable estate of the surviving spouse.

95

Portability Regulations

• On June 15, 2012, the Treasury Department issued temporary and

proposed regulations aimed at resolving some of the issues left

open by the portability statute.

• Timely filed return

96

Portability Regulations (Cont.)

• Code Sect. 2010(c)(5)(A) provides that the portability election must

be made on the deceased spouse’s timely filed estate tax return,

within the “time prescribed by law (including extensions) for filing

such return.”

– Under the regulations, the last return filed by the due

date (including extensions) will supersede any previously

filed return. Therefore, an executor can supersede a

previously filed portability election. Once the due date

has passed, the election is irrevocable. Treas. Reg.

§20.2010-2T(a)(4)

97


– Issue: If an estate is under the federal threshold (and so

technically is not required to file a federal 706), is the estate

subject to the same election deadline as a taxable estate?

– Regs: Yes; Treas. Reg. §20.2010-2T(a)(1) states that any

estate making the portability election is required to file a timely

Form 706 under Code Sect. 6018(a).

98


• “Complete” estate tax return

– Notice 2011-82 states that by filing a “properly prepared

and complete” Form 706, an estate is considered to

have made the portability election.

– Issue: For an estate under the federal threshold, what is

considered “properly-prepared and complete?”

– Regs:

99


• Treas. Reg. §20.2010-(a)(7)(i) provides that an estate tax return

prepared in accordance with all applicable requirements is

considered complete and properly prepared.

• However, Treas. Reg. §20.2010-(a)(7)(ii) provides a break for

smaller estates, stating that executors of estates that are not

otherwise required to file an estate tax return do not have to report

the value of certain property that qualifies for the marital or

charitable deduction.

100


– If this special rule is used, then the executor must estimate the

total value of the gross estate and report the estimate as a

range on Line 1, Part 2 of the Form 706. The new form is not

available yet, so until it is, the executor must round the

estimate to the nearest $250,000 and attach to the Form

706.

– All other information regarding the marital/charitable deduction

property (description, ownership, beneficiary, etc. …)

101


• The special rule is not available if:

– The value of the property relates to, affects or is needed to

determine the value passing from the decedent to another

recipient;

– The value is needed to determine the estate’s eligibility for Code

Sect. 2032 , 2032A, 6166 or other provision;

102


– Less than the entire value of the property is eligible for the

martial or charitable deduction; or

– A partial disclaimer or partial QTIP election is made with respect

to the property.

103


– The rule will also generally not apply in states where a

separate estate or inheritance tax return is required (i.e., New

Jersey and New York).

• Opting out of portability

– To opt out, Treas. Reg. §20.2010-2T(a)(3) requires an

executor to make an affirmative statement on the estate

tax return signifying the decision to have the portability

election not apply.

– Or, just don’t file a timely return

104


• Executor responsible for making the election

• Issue: A commenter to Notice 2011-82 noted that while

existing regulations allow a surviving spouse to file a Form

706 in certain cases, Code Sect. 2010(c)(5) permits only

the executor to file the estate tax return and to make the

portability election.

• Regs: Treas. Reg. §20.2010-2T(a)(6)(i) provides that an

appointed, qualified and acting executor or administrator is

the party to file the Form 706 and make the portability

election.

105


– In the case of an estate without an appointed executor,

any person in actual or constructive possession of any

property of the decedent may file the return to elect

portability or to opt out. Treas. Reg. §20.2010-

2T(a)(6)(ii)

– A portability election made by such a “non-qualified

executor” cannot be superseded by another “non-

qualified executor” of the same decedent’s estate.

106


• Computation of portability election

• Treas. Reg. § 20.2010-2T(b)(1) requires that an executor include a computation of the deceased spouse’s unused exclusion amount (DSUE) on the estate tax return.

• The current 706 does not include a section for computation of the DSUE.

• Therefore, Treas. Reg. §20.2010-2T(b)(2) provides a transition rule which permits, prior to a new 706 being released, the preparation of a complete and properly prepared 706 to be deemed as the computation of the DSUE.

107


• Method of calculating the DSUE

– Code Sect. 2010(c)(4) defines the DSUE as the lesser of the (i)

basic exclusion amount or (ii) the excess of (A) the basic

exclusion amount of the last deceased spouse over (B) the

amount with respect to which the tentative tax is determined

under Code Sect. 2001(b)(1) on the estate of the deceased

spouse.

108


– Example 3 of the JCT explanation of TRA 2010 contained a

calculation of the DSUE that effectively used the applicable

exclusion amount rather than the basic exclusion amount,

confusing practitioners.

– Treas. Reg. §20.2010-2T(c)(1)(ii)(A) states that Code Sect.

2010(c)(4)’s reference to “basic exclusion amount” should be

read “as if” it stated “applicable exclusion amount” instead.

109


• Effect of gift taxes paid and payable on the DSUE

• Treas. Reg. §20.2010-2T(c)(2) provides that amounts on which

gift taxes were paid by a decedent are excluded from adjusted

taxable gifts, for the purpose of computing the DSUE.

» Example: Married decedent made a $2,000,000 gift

in 2009 and paid gift tax on the excess over

$1,000,000. Decedent dies in 2012, when the

federal exemption is $5,120,000. Surviving spouse’s

DSUE is $5,120,000 - $1,000,000 (not $2,000,000)

= $4,120,000.

110


• When the DSUE is available to the surviving spouse

• Treas. Reg. §§20.2010-3T(c)(1) and 25.2505-2T(d)(1)

provide that the DSUE is available to the surviving spouse

immediately after the death of the deceased spouse.

• If the portability election is made but then revised/superseded, it

could present an issue as to who makes a large gift immediately

following the deceased spouse’s death.

111


• Last deceased spouse limitation

• Treas. Reg. §§20.2010-3T(a)(3) clarifies that remarriage alone does not affect who will be considered the last surviving spouse and does not prevent the surviving spouse from including in the surviving spouse’s applicable exclusion amount the DSUE of the deceased spouse who most recently preceded the surviving spouse in death.

• While the applicable credit amount for gift tax purposes under Code Sect. 2505(a)(1) is the credit in effect under Sect. 2010(c) that would apply if the donor died as of the end of the calendar year, the identity of the “last deceased spouse” is determined upon the date of the gift (not as of the end of such year). Treas. Reg. §25.2505-2T(a) (see also § 20.2010-3T(a) for a comparable rule for estate tax purposes)

112


• Ordering rule for gifts

• Treas. Reg. §25.2505-2T(b) provides that when a surviving spouse

makes a taxable gift, the DSUE of the last deceased spouse is first

used up before any of the surviving spouse’s basic exclusion

amount is used.

113


• Multiple spouses

– Treas. Reg. §25.2505-2T(c) permits a surviving spouse

to use DSUEs from successive deceased spouses.

– In other words, no “portability recapture”; a surviving

spouse cannot “hoard” DSUEs from multiple spouses for

estate tax purposes, but can use successive DSUEs for

gifting (after the death of each spouse)

» Example: Husband 1 dies married to Wife 1, with a

$1,000,000 DSUE. Wife 1 makes a $1,000,000

taxable gift, using the entire DSUE amount. Wife 1

then marries Husband 2, who dies the next day with

a $5,000,000 DSUE. Wife 2 may make a gift of up to

$10,000,000 tax free (she is not limited to

$10,000,000 total).

114


• Examination of the deceased spouse’s Form 706 upon the death of the

surviving spouse

• Issue: Code Sect. 2010(c)(5)(B) allows the IRS to examine the

returns of the deceased spouse to determine the proper DSUE

available to the surviving spouse. Commentators were concerned

over the scope and effect of such an examination.

• Regs: Treas. Regs. §§20.2001-2T(a), 20.2010-2T(d), 20.2010-

3T(d), 2505-2T(e) provide that the IRS’ examination of a

deceased spouse’s return (i) may result in the adjustment of the

surviving spouse’s DSUE at any time but (ii) may only result in an

assessment of additional tax with respect to the deceased

spouse’s return within the deceased spouse’s period of limitations

under Code Sect. 6501 (generally three years).

115


• The ability of the IRS to examine returns of a deceased

spouse applies to each transfer by the surviving spouse to

which a DSUE is or has been applied. So, the IRS may

examine upon the filing of a Form 709 by the surviving

spouse or Form 706 by the surviving spouse’s estate.

• The Code Sect. 6501 statute of limitations for assessment

of a tax on the surviving spouse’s return is not extended by

virtue of the IRS’ ability to examine the returns of deceased

spouses.

116


• Non-residents who are not citizens

• Treas. Regs. §§ 0.2010-3T(e) and 25.2505-2T(f) provide that a

non-resident surviving spouse who was not a citizen of the U.S. at

the time of such surviving spouse’s death may not take into account

the DSUE of any deceased spouse of such surviving spouse, except

to the extent allowed under a treaty obligation of the U.S.

117


• Portability and property passing into a QDOT

• Treas. Reg. §§20.2010-2T(c)(4) provide that the executor of a decedent’s estate claiming a marital deduction for property passing to a QDOT shall calculate the decedent’s DSUE on a preliminary basis for purposes of electing portability. However, this amount will decrease as distributions are made from the QDOT, and additional estate tax is payable by the decedent’s estate under Code Sect. 2056A.

• Treas. Reg. §§20.2010-3T(c)(2) provide that the earliest date that a DSUE may be included in determining a surviving spouse’s applicable exclusion amount is the date of the event that triggers the final estate tax liability of the decedent under Code Sect. 2056A.

118


• As such, the decedent’s DSUE will generally be available for

transfers occurring by reason of the surviving spouse’s death, but

not available to the surviving spouse during his/her lifetime (unless

the QDOT is terminated during the surviving spouse’s lifetime).

119

IMPACTS OF STATE LAWS AND DEATH TAXES, WILLS AND TRUSTS


State Estate Tax History

I. Before the EGTRRA, states were following the federal estate

tax, and they had a death tax credit carved out of the

federal estate tax reported on Line 15 of the Form 706.

However, their due dates and filing requirements may have

been different.

II. The death tax credit has been replaced with a deduction that

is reported on Line 3b of the Form 706.

III. The American Taxpayer Relief Act of 2012 made the deduction

permanent.

121

Decoupling States

Some states have refused to see their income reduce and have

decoupled from the federal estate tax.

I. Separate estate tax for three states:

A. Connecticut ($2 M)

B. Oregon ($1 M)

C. Washington ($2M)

122

Decoupling States (Cont.)

II. Pick-up tax for 10 jurisdictions:

II. $5 million: Delaware, North Carolina

III. $2 Million: Maine

IV. $1 million: District of Columbia, Maryland, Massachusetts,

Minnesota, New York

V. Other: New Jersey ($675,000), Rhode Island ($910,725)

III. Modified pick-up tax for: Hawaii ($5 M), Illinois ($4 M),

Vermont ($2.75 M)

123

Decoupling States (Cont.)

IV. Inheritance tax: Indiana, Iowa, Kentucky, Maryland, Nebraska

(county), New Jersey, Tennessee

124

Impacts Of Decoupling

• Old tax clauses may result in state estate tax due.

• QDT may not be available.

• Maryland state system

125

FREQUENT ESTATE TAX AUDIT RED FLAGS


Audit Red Flags

• Real estate valuation issues

• Family limited partnership discount issues

• Limited liability company discount Issues

• Closely held corporation discount issues

• Terminating notes on death of decedents

(self-canceling installment notes)

• Lifetime gifts and transfers

• Expenses of administration

128

NON-RESIDENT/NON-CITIZEN, AND NON-CITIZEN 706 ISSUES


Non-Citizen Residents

• General rule

― Estate tax applies on all U.S. situs assets.

― Exemption of $5M

130

Non-Citizen Spouse

• Joint property

― ERTA does not apply.

― The Economic Recovery Tax Act (ERTA) of 1976 created

a presumption for couples that joint property or

properties held as tenant by the entirety are owned

50% by each spouse. This is an irrefutable presumption

but for properties acquired before the ERTA. See IRC

Sect. 2040 (b)

― IRS assumption that deceased owns 100% of the joint

property

― Non-citizen spouse has to prove his/her contribution.

131

Non-Citizen Spouse (Cont.)

• The Economic Recovery Tax Act (ERTA) of 1976 has created an

unlimited marital deduction.

• This presumption does not apply to non-U.S. citizen spouse.

The underlying purpose of this exception for a non-U.S. citizen

spouse was the concerns that a non-U.S. citizen spouse may

transfer the assets overseas prior to her/his death and/or

move permanently to her/his country of origin. Therefore, the

IRS could not collect the tax on the death of the surviving

spouse.

132

Non-Citizen Residents

• Unlimited marital deduction

― Does not apply to the non-U.S. citizen spouse

― Non-U.S. citizen spouse can qualify if he/she becomes

citizen before filing the tax return and/or if the assets are

held in a QDOT trust.

133

QDT Trust

• Even when the decedent’s spouse estate planning does not

provide for the creation of a QDT trust, the surviving spouse

can request to the IRS the creation of such a trust.

• Minimum requirements:

― All income to be paid to the surviving spouse for life

― No principal distributions to anyone other than the

surviving spouse during his/her life

― At least one U.S. trustee, and the trustee(s) must have the

power to withhold estate tax on any such distribution

134

QDT (Cont.)

• For trusts over $2M, a U.S. institutional trustee or a bond or a

letter of credit

― $600K of real property exemption to determine the

bond/LoC amount

• For trusts under $2M, if over 65% of assets in offshore real

property, a U.S. institutional trustee, posting of a bond or LoC

equal to 65% of the initial value of the trust assets

135

QDT (Cont.)

• Consequences of the QDT

― Distribution of principal during the life of the surviving spouse

― Except for distribution of hardship, subject to estate tax at

the top bracket of the deceased spouse

― Postponement of estate tax only

― The remaining principal in the trust on the death of the

second spouse will also be subject to estate tax in the

estate of the first spouse.

― On the death of the second spouse, the estate tax return of

the first spouse needs to be reopened.

― The trust assets will be taxed at the rate in existence at the

time of the first spouse’s death.

136

QDT (Cont.)

• Termination of the QDT:

― Becoming a US citizen

― Watch to distributions of principal

― At the death of the surviving spouse

137

Citizen Non-Residents

• Transfer certificate requirements

― Not required for U.S. assets administered by a U.S. executor

― Part A: If the value of the taxable assets in the U.S. exceeds $60,000,

you need to file IRS Form 706-NA (Special rules for 2010 see

IRS notice2011-66):

― List on Schedule A only the assets located in the U.S.

― Documents to be sent to Department of the Treasury, Internal

Revenue Service Center, Cincinnati, OH 45999

― Part B: If the value of the taxable assets in the US is equal or less than

$60,000:

― Documents to be sent to Department of the Treasury, Internal

Revenue Service, STOP 824G, Cincinnati, OH 45999

― Do not use From 706-NA

138

Citizen Non-Residents (Cont.)

Part B documents required:

• Copies of the decedent's last will and testament along with any

codicils; please include English translations if in another language

• One copy of each death tax or inheritance tax return and any

corrective statements filed with taxing authorities other than the

U.S.; please include English translations if in another language

• One copy of the decedent's death certificate; pease include English

translation if in another language

• An affidavit, which is a written declaration made under oath before a

notary public or other comparable local official. The affidavit may be

in the form of a letter.It must be signed by the executor,

administrator, or other personal representative of the estate and

include all of the following items:

139

Citizen Non-Residents (Cont.)

― The decedent's date and country of birth

― The date of the decedent's naturalization as a U.S. citizen, or a

statement that the decedent had never become a naturalized

U.S. citizen

― A list of all the decedent's U.S. assets in which the decedent had

any interest at the date of death (whatever may be their legal

situs for U.S. estate tax purposes) and their values at the

decedent's date of death; for any U.S. bank or investment

account, please include the account number

― The decedent's citizenship and residence at the date of death

― Whether any of the decedent's U.S. bank accounts were used in

connection with a trade or business in the U.S.

140

U.S. Expatriates

• Definition: Person who within 10 years before the date of

death lost U.S. citizenship or ended long-term US residency,

with the principal purpose of avoiding U.S. taxes

• Look at the dates: If after June 17, 2008, they are not

considered U.S. expatriate for the purpose of 706-NA

141

Non-Citizen Non-Resident

• General rule

― Estate tax applies on all U.S. situs assets

― Exemption of $60,000

― Estate tax assessed at the same rate as for U.S. citizens

― Unlimited marital deduction available under conditions

― Charitable deduction available only for bequests to U.S.

charities

142

Non-Citizen Non-Resident (Cont.)

• U.S. situs assets Include:

― Real estate property situated in the U.S., including houses

and condominiums

― Tangible personal property situated in the U.S. (jewelry,

antiques, artworks, cars)

― Shares of stock of U.S. corporations

― Cash deposits with U.S. brokers, money markets in U.S.

mutual funds, and cash in deposit boxes

143

Non-Citizen Non-Resident Filing Requirements

• Must file Form 706-NA with tax return

― Form 706-NA: U.S. estate (and generation-skipping

transfer) tax return

• Form 706-NA

― “Foreigner” designation

• If there is a bilateral fiscal treaty, file IRS Form 8833 with tax

return

― Form 8833: Treaty-based return position fisclosure Under

sections 6114 or 7701(b)

― Explain briefly treaty based return position taken

144

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Transcript of Form 706 Compliance Issues for Estatesmedia.straffordpub.com/products/form-706-compliance... ·...