Estate Tax Legislation 


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    UPDATE: Inherited IRAs Ruled Not Retirement Funds (June 2014)
    The U.S. Supreme Court held that moneys in an inherited IRA do not qualify as retirement funds for purposes of the Bankruptcy Code provision that exempts retirement funds from a debtor’s bankruptcy estate. Although traditional retirement accounts, such as IRAs or Roth IRAs, are included in the definition of “retirement funds” excluded from a bankruptcy estate, inherited IRAs are not because they do not operate as retirement accounts. The Supreme Court pointed to three legal characteristics of inherited IRAs in their ruling: inherited IRA owners may not make additional contributions to the account, owners must withdraw funds from their accounts, regardless of how many years they are from retirement, and owners are not subject to any age-related penalties for withdrawals from their accounts. Read more from the Journal of Accountancy. Listen to 2 podcasts from Bob Keebler on the background of the Clark decision and understanding asset protection and income tax planning after the decision.

    UPDATE: Final Regulations Issued on Trust and Estate Investment Expenses (May 2014)
    The IRS issued final regulations on the controversial question of which costs incurred by trust and estates are subject to the 2% floor on miscellaneous deductions under Sec. 67(a) (T.D. 9664). The regulations will apply to tax years beginning on or after May 9, 2014. Despite objections from the AICPA and other commentators, the final regulations retain from the proposed rules a requirement that certain fees be unbundled.

    The regulations finalize proposed rules (with a few modifications in response to comments) issued in September 2011 (REG-128224-06) in response to the U.S. Supreme Court’s decision in Knight, 552 U.S. 181 (2008), on the income tax deductibility by estates and nongrantor trusts of investment advisory and other fees. One significant change was the addition of appraisal fees to the category of costs that are fully deductible if they are needed to determine the value of property as of the decedent’s date of death (or the alternate valuation date), to determine value for purposes of making distributions, or to properly prepare the estate or trust’s tax returns. Read more from the Journal of Accountancy.

    UPDATE: IRS Automatically Extends Filing for Certain Estates Electing Portability (January 2014)
    The IRS released Revenue Procedure 2014-18, providing an automatic extension for certain estates of decedents dying in 2011, 2012 and 2013 to elect portability. The extension applies to estates that would otherwise not have had a filing requirement, and allows the estates to file a return to elect portability until December 31, 2014. It includes the estates of same-sex decedents who were not eligible to elect portability until after the Windsor decision.

    UPDATE: Deadline for 2013 Trust Distributions is March 6, 2014 (January 2014)
    Beginning in 2013, the 3.8% net investment income tax (NIIT) is effective for trusts with undistributed net income in excess of $11,950. In addition, trusts reach the highest income bracket of 39.6% at $11,950 of taxable income. The threshold for regular tax rates and the NIIT is much higher for individuals (NIIT becomes effective at $200,000 of AGI for single filers; $250,000 of AGI for married persons filing jointly; and $1250,000 of AGI for married persons filing separately); therefore, trusts should consider distributing more income to individual beneficiaries to reduce the overall tax impact. Trusts have 65 days after year-end (March 6, 2014) to make distributions for the 2013 tax year.

    ADVOCACY: AICPA Comments on Medicare Surtax for Trusts and Estates (May 2013)
    On May 8th, the AICPA submitted comments to the IRS on the proposed regulations under Section 1411, regarding the Medicare Surtax as relevant to trusts and estates. Section 1411 imposes a tax on unearned income on investments of certain individuals, estates, and trusts, whose income is above the statutory threshold amounts. The AICPA comments recommended that the final regulations address specifics in connection with the exemption from Section 1411 tax for certain types of trusts, computation of DNI in examples 1 and 2, computation of tax for electing small business trusts, charitable remainder trusts, allocation of state and local taxes, other appropriate deductions, treatment of capital gains as part of trust distribution and foreign trusts and estates.

    UPDATE: Draft Instructions to Form 706 Posted (September 2012)
    On September 12, the IRS posted draft instructions to Form 706. A draft version of Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, was posted on August 17. The draft form for the first time addresses portability of a deceased spouse’s unused estate and gift tax exclusion (DSUE) amount and provides a check box for the executor to opt out of electing portability of the unused portion. The draft instructions provide more guidance for electing the portability of a DSUE amount and for the executor’s use of the check box to opt out of electing portability of the unused portion of the exclusion amount. Read more from the Journal of Accountancy.

    ADVOCACY: AICPA Requests Permanent Extension of the Portability Relief (September 2012)
    On September 14, the AICPA submitted comments to IRS on the proposed regulations regarding portability of the deceased spousal unused exclusion (DSUE) amount. In the comments, AICPA requested:

    • Permanent extension of the temporary relief in Notice 2012-21,
    • A short Form 706-EZ to make the portability election, and
    • That a surviving spouse should be able to file for portability if the executor does not.

    The AICPA appreciated the guidance and said it was hopeful that Congress will permanently extend the portability rules to allow taxpayers and practitioners to rely on the rules in spousal estate planning.  In addition, the AICPA is hopeful that Congress will allow the generation-skipping transfer (GST) tax exemption to be portable between spouses.  

    UPDATE: Advice for Dealing with Section 754 Elections for 2010 Estates Electing Carryover Basis (September 2012)
    The AICPA continues to hear from members interested in the section 754 election and section 743 adjustment issues with regard to the carryover basis election.

    Last September, the AICPA requested guidance on whether the basis adjustment under section 743 is available upon the death of a partner if the estate of the partner elects out of the estate tax and applies the carryover basis rules to the assets of the estate. The Trust, Estate and Gift Tax Technical Resource Panel (TRP) also raised this issue with government officials last fall and the response was that no more carryover basis guidance was forthcoming.

    Although no official guidance has been issued, the AICPA Tax Division recently shared information learned through discussions with government officials. To learn more, view the September 7th Tax E-Alert.

    Leg/Reg Update: Draft Form 706 Provides Check Box to Not Elect Portability (August 2012)
    The IRS posted a draft version of Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, on August 17. The draft form for the first time addresses portability of a deceased spouse’s unused estate and gift tax exclusion (DSUE) amount and provides a check box for the executor to opt out of electing portability of the unused portion. Draft instructions have not yet been posted. Read more about the draft form from the Journal of Accountancy.

    As a reminder, the portability rules enacted in the 2010 Tax Act allow married spouses to benefit from the unused portion of the $5 million exemption when the death of the first spouse occurs either in 2011 or 2012. A timely filed Form 706 is required to elect portability even if the estate is below the $5 million exemption amount and no tax is due. In the event that in the estate fails to file a federal estate tax return, any excess applicable exemption amount is lost and unavailable at the death of the surviving spouse. It is important for taxpayers and practitioners to know this when the first spouse dies and consider filing an extension (Form 4768) or Form 706 before the nine months from date of death filing deadline. It is critical that you educate clients where relevant and document to protect yourself.

    In June, the IRS issued temporary and proposed regulations that provide guidance on the estate and gift tax applicable exclusion amount and portability. The temporary regulations included guidance on the requirements for electing portability of a DSUE amount to the surviving spouse and guidance on the rules for the surviving spouse's use of this DSUE amount. To make this requirement easier for estates that are not required to file a return under Sec. 6018(a), the regulations permit the executor to estimate the gross value of the estate based on a good faith determination of the value of the estate’s assets. Read more on these regulations from the Journal of Accountancy.

    See the AICPA portability resource page for more information and resources regarding portability.

    ADVOCACY: AICPA Submits Comments to IRS on Transfers from Irrevocable Trusts (June 2012)
    The AICPA responded June 26, 2012 to an Internal Revenue Service request for comments, Notice 2011-101, about when transfers of principal from one irrevocable trust to another irrevocable trust should not be treated as having an income, gift, estate and/or generation-skipping transfer tax consequence.  Such transfers are often referred to as “decanting.”  The Treasury Department and the IRS are studying the tax implications of such transfers, when there is a change in the beneficial interests in the trust, in order to provide guidance to taxpayers.

    The AICPA said its comments address relevant federal income tax, gift tax, estate tax and generation-skipping transfer tax issues, as well as certain foreign trust aspects of decanting, as requested in the IRS notice.  The AICPA noted that some states have enacted decanting statutes, but said its letter does not compare or contrast the respective state decanting statutes, nor does it address the effect of state law or the absence of state law as it relates to a decanting action.

    UPDATE: IRS Issued Guidance on Estate Tax Exemption Portability (June 2012)
    IRS recently issued temporary regulations and proposed that provide guidance on the estate and gift tax applicable exclusion amount and portability. The temporary regulations included guidance on the requirements for electing portability of a deceased spousal unused exclusion (DSUE) amount to the surviving spouse and guidance on the rules for the surviving spouse's use of this DSUE amount. The portability rules enacted in the 2010 Tax Act allow married spouses to benefit from the unused portion of the $5 million exemption when the death of the first spouse occurs either in 2011 or 2012. A timely filed Form 706 is required to elect portability even if the estate is below the $5 million exemption amount and no tax is due. It is important for taxpayers and practitioners to know this when the first spouse dies and consider filing an extension (Form 4768) or Form 706 before the nine months from date of death filing deadline. Read more from the Journal of Accountancy. See the AICPA portability resource page for more information and resources regarding portability.

    ADVOCACY: AICPA Submits Written Testimony for “Planning for the Death Tax: Can Small Businesses Survive?” Hearing (June 2012)
    As Congress considers various issues and alternatives with regard to small businesses and individuals and the estate tax system, the AICPA has encouraged Congress to make permanent changes to the estate tax as soon as possible, and well before the current rules expire on December 31, 2012, in order to provide certainty to taxpayers in planning their affairs.

    The uncertainty of the tax law impedes proper estate planning for taxpayers, and the necessity to revise estate planning documents multiple times places an undue burden on taxpayers and their advisors. In addition, if no Congressional action is taken, on January 1, 2013, the 2001 legislation will sunset, which will create turmoil for gifts to multigenerational trusts to which GST exemption was allocated between 2001 and 2012.

    The AICPA outlined in its testimony the estate tax reforms it believes are most important and noted it first urged Congress to make many of the reforms in 2001 as part of the AICPA’s Study on Reform of the Estate and Gift Tax System.  It also brought the proposed reforms to the attention of Congress in 2005, 2006 and 2011.

    The written testimony was submitted June 8, 2012 to the House Small Business Committee’s Subcommittee on Economic Growth, Tax and Capital Access for the record of the Subcommittee’s May 31, 2012 hearing entitled “Planning for the Death Tax:  Can Small Businesses Survive?”.

    ADVOCACY: AICPA Suggests a Full Deduction for Administration Costs of Estates and Trusts (May 2012)
    On May 2, the AICPA submitted a legislative proposal to Congress to amend Internal Revenue Code section 67(e) to simplify the law and allow estates and nongrantor trusts to fully deduct the cost of complying with fiduciary duties in administering estates and trusts. The current law denies a deduction for the cost of complying with many fiduciary duties to the extent that their aggregate cost does not exceed 2 percent of the taxpayer’s adjusted gross income. The AICPA believes the proposed amendment would:

    • simplify the statute,
    • modernize it for the prudent investor rule,
    • make it easier to administer, and
    • provide a consistent definition of AGI for estates and nongrantor trusts throughout the Internal Revenue Code.

    Additional AICPA comments and guidance on this issue are available.

    ADVOCACY:  AICPA Submits Comments on Estate Tax Election to Use the Alternate Valuation Method (February 2012)
    The AICPA submitted comments in response to November 2011 proposed regulations regarding guidance for estates on the election to use the alternate valuation method under Internal Revenue Code section 2032.   These comments supplement AICPA prior comments (submitted August 1, 2008) on this subject.

    The AICPA urges the Service and Treasury to consider our comments and recommendation to provide a blanket exception for any action taken by a publicly-traded entity and, for interests in non-publicly-traded entities, limit the prohibition on valuation adjustments to just those adjustments resulting from actions within the control of the decedent’s executor.  If that is not possible, then the AICPA urges adoption of a rule that would disregard a change in ownership or change in entity structure during the six-month alternate valuation period only if the change is undertaken primarily to reduce the value of an estate asset.

    UPDATE: Administration’s Budget Proposal Includes Change to Tax Treatment/Estate Planning with IDGTs (February 2012)
    Among the various estate tax proposals in the recently released President’s fiscal year 2013 budget proposal and Treasury explanation, is a new proposal that could alter estate planning techniques and benefits with intentionally defective grantor trusts (IDGTs). The assets in these trusts would be included in the estate of the grantor at death.  The proposal is being considered in order to coordinate certain income and transfer tax rules applicable to grantor trusts.  Under the proposal, when a transfer is made to a grantor trust, the gift tax would be applicable when there is a distribution from the grantor trust or when the trust ceases to be a grantor trust.  To the extent not yet distributed, any amount in the grantor trust at the date of the grantor’s death would be subject to estate tax.  This would eliminate the transfer tax benefits of sales to IDGTs. See the AICPA Estate Tax Budget Proposal Webpage for more information.

    UPDATE:  Extension of Time to Make Portability Election in Certain Circumstances (February 2012)
    On February 17, the IRS announced an extension of the deadline for certain 2011 estates to make a portability election to pass along a decedent’s unused estate and gift tax exclusion amount to their surviving spouse. Notice 2012-21 provides an extension to estates of married individuals with assets of $5 million or less, but only if the decedent died in the first six months of 2011, and the executor files Form 4768 requesting an extension no later than 15 months after the decedent's date of death.   The extra time is available to an estate even if the estate did not request an automatic six-month filing extension on Form 4768 prior to the regular nine-month filing deadline. As a result, these estates will now have until 15 months after the date of death, rather than the usual nine months, to make the election by filing an estate tax return on Form 706. Thus, the first estate tax returns for estates eligible to make the portability election (because the date of death is after Dec. 31, 2010) are now due on Monday, April 2, 2012. Affected estates should submit both a properly-prepared Form 4768 and Form 706 to the IRS no later than 15 months after the decedent’s date of death. Read more from the Journal of Accountancy.

    UPDATE: If Form 706 is Not Timely Filed, Portability Election May Still Be Possible (February 2012)
    IRS Procedure for Requesting 6-Month Extension to File Estate Tax Return in Effort to Make Portability Election if Form 706 Not Timely Filed Explained
    Beginning on January 1, 2011, the Internal Revenue Code provides for portability of the estate tax exemption between spouses.  According to issued guidance so far from the IRS (Notice 2011-82 and IR-2011-97), to claim the benefit of portability, a timely filed Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return, is required.  If the estate tax return is not timely filed, the guidance provides that the surviving spouse will not be able to claim the benefit of portability.

    There is a procedure under section Treas. Reg. § 20.6081-1(c) that permits an estate, upon showing good cause, to seek a 6-month extension of time to file the estate tax return.  Under this procedure, an estate is to file Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes.  Form 4768 must contain a detailed explanation of why it is impossible or impractical to file a reasonably complete estate tax return by the due date and an explanation showing good cause for not requesting the automatic extension of time to file the return.  Section 20.6081-1(c) provides that Form 4768 should be filed sufficiently early to permit the IRS time to consider the matter and reply before what otherwise would be the due date of the return.  The instructions to Form 4768 provide that if the estate has not filed an application for an automatic extension and the time for filing such application has passed, the estate should file Form 4768 as soon as possible.  It may be worth considering requesting a 6-month extension of time to file the estate tax return if you missed filing the return in time and would like to try to obtain the benefit of portability for the surviving spouse.

    ADVOCACY: AICPA Suggests Consistent Treatment of Estate and Trust Federal Tax Payments (January 2012)
    In a letter to the Senate Committee on Finance and the House Committee on Ways and Means, dated January 12, the AICPA suggested Congress pass legislation that treats all federal tax payments of trusts and estates, including estimated tax payments, backup withholding and regular withholding, consistently. Currently, the ability of a trust or estate to allocate its tax payments to its beneficiaries is different for each, which becomes confusing and unnecessarily complex to taxpayers and tax practitioners. Read the comment letter for more information, including details of the AICPA’s proposal.

    REMINDER: Form 8939 to Elect Carryover Basis for 2010 Deaths Due Jan. 17
    Form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent, for decedents dying between December 31, 2009 and January 1, 2011 is due on January 17, 2012. Practitioners are reminded of the critical decision that needs to be made by January 17 as to whether the estate wants to elect carryover basis (on the Form 8939) and have no estate tax apply, or file a Form 706 for the estate to be subject to the estate tax (with a $5 million exemption and stepped up basis applicable). Form 706 is due by March 19, 2012, assuming a Form 4768 extension was filed by the September 19, 2011 deadline.  The AICPA and PFP Division have several resources to help PFP/PFS members analyze the decision.

    • Leimberg Information Services, Inc. shares a 60 Second Planner with Bob Keebler covering how to handle property that has been sold through the administration of the estate
    • Download a decision chart from Bob Keebler;
    • Read a blog post or listen to an audio stream with Bob Keebler (“New Estate Planning Guidance for Decedents Passing in 2010”);
    • Visit the 2010 Deaths and Carryover Basis Resource Page, with links to the IRS guidance, AICPA webinars, Tax Adviser articles, and updates. 

    UPDATE: AICPA Comments on Trust Investment Expenses  (December 2011)
    The AICPA submitted comments to the IRS, urging the agency to consider our comments and recommendations to achieve our mutual goal of consistency with the Supreme Court’s interpretation of section 67(e) in Knight v. Commissioner. The AICPA continues to believe that the regulations should not include an unbundling requirement; however, if the final regulations require unbundling, we encourage them to continue to allow any reasonable method to be used for allocating expenses.

    The AICPA also requested that the final regulations omit the provision that defines “commonly incurred costs” as those that do not depend on the identity of the payor. The examples of ownership costs should be corrected to remove non-miscellaneous itemized deductions such as partnership costs other than certain portfolio costs included in Code K on Form 1065 Schedule K-1, Line 13. 

    The AICPA also recommended that the cost of preparing the decedent’s gift tax returns be included in the list of tax return preparation costs not subject to the 2 percent floor. The cost of preparing other individual income tax returns, gift tax returns, and tax returns for a sole proprietorship or a retirement plan should also not be subject to the 2 percent floor.

    UPDATE: IRS Releases Revised Proposed Regulations on Alternate Valuations for Estates  (December 2011)
    The IRS released revised proposed regulations replacing the prior April 2008 proposed regulations due to comments (including AICPA’s) regarding alternate valuations for estates - allowing estates to use a beneficial six-month alternate valuation date more broadly.  

    These regulations concern the election to use the alternative valuation method by estates that experience a reduction in the value of the gross estate following the date of the decedent’s death due to market conditions—but not due to other post-death events. The proposed regulations would amend existing regulations to define “market conditions” and “post-death events” and provide examples.

    The revised regulations are more precise than the previous proposed regulations – more focused on which transactions are required to use the transaction date as opposed to the six-month date. The new proposed regulations will apply after they are published as final regulations.

    ADOCACY: AICPA Comments to Congress on Estate Tax Suggestions (November 2011)
    On November 18, AICPA submitted to Congress suggestions for making permanent estate tax and GST (generation-skipping transfer) tax provisions.  The AICPA urged prompt action to enact permanent gift, estate and GST tax provisions and thus provide needed certainty to taxpayers in planning their affairs.  In addition, the AICPA requested that when Congress makes these provisions permanent (especially the non-controversial GST tax technical modifications), Congress also includes other needed technical changes to permit administrative relief (i.e., granting the Internal Revenue Service (IRS) permission to grant section 9100 relief) for certain late or defective lifetime (i.e., inter vivos) qualified terminable interest property (QTIP) elections and for late elections by certain qualified revocable trusts (QRTs) to be treated as part of a decedent’s estate.  

    UPDATE: IRS Releases Draft 2011 Gift and GST Tax Forms (November 2011)
    The IRS has released draft gift tax return (Form 709) and instructions for 2011.  Draft forms and instructions for distributions and terminations subject to the GST tax (Forms 706-GS(D) and 706-GS(T)) in calendar years after 2010 have also been released. Download draft forms on the IRS web site.

    The forms have been updated where applicable to reflect the $5 million gift and GST tax exemption amounts and top 35% rates for 2011. Further, the draft Form 709 and the instructions incorporate the potential deceased spousal unused exclusion amount (“DSUEA”) in the gift tax computation. A surviving spouse of a 2011 decedent whose estate made a portability election and filed a complete and timely Form 706 can use the DSUEA. Read more about the portability election at aicpa.org/PFP/advocacy.

    UPDATE: Proposed Legislation Would Restore Estate Tax Rates to Pre-2011 Levels (November 2011)
    On November 17, Representative Jim McDermott (D-WA), a senior member of the House Ways and Means Committee, introduced HR 3467, the “Sensible Estate Tax Act of 2011,” that would change the estate-tax structure.

    Among other changes, the bill would return tax rates on estates of decedents dying after December 31, 2012 to pre-2001 levels of up to 55% with exclusions of $1 million for individuals and $2 million for married couples. Further, it would extend and make portability permanent, restore the credit for state death taxes paid, impose GRAT restrictions (including a 10 year minimum term), impose a consistency and a basis reporting requirement, modify rules on valuation discounts and minority interest discounts, and limit the GST tax exemption duration to 90 years after the establishment of a trust. Read the proposed legislation.

    UPDATE: Download Updated Decision Chart on the 2010 Estate Tax Election (November 2011)
    Download an updated decision chart from Bob Keebler, which will help you analyze whether or not to make the 2010 election not to incur the federal estate tax. The latest version of this chart reflects the final due dates for Form 8939 and references Notices and Revenue Procedures.

    UPDATE: Final Regs Clarify Estate Tax Treatment of Grantor Retained Interests (November 2011)
    On November 7th, the IRS issued final regulations providing guidance on the portion of property (held in trust or otherwise) includible in the grantor’s gross estate if the grantor has retained the use of the property or the right to an annuity, unitrust, graduated retained interest, or other payment from the property for life, for any period not ascertainable without reference to the grantor’s death, or for a period that does not in fact end before the grantor’s death. Read more from the Journal of Accountancy.

    UPDATE: Filing Protective Claim for Refund of Estate Tax (October 2011)
    On October 14th, the IRS released Revenue Procedure 2011-48 providing guidance related to the filing and subsequent resolution of a protective claim for refund of estate tax that is based on a deduction for a claim or expense under section 2053 of the Internal Revenue Code.

    UPDATE: Final 2011 Form 706 Instructions Released (September 2011)
    The 2011 Form 706 and instructions are now available on the IRS website.   The Form 706 is due nine months after the date of death.

    UPDATE: Estates Must File Form 706 to Make Portability Election (September 2011)
    The IRS on September 29th issued Notice 2011-82 to alert executors of 2011 estates of the need to file a Form 706 to make the election to transfer a decedent’s unused $5 million estate and gift tax exclusion to the surviving spouse. In particular, for the executor of a 2011 estate to make a portability (i.e. deceased spouse unused exclusion amount (DSUEA)) election, the executor is required to file a timely Form 706 for the decedent's estate, even if the estate is not otherwise obligated to file a Form 706.

    If a timely return is not filed, any excess exclusion amount is lost forever and is unavailable at the death of the surviving spouse. To avoid falling into this trap, practitioners should discuss with their clients the benefit of filing the federal estate tax return for the first spouse, even if no tax is due. Over the next few weeks and months, it is very important to file extensions (Form 4768) or Form 706 for early 2011 deaths within the nine-month deadline (starting October 3, 2011).

    If the estate files a Form 706 and does not wish to allow the surviving spouse to use the DSUEA, the executor must attach a statement to that effect or write across the top of page 1 of the Form 706 “No Election under Section 2010(c)(5).”  If a Form 706 is not otherwise required to be filed, the failure to file a timely and complete Form 706 will prohibit the surviving spouse’s use of the DSUEA. 

    Decedents intending to use the DSUEA of a predeceased spouse must also follow these new Form 706 instructions - including attaching a copy of the predeceased spouse’s Form 706 and a calculation of the DSUEA. They must also complete Part 4, indicating on the Explanation line (line 3) that the executor of the predeceased spouse elected to allow the decedent to use the DSUEA.  Regardless of whether the decedent uses the DSUEA, if the decedent had more than one marriage, the Form 706 now requires the executor to provide the name and Social Security number of each former spouse and specify whether the marriage ended in annulment, divorce, or death.

    Read more from Journal of Accountancy and the IRS News Release.

    UPDATE: Trustee Fees New Proposed Regulations Issued – Require Unbundling Once Final Regulations Issued (September 2011)
    After years of delay and many AICPA comments, the IRS withdrew the 2007 proposed regulations and issued new proposed regulations (REG-128224-06) regarding tax treatment of trustee fees under Section 67(e). The new regulations describe which costs incurred in connection with the administration of a trust or estate are subject to the miscellaneous itemized deduction 2 percent floor. The newly proposed regs require unbundling of fiduciary fees and commissions. If a “bundled” fee (single fee or commission) is not computed on an hourly basis, the portion attributable to investment advice is subject to the 2 percent floor, while the rest is not. Bundled fees that are computed on an hourly basis (including legal and accounting fees) must be separated between costs subject to the 2 percent floor and those that are not. Any reasonable method can be used to make the allocations. Taxpayers can continue to rely on the interim Notice 2011-37 (issued April 13, 2011) until these newly proposed regulations are issued as final regulations. 

    The IRS is holding a hearing regarding the proposed regulations on December 19th; the AICPA is likely to testify so if you have comments, email them to AICPA Tax Division Senior Technical Manager Eileen Sherr at Esherr@aicpa.org. Since the hearing is at the end of 2011, final regulations will not likely be issued until 2012 and unbundling is not likely to be required in the middle of the year. So it appears that the earliest that trustees will be required to unbundle will be 2013.

    UPDATE: Final Form 706 and Instructions Available for 2010 Decedents; Due Date Postponed (September 2011)
    In light of recent estate tax developments, listen to Bob Keebler’s thoughts on critical issues to think through for 2010 and 2011 estate planning and filings.

    The final Form 706 and instructions were issued September 3rd and 8th, respectively, by the IRS for decedents who died in 2010. For most people who died in 2010, the form and estate tax payment are due September 19th.  The AICPA requested a 90-day postponement of the due date, and on September 13th, the IRS announced filing and penalty relief for 2010 estates.

    Specifically, 2010 estates that request an extension on Form 4768 now have until March 19, 2012 to file their estate tax returns and pay any estate tax. Additionally, Form 8839, the form for estates opting out of the estate tax and into carryover basis will be available later this fall and will be due January 17, 2012. Finally, special penalty relief is provided to many individuals, estates and trusts that already filed a 2010 federal income tax return, or obtained an extension and plan to file by the Oct. 17, 2011 extended due date.

    UPDATE: Portability and the Need to File Federal Estate Tax Returns for Decedents Dying after December 31, 2010  (September 2011)
    Provided by Bob Keebler, CPA, MST
    Most practitioners are aware that the Tax Relief Act of 2010 included a portability provision for the applicable credit amount.  Under this provision, if a spouse dies after 2010 and does not use all of his or her applicable credit amount, the unused portion can be added to the credit amount of the surviving spouse.

    To take advantage of portability, however, the unused credit amount must be transferred from the estate of the first spouse to die to the surviving spouse.   This can only be done by filing an estate tax return (Form 706), even if no tax is due (IRC § 2010(c)(5)). If the return is not filed, any excess credit amount is lost forever and is unavailable at the death of the surviving spouse. To avoid falling into this trap, it is important that practitioners discuss with their clients the benefit of filing the federal estate tax return for the first spouse. 

    ADVOCACY: AICPA Submits Comments on Carryover Basis Guidance (September 2011)
    On September 7th, the AICPA provided comments to the IRS on Notice 2011-66, Method for Making Election to Apply Carryover Basis Treatment under Section 1022 to Estates of Decedents who Died in 2010 and Rules Applicable to Inter Vivos and Testamentary Generation-Skipping Transfers in 2010. The letter requested additional guidance on several issues needing resolution to apply the carryover basis rules appropriately, including the AMT basis issue referenced in the following article from Bob Keebler (originally published by Leimberg Information Services, Inc.). Download an updated decision chart from Bob Keebler, which now includes reference to the AMT carryover basis issue discussed the article.

    UPDATE: Draft 2011 Form 706 Instructions Available (September 2011)
    On September 2nd, the IRS released Draft 2011 Form 706 instructions. The Draft 2011 Form 706 dated August 25th is also live on the IRS’ website. If you have any comments on these drafts, you can submit them on the IRS.gov page titled Comment on Forms and Publications.

    UPDATE: 2010 Form 706 & Guidance for 2010 Decedents (August 2011)
    The 2010 Form 706, U.S. Estate and Generation-Skipping Transfer Tax Return (for decedents dying in 2010), draft form (as of 6/17/11) and draft instructions (as of 8/1/11) were posted by the IRS on August3rd.  The Form 706 and instructions are still in draft form only and are not posted in the official forms area of the IRS website.  AICPA is requesting an extension of the due date for the filing of Form 706 and Form 8929 given the delays in the issuance of the final forms to tax return preparers. Read the letter to the IRS. Also, Notice 2011-66 provides guidance for executors of estates of decedents who died in 2010 regarding the time and manner of choosing to opt out of the estate tax have the carryover basis rules apply. Revenue Procedure 2011-41 provides safe harbor guidance regarding property acquired from estates of decedents who died in 2010.

    UPDATE: Discharge of Indebtedness Rules Clarified for Grantor Trusts and Disregarded Entities (April 2011)
    On April 12th, the IRS proposed rules (Reg-154159-09) governing the application of the discharge of indebtedness rules to grantor trusts and disregarded entities. The proposed regulations generally treat the owner of the grantor trust or disregarded entity as the "taxpayer" for purposes of the IRC § 108 exclusion. The proposed regulations clarify that the insolvency exception is available only to the extent that the owner is insolvent—the insolvency of the grantor trust or disregarded entity itself is not taken into account. Similarly, the proposed regulations clarify that the bankruptcy exception is available only if the owner of the grantor trust or disregarded entity is subject to a bankruptcy court’s jurisdiction—if the grantor trust or disregarded entity is under a bankruptcy court’s jurisdiction and the owner is not, the exception is not available. Click here to read more from Journal of Accountancy.

    UPDATE: IRS Will Not Assess Penalties on Reasonable Estimates of 2010 Carryover Basis Income (April 2011)
    On April 9th, the IRS posted information for individuals who acquired property from a 2010 decedent, advising that those individuals file an extension if based on the estimate of a gain/loss from sales of property acquired from a 2010 decedent. Furthermore, the IRS indicated that they will not assess penalties for reasonable estimates of carryover basis income, however, interest will accrue.

    UPDATE: IRS Provides Interim Guidance on Trustee Fees (April 2011)
    Notice 2011-37 provides interim guidance on the treatment under IRC section 67 of investment advisory costs and other costs subject to the 2-percent floor under section 67(a).  Specifically, this notice provides that, for taxable years beginning before the date that final regulations under §1.67-4 of the Income Tax Regulations are published in the Federal Register, nongrantor trusts and estates will not be required to “unbundle” a fiduciary fee into portions consisting of costs that are fully deductible and costs that are subject to the 2-percent floor.   Click here to read more from the Tax Adviser.

    UPDATE: Deadline Extended for Filing Form 8939 (March 2011)
    The Treasury Department and the IRS announced on March 31st that Form 8939 is not due on April 18, 2011 and should not be filed with the final Form 1040 of persons who died in 2010.  New guidance that announces the form due date will be issued at a later date, and Form 8939 will be released soon after guidance is issued. The prior deadline was April 18, which remains the deadline for filing a decedent’s final Form 1040 this filing season.  The forthcoming guidance will also explain the manner in which an executor of an estate may elect to have the estate tax not apply. A reasonable period of time for preparation and filing will be given between issuance of the guidance and the deadline for filing Form 8939 and for electing to have the estate tax rules not apply. The Form 8939 is not currently available, but will be made available soon after the guidance is issued. Both will be made available on IRS.gov.

    UPDATE: IRS Webpages with New Information on 2010 Estate and Gift Tax Issues (March 2011)
    The IRS recently developed and updated various pages dealing with estate tax, including:

    If you have any clients who died in 2010, you may want to refer to these pages on the IRS website.

    The PFP Division also several archived web seminars and resources to help practitioners with administration of 2010 deaths. Click here to access the seminar recording, presentation materials and supplemental materials from Bob Keebler’s December 14th web seminar “Carryover Basis In-Depth: What CPAs Need To Know About the New Rules.”  Download a decision chart from Bob Keebler to help determine whether or not to elect out of the estate tax and into carryover basis for 2010 decedents.

    UPDATE: Information on Carryover Basis IRS Form 8939 (February 2011)
    We have been informed by IRS officials that IRS Form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent, should be filed separately. It should not be filed with the decedent's final income tax return. Likewise, the election for reduced basis in lieu of paying estate tax will not be made on the decedent's final return; that election will most likely be made simply by filing Form 8939 instead of filing Form 706. Also, we expect Treasury guidance to give everyone an administrative extension of time to file Form 8939 at least until 10/17/2011.

    ADVOCACY: AICPA Requests Interim Guidance for 2010 Regarding Estates and Trusts Investment Management and Advisory Costs (February 2011)
    The AICPA recently submitted a letter to IRS and Treasury, requesting prompt issuance of a Notice for 2010 tax return filings, similar to IRS Notice 2010-32, Notice 2008-116, and Notice 2008-32, which provided interim guidance on section 67 limitations on estates and non-grantor trusts for bundled investment management and advisory costs for 2007, 2008, and 2009 return filings.  Taxpayers and practitioners continue to need similar clarity for preparing their 2010 and future tax returns.

    Practitioners should be aware that although the proposed regulation section 1.67-4 requires the unbundling of trustee fees, the proposed regulations are effective only for payments made after the date final regulations are published in the Federal Register. Therefore, unbundling is not required until and unless the final regulations require such treatment.  AICPA submitted comments to the IRS, noting problems with the proposed regulations and the difficulties involved with the regulations’ unbundling approach.

    UPDATE: Analyzing the 2010 Election Not to Incur the Federal Estate Tax (February 2011)
    The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“the Act”) enacted a $5 million exemption (indexed in 2012) and a 35% estate tax rate for two years effective January 1, 2010 (retroactive). The Act also provided an election for executors of 2010 estates to opt out of the estate tax and into the modified carryover basis regime of IRC Section 1022.  Estates of 2010 decedents have a short window of opportunity to consider staying in the estate tax system or electing into carryover basis. On September 19, 2011 (due to September 17th falling on a Saturday), nine months after the date of enactment of the Act, most estate tax returns for 2010 decedents will be due (unless extended). Download a decision chart from Bob Keebler to help determine whether or not to elect out of the estate tax and into carryover basis for 2010 decedents. Bob has provided a break even formula to help determine whether or not to elect out.

    UPDATE: Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (December 2010)
    On Wednesday, December 15th, the Senate passed the tax compromise package to extend 2001 and 2003 tax cuts by a vote of 81-19 (“The Jobs Creation Act” or “The Act”). The House passed this legislation on Thursday, December 16th by a vote of 277-148, and it was signed into law by President Obama on Friday, December 17th. For a thorough recap of the Act’s provisions, visit the Journal of Accountancy's Congressional Hot Topics Page.

    On Wednesday, December 15th, the Senate passed the tax compromise package to extend 2001 and 2003 tax cuts by a vote of 81-19 (“The Jobs Creation Act” or “The Act”). The House passed this on Thursday, December 16th by a vote of 277-148, and it was signed into law by President Obama on Friday, December 17th.

    Marty Shenkman, CPA/PFS, shares a year-end alert written in client terms that includes urgent points that may affect your planning for the 2010 year, and may require immediate action. 

    ADVOCACY: AICPA Requests Guidance From IRS on Modified Carryover Basis Rules (December 2010)
    The traditional “step-up basis” method, under which heirs were permitted to use the fair market value of the assets at the time of the decedent’s death, was repealed for 2010 by the Economic Growth and Tax Relief Reconciliation Act of 2001 and replaced with carryover basis. With the April 18, 2011 filing deadline rapidly approaching, the AICPA requests that the IRS address a number of issues in its forthcoming related guidance. Read the letter of request here.

    ADVOCACY: AICPA Recommends Administrative Relief for Late QTIP and Section 645 Elections (November 2010)
    The AICPA submitted a letter to Congress recommending administrative relief for late QTIP and section 645 elections.  Furthermore, the letter reminded Congress of the generation-skipping transfer tax (GSTT) technical provisions from EGTRAA 2001 that need to be extended before the end of the year.  A letter was previously sent by the AICPA on September 21st regarding this issue.

    The AICPA submitted a to Congress recommending administrative relief for late QTIP and section 645 elections.  Furthermore, the letter reminded Congress of the generation-skipping transfer tax (GSTT) technical provisions from EGTRAA 2001 that need to be extended before the end of the year.  A was previously sent by the AICPA on September 21st regarding this issue.

    UPDATE: Carryover Basis Resources (October 2010)
    Although the tax treatment for decedents dying in 2010 continues to be uncertain, it is likely that there will be a choice between applying the modified basis rules and using the estate tax rules that applied in 2009.  In a brief, 13 minute podcast, Bob Keebler offers an executive summary of 2010 carryover basis rules. CCH also shares an article written on this topic by Bob that helps in identifying the considerations involved in determining which option makes the most sense based on the client situation.

    Although the tax treatment for decedents dying in 2010 continues to be uncertain, it is likely that there will be a choice between applying the modified basis rules and using the estate tax rules that applied in 2009.  In this brief, 13 minute , Bob Keebler offers an executive summary of 2010 carryover basis rules. CCH also shares an written on this topic by Bob that helps in identifying the considerations involved in determining which option makes the most sense based on the client situation.

    ADVOCACY: AICPA Requests Interim Guidance for 2009 and 2010 Regarding Estates and Trusts Investment Management and Advisory Costs (March 2010)
    The AICPA recently submitted a letter to Treasury, requesting prompt issuance of a Notice for 2009 and 2010 tax return filings, similar to IRS Notice 2008-116 and Notice 2008-32, which provided interim guidance on section 67 limitations on estates and non-grantor trusts for bundled investment management and advisory costs for 2007 and 2008 return filings. Taxpayers and practitioners continue to need similar clarity for preparing their 2009 and 2010 tax returns.

    Practitioners should be aware that although the prop. reg. section 1.67-4 requires the unbundling of trustee fees, the proposed regulations are effective only for payments made after the date final regulations are published in the Federal Register. AICPA submitted comments to the IRS, noting problems with the proposed regulations and the difficulties involved with the regulations’ unbundling approach.

    The AICPA recently submitted a to Treasury, requesting prompt issuance of a Notice for 2009 and 2010 tax return filings, similar to IRS Notice 2008-116 and , which provided interim guidance on section 67 limitations on estates and non-grantor trusts for bundled investment management and advisory costs for 2007 and 2008 return filings. Taxpayers and practitioners continue to need similar clarity for preparing their 2009 and 2010 tax returns. Practitioners should be aware that although the prop. reg. section 1.67-4 requires the unbundling of trustee fees, the proposed regulations are effective only for payments made after the date final regulations are published in the Federal Register. AICPA submitted comments to the IRS, noting problems with the proposed regulations and the difficulties involved with the regulations’ unbundling approach.

    ADVOCACY: AICPA Urges Congress to Act Promptly to Create Certainty on the Estate Tax (January 2010)
    On January 13, 2010, the AICPA sent a letter to Congress, urging prompt action on the estate tax to provide needed certainty to taxpayers. The AICPA sent similar letters to Congress over the past few years and testified on this before the Senate Finance Committee in 2008.

    The AICPA Tax Division, with approval by the PFP Executive Committee, pointed out that the expiration of the estate and generation skipping transfer (GST) taxes at the end of 2009 and the imposition of the carryover basis rules are causing tremendous uncertainty for taxpayers and their advisers. The planning and administration of estates and the administration of the income tax are significantly affected by the undecided future of these transfer taxes. The possibility of re-enactment for 2010, the future of the tax systems for 2011 and beyond and the practical problems of identifying costs that must be considered as part of tax basis for assets distributed from estates created after December 31, 2009 are the most pressing concerns in this area. The AICPA also provided Congress a priority list of suggested reforms of the current estate and gift tax system. Click here to read the AICPA’s letter to Congress.

    On January 13, 2010, the AICPA sent a to Congress, urging prompt action on the estate tax to provide needed certainty to taxpayers. The AICPA sent similar letters to Congress over the past few years and testified on this before the Senate Finance Committee in 2008. The AICPA Tax Division, with approval by the PFP Executive Committee, pointed out that the expiration of the estate and generation skipping transfer (GST) taxes at the end of 2009 and the imposition of the carryover basis rules are causing tremendous uncertainty for taxpayers and their advisers. The planning and administration of estates and the administration of the income tax are significantly affected by the undecided future of these transfer taxes. The possibility of re-enactment for 2010, the future of the tax systems for 2011 and beyond and the practical problems of identifying costs that must be considered as part of tax basis for assets distributed from estates created after December 31, 2009 are the most pressing concerns in this area. The AICPA also provided Congress a priority list of suggested reforms of the current estate and gift tax system. to read the AICPA’s letter to Congress.

     




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