Recent developments in estate planning: Part 3

Contributors: Members of the Ernst & Young LLP National Tax Department in Private Tax

This article is the third installment of an annual update on recent developments in trust, estate, and gift taxation. The first two installments appeared in the November and December issues, respectively. The update covers developments in estate and gift tax returns and planning during July 2021 through July 2022.

Generation-skipping transfer tax

Automatic allocation of GST exemption to GST trust allowed

In IRS Letter Ruling 202210010 released on March 11, 2022, the IRS ruled that an individual’s generation-skipping transfer (GST) exemption was automatically allocated to a transfer to a trust even though the individual improperly reported the transfer on her gift tax return.

The taxpayer established an irrevocable trust for the benefit of her descendants. During the taxpayer’s lifetime, the trustee could distribute the income and principal of the trust to her descendants in the trustee’s discretion to provide for their health, education, maintenance, and support. Upon the taxpayer’s death, the trust would divide into separate shares for the benefit of each of her children and his or her descendants. During each child’s life, the trustee could distribute principal and income in the trustee’s discretion to the child and his or her descendants to provide for their health, education, maintenance, and support.

At the death of a child, he or she would have a limited power to appoint the remainder of his or her trust to any person or entity other than the child’s estate, the child’s creditors, or the creditors of the child’s estate. Each child also would have a general power to appoint to the creditors of his or her estate an amount with a value equal to the greatest amount that produces the lowest sum of: (1) the transfer taxes payable with respect to the child’s estate and (2) the GST tax payable with respect to the trust. Any unappointed assets of a child’s separate trust would continue in trust for the benefit of his or her descendants.

The taxpayer transferred nonvoting partnership units in a limited partnership to the trust. The taxpayer reported the transfers to the trust on her Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, for the year of the transfers. However, the transfers to the trust were incorrectly reported on Form 709, Schedule A, Part 1, Gifts Subject Only to Gift Tax, instead of on Schedule A, Part 3, Indirect Skips and Other Transfers in Trust. Furthermore, the automatic allocation of the GST exemption was not reported on Schedule D, Computation of Generation-Skipping Transfer Tax.

The taxpayer requested a ruling that GST exemption was automatically allocated to the transfers of the partnership units.

The IRS first addressed whether the trust was a “GST trust” to which GST exemption is automatically allocated. Sec. 2632(c)(3)(B) defines a “GST trust” as a trust that could have a generationskipping transfer with respect to the transferor. However, this provision also lists six exceptions to the definition. In particular, Sec. 2632(c)(3)(B)(ii) provides an exception if more than 25% of the trust corpus must be distributed to, or may be withdrawn by, nonskip persons who are living on the date of death of another person identified in the trust who is more than 10 years older than such person. Sec. 2632(c)(3)(B)(iii) provides an exception if the trust instrument provides that if one or more skip persons die on or before a date described in Sec. 2632(c)(3)(B)(ii), more than 25% of the trust corpus either must be distributed to the estate or estates of one or more of such individuals or is subject to a general power of appointment exercisable by one or more such persons.

The IRS concluded that more than 25% of the trust would be subject to a general power of appointment held by the children (nonskip persons) if GST exemption was not allocated to more than 25% of the trust. It then concluded, however, that the general power of appointment contingent upon the inclusion ratio of the trust did not, in this case, prevent the trust from being a GST trust at the time of the transfer to the trust.

The IRS next addressed the failure to correctly report the transfers on the taxpayer’s gift tax return. The IRS concluded that the failure to correctly report the transfers did not amount to an election out of the GST exemption automatic allocation rules to a GST trust because no election statement making the election was attached to the gift tax return. Because the trust met the definition of a GST trust, the IRS ruled that GST exemption was automatically allocated to the transfers to the trust even though the gift tax return failed to properly account for the automatic allocation.

The key to the IRS’s ruling is that the testamentary general power of appointment was a “contingent” power that had not yet manifested at the time of the transfers to the trust. Therefore, the testamentary general power of appointment at the time of the transfers was not an absolute right to withdraw more than 25% of the trust corpus.

Late allocation to CRUT allowed

In IRS Letter Ruling 202134005 released Aug. 27, 2021, the taxpayer requested an extension of time to allocate GST exemption to a charitable remainder unitrust (CRUT).

The donor created and funded the CRUT sometime after Sept. 24, 1985, and before July 29, 1997. The CRUT instrument provided for the annual payment of a unitrust amount for life to the taxpayer’s grandchild. At the grandchild’s death, the remainder of the CRUT would be paid to a charity. The donor and the donor’s spouse elected to split gifts in the year the CRUT was created and hired an accounting firm to prepare their gift tax returns for that year. The accounting firm failed to allocate GST exemption to the CRUT.

The donor died, and the executor of the donor’s estate and the donor’s spouse were made aware of the GST tax consequences of the unitrust payments from the CRUT as the donor’s estate tax return was being prepared. Upon realization of the error, the executor of the taxpayer’s estate and the donor’s spouse requested an extension of time pursuant to Sec. 2642(g) and Regs. Sec. 301.9100-3 to allocate the donor’s and his spouse’s GST exemption to the transfers to the CRUT and requested that the GST exemption allocated to the transfer would be effective on the date of the transfers.

Requests for relief under Regs. Sec. 301. 9100-3 will be granted when the taxpayer provides evidence to establish to the IRS’s satisfaction that the taxpayer acted reasonably and in good faith and that granting relief will not prejudice the interests of the government. A taxpayer is considered to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, a regulatory election.¹

Based on the facts submitted and the representations made by the taxpayer, the IRS concluded that the requirements of Regs. Sec. 301.9100-3 were satisfied. As a result, the donor’s executor and spouse were granted an extension of 120 days from the date of the ruling to allocate their available GST exemption to the transfer to the CRUT.

This CRUT was created before the automatic allocation rules for GST trusts came into existence in 2001;² otherwise, the taxpayers would not have had to make these requests, as GST exemption would have been automatically allocated to the CRUT. The transfer to the CRUT is not a direct skip because the charity is always considered a nonskip person. Had the IRS not granted the taxpayers an extension of time to allocate GST exemption to the CRUT, the unitrust payments to the grandchild would have been taxable distributions, which would have required the grandchild to pay GST tax from the distribution he or she received from the CRUT.

Trusts

Trust division preserves assets’ basis, other tax attributes

In IRS Letter Ruling 202133005 released Aug. 20, 2021, the IRS ruled on the tax consequences of the division of a trust. While the IRS has ruled many times on the tax consequences of this issue, this ruling addresses what happens to the tax attributes of the original trust upon division.

The grantors created a trust for the benefit of their descendants. At the time of the proposed division, the trust held limited liability company (LLC) member interests and limited partner interests in entities that owned passive investments and nonoperating oil and gas working interests and related royalty interests.

The trust provided that the trustees had the discretion to make distributions of income and principal for the beneficiaries’ support, maintenance, health, and education. In addition, an independent trustee could distribute to the beneficiaries so much of the income and principal as the trustee determined. Upon the death of the last of the grantors to die, the trustee was to divide the trust into separate trusts, one for the benefit of each of the grantors’ children and that child’s descendants.

Upon the death of the first grantor, the second grantor and the children petitioned the court to have the trust divided pro rata into separate trusts for each of the children and their descendants prior to the date provided in the trust instrument, which did not prohibit the early division of the trust.

The ruling request requested the following rulings, which were granted by the IRS:

1. The pro rata transfer of assets from the original trust to the newly created trusts would not be a distribution for purposes of Secs. 661 and 662.
2. The pro rata transfer of assets from the original trust to the newly created trusts would not result in the realization of any income, gain, or loss under Sec. 61 or Sec. 1001.
3. The newly created trusts would be treated as separate trusts for federal income tax purposes pursuant to Sec. 643(f).
4. The tax basis that the newly created trusts would have in the assets of the original trust after the division would be the same as their tax basis in the original trust.
5. Each asset of the original trust would have the same holding period after the transfer that the asset had before the division.
6. On the division of the original trust into the newly created trusts, each of the newly created trusts would succeed to and take into account an equal portion of any net operating loss carryforward, net capital loss, and other tax attributes of the original trust, including passive activity losses and credit carryforwards and statutory depletion deductions. Each asset transferred to the newly created trusts would have the same tax attributes immediately after the division that it had immediately before the division.
7. The GST tax-exempt status of the original trust would not be affected by the division.

The IRS has previously ruled favorably in all of the above rulings on the division or severance of a trust except Ruling No. 6. Although not stated in this ruling request, the premise for these rulings is that the IRS has opined that the division or severance of a trust — at least, if accomplished during the same tax year — is a continuation of the old trust (except maybe Ruling No. 3, which requests that the resulting trusts be treated as separate trusts).³ Although the Service does not provide any analysis for Ruling No. 6, this ruling is consistent with the IRS’s opinion that the trusts resulting from a division or severance are a continuation of the old trust.

Trust’s modification does not lose its GST tax-exempt status

In IRS Letter Ruling 202206008 released Feb. 11, 2022, the IRS ruled that trust modifications under a settlement agreement creating a formula testamentary general power of appointment in one of the trust’s beneficiaries would not result in the loss of the trust’s GST tax-exempt status and would result in only the trust property subject to the beneficiary’s general power of appointment being included in the beneficiary’s gross estate.

A parent’s will left the remainder of the parent’s estate to two trusts, Trust A and Trust B. Trust B was the subject of the ruling request. Regarding the administration of Trust B, the will provided that all of the net income was to be distributed to the parent’s child (Child) during Child’s life. Regarding Trust B’s corpus, the trustee had the discretion to make distributions as the trustee deemed necessary for the maintenance, education, welfare, and comfort of any of the trust’s beneficiaries. Upon Child’s death, Trust B was to terminate and be distributed, per stirpes, to Child’s surviving descendants.

The parent died prior to Sept. 25, 1985, therefore grandfathering Trust B for GST tax purposes (i.e., the trust was not subject to GST tax).

A controversy arose regarding the administration of Trust B when the trustee wanted to exercise its discretion to provide Child with a power of appointment over certain assets of Trust B (which authority the trustee had under the will). The other beneficiaries of the trust opposed the proposed exercise of the trustee’s discretionary authority. Litigation was commenced, and the parties reached a court-approved settlement agreement.

The settlement agreement granted Child a testamentary general power of appointment to appoint “the largest portion of Trust B that could be included in Child’s federal estate without increasing the total amount of the ‘Transfer Taxes’ actually payable at Child’s death over and above the amount that would have been actually payable in the absence of this provision. The term ‘Transfer Taxes’ means all inheritance, estate, and other death taxes, plus all federal and state GST taxes, actually payable by reason of Child’s death.” In the event Child failed to exercise the testamentary general power of appointment, property subject to the power was to be distributed per stirpes to Child’s thenliving descendants.

The parties requested a ruling (1) that the settlement agreement would not result in the loss of Trust B’s GST tax-exempt status and (2) that Child’s testamentary general power of appointment under the settlement agreement would result in only the property subject to the power being included in Child’s estate.

Regarding the GST tax-exempt status of Trust B, the IRS cited the criteria in Regs. Sec. 26.2601-1(b)(4)(i)(D), as it normally does when considering whether modifications to a grandfathered trust cause the trust to lose its grandfathered status: (1) whether the modification shifts a beneficial interest in the trust to a beneficiary who occupies a lower generation than the persons who held the beneficial interest prior to the modification and (2) whether the modification extends the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust.

The IRS ruled that the settlement agreement (1) did not shift a beneficial interest in Trust B to a person in a generation lower than those persons included in the original trust and (2) did not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust.

Regarding Child’s testamentary general power of appointment, the IRS looked to Sec. 2041(a)(2), which includes in a decedent’s estate any property over which a decedent had a general power of appointment at the time of his or her death.

The IRS ruled that the settlement agreement would include in Child’s estate only that property in Trust B over which Child exercised a testamentary general power of appointment.

The ruling on the creation of a formula testamentary clause is an issue that the IRS is not known to have previously ruled on — not because it had a no-rule position on the issue, but because the IRS has never been formally asked to rule on it. Many estate planners have avoided using this formula testamentary general power of appointment because they believe it might include the entire trust — not just the part of the trust subject to the power in the beneficiary’s estate — or that the IRS may not give it effect under some theory of economic substance. This ruling reflects the IRS’s reasoning that it does not cause inclusion of the entire trust.

Why did the trustee seek to grant Child a testamentary general power of appointment? One reason may be that it was for estate planning purposes, but that is unlikely because the trust was already free from estate and GST taxes — unless the trust was about to terminate and there was a desire among the parties to move assets to a new GST tax-exempt trust using Child’s GST exemption. The likely reason is that it was an income tax play to have assets of the trust included in Child’s estate to get a basis step-up without incurring estate tax (because Child had available GST exemption). Then again, it could have been done for both reasons.

The ruling states that only Child’s exercise of the testamentary general power of appointment would cause inclusion of Trust B property in his estate. However, Sec. 2041(a)(2) applies to any property over which a decedent had a general power of appointment at the time of his or her death. Thus, the IRS’s ruling on the issue is that the property over which Child had a general power of appointment is included in Child’s estate regardless of whether Child exercises the power. However, if Child does not exercise the power, what trust property would be included in the taxpayer’s estate that would be stepped up?

Trusts’ merger does not trigger distributions or GST tax

In IRS Letter Ruling 202215015 released April 15, 2022, the IRS ruled that the merger of two trusts would not result in a loss of a grandfathered exemption from the GST tax and would not cause any distributions from the merged trust to become subject to the GST tax.

The taxpayers, a married couple, created three irrevocable trusts, Trust 1, Trust 2, and Trust 3, for the benefit of their descendants. All three trusts had an inclusion ratio of zero for GST tax purposes. The beneficiaries of all three trusts were the same. The distribution, dispositive, and trust power provisions of all three trusts were substantially identical. Trust 1 and Trust 2 had Identical termination provisions, while the provisions of Trust 3 would allow it to exist in perpetuity. The taxpayers proposed to merge Trusts 2 and 3 into Trust 1 to save administrative costs and enhance the management of the trusts’ investments.

Regs. Sec. 26.2601-1(b)(4)(i) provides rules for determining when a modification, judicial construction, settlement agreement, or trustee action with respect to a trust that is grandfathered for GST tax purposes will not cause the trust to lose its exempt status. The regulation provides that a modification of the governing instrument of an exempt trust by judicial reformation, or nonjudicial reformation that is valid under applicable state law, will not cause a grandfathered trust to be subject to GST tax if (1) the modification does not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation.⁴ Than the person or persons who held the beneficial interest prior to the modification and (2) the modification does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust.

The IRS noted, as it has in other letter rulings, that there is no similarly published guidance regarding the application of GST tax to the modification of trusts that are GST tax-exempt because they have an inclusion ratio of zero (i.e., not grandfathered, but GST exemption was allocated to transfers to the trust sufficient to make the trust GST tax-exempt). Noting that there has been no guidance for GST-exemption trusts like that provided in Regs. Sec. 26. 2601-1(b)(4)(i), the IRS stated that, at a minimum, a change that would not affect the GST status of a grandfathered trust should similarly not affect the status of a trust that is GST tax.exempt.

Noting that Trust 3 with no termination date and Trust 2 with the same termination date as Trust 1 would be merged into Trust 1, the IRS ruled that merger would not (1) shift a beneficial interest in the trust to any beneficiary who occupied a lower generation than the person or persons who held the beneficial interest prior to the modification or (2) extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. Therefore, the merger of the trusts would not result in a loss of GST tax-exempt status of any trust and would not cause any distributions from the merged Trust 1 to become subject to GST tax.

It is likely that the IRS would not have ruled or would have ruled negatively if Trust 1 and Trust 2 were being merged into Trust 3, which would never terminate, as it would likely violate both of the criteria cited in Regs. Sec. 26.2601-1(b)(4)(i).

Other developments

No-rule list updated for private foundation self-dealing

The IRS updated its no-rule list to include certain self-dealing transactions.

The IRS announced that it will not issue letter rulings on whether certain transactions constitute self-dealing under Sec. 4941(d).⁵ This announcement represents an addition to the IRS’s no-rule list published in Rev. Proc. 2021-3.

Generally, Sec. 4941(d) prohibits a private foundation and any disqualified person from entering into any of several direct or indirect transactions between them: (1) sales, exchanges, or leases of property; (2) lending of money or other extensions of credit; (3) furnishing of goods, services, or facilities; (4) payment of compensation; and (5) transfers of assets to, or for the benefit of, the disqualified person. It also prohibits agreements by a private foundation to make any payment of money or other property to a government official, other than certain employment agreements.

On occasion, donors may try to circumvent these rules by entering into a transaction with an LLC that, by itself, does not meet the definition of a disqualified person. For example, a potential donor may provide assets, including promissory notes, to an LLC in exchange for a nonvoting interest in the LLC and then gift or bequeath the same nonvoting interest to a private foundation. By providing the private foundation with nonvoting rights, the donor can essentially avoid a negative outcome, as the private foundation would lack the “control” element necessary for self-dealing. Because of the specific facts and circumstances involved in these transactions, many organizations would preemptively seek a ruling from the IRS that the transaction was not an indirect self-dealing transaction.

Under Rev. Proc. 2021-40, the IRS will not issue letter rulings on whether an act of self-dealing occurs when a private foundation, or other entity subject to Sec. 4941, owns or receives an interest in an LLC or other entity that owns a promissory note issued by a disqualified person. Rev. Proc. 2021-40 explains that the IRS is “currently reviewing its prior ruling position on [these] transactions.” The new revenue procedure applies to all letter requests pending in or received by the IRS on or after Sept. 3, 2021.

Administration budgetary proposals would affect trusts, estates, and gifts

On March 28, 2022, President Joe Biden released his proposed federal budget.⁶ For fiscal 2023, which included proposed changes to the rules for taxing certain individuals, estates, and trusts, as well as broadening the circumstances under which capital gains become taxable.

Treat gifts or bequests of appreciated property as realization events: This provision would cause capital gain to be realized at the time of the transfer for appreciated property transferred by gift or bequest. For transfers at death, a maximum of $3,000 in capital losses and carryforwards could be claimed against ordinary income on the decedentfs final income tax return, and any capital gains tax realized would be deductible on the estate tax return. A trust, partnership, or other noncorporate entity owning property that has not been the subject of a recognition event in the last 90 years would also be required to recognize gain on unrealized appreciation. Generally, a transferred partial interest would be valued based on its proportional share of the fair market value (FMV) of the whole property.

Recognition events would include transfers of property:

• Into a trust and distributions in-kind from a trust, except for a grantor trust that is wholly owned and revocable by the donor; and
• To and by a partnership or other noncorporate entity, if the transfers are effectively a gift to the transferee.

Generally, and with certain exceptions, the distribution of an asset from a revocable grantor trust would cause the deemed owner of the trust to recognize gain on any unrealized appreciation in the value of the asset. Unrealized appreciation in the value of the asset would be realized at the deemed owner’s death or any other time when the trust becomes irrevocable.

Available deferral elections would allow taxpayers to:

• Elect not to recognize unrealized appreciation of certain family-owned and -operated businesses until the business is sold or is no longer family-owned and -operated; and
• Pay the tax imposed on appreciated assets transferred at death by applying a 15-year fixed-rate payment plan, unless the assets are liquid or a business made a deferral election.

Modifying the GRAT rule: This provision would modify the rules for grantor retained annuity trusts (GRATs) by (1) requiring a minimum value for gift tax purposes of the GRAT’s remainder interest. The greater of (a) 25% of the value of the assets transferred to the GRAT, or (b) $500,000; (2) prohibiting any decrease in the annuity during the GRAT term; (3) prohibiting the grantor from acquiring in an exchange an asset held in the trust without recognizing gain or loss; and (4) requiring the GRAT term to be between (a) 10 years and (b) the life expectancy of the annuitant plus 10 years. The minimum-value requirement would eliminate the ability to create a GRAT that does not have gift tax consequences, severely limiting its usefulness in an estate plan.

The prohibition of decreasing annuity payments would eliminate the “frontloading” of GRATs with other assets so that more of the main asset that is the target for using the GRAT is preserved for the remainder beneficiary of the GRAT. The required minimum term of the GRAT would make a GRAT a riskier planning technique because the transfer tax benefits of GRATs are typically achieved when the grantor outlives the GRAT term. The required maximum term of the GRAT would prevent 99-year GRATs that some taxpayers have created so that the amount includible in the grantor’s estate under Sec. 2036 is very small.

Impose income tax on transfers between a grantor and a grantor trust: For a trust that is not fully revocable by a deemed owner, this provision would treat the transfer of an asset for consideration between a grantor trust and its deemed owner as a potentially taxable transaction. The seller would recognize gain on any appreciation in the value of the transferred asset. Further, the proposal would treat the payment of income tax on the income of a grantor trust as a gift occurring on Dec. 31 of the year in which the income tax is paid, unless the trust reimburses the deemed owner during the same year. This provision would supersede Rev. Rul. 85-13 (disregarding sales and exchanges between a grantor and his or her grantor trust for income tax purposes) and make sales and the satisfaction of obligations with appreciated property (including in-kind payments of annuity and unitrust amounts, e.g., GRAT annuity payments) result in the recognition of gain.

Treat payment of income tax by the grantor of a grantor trust as a gift: This provision would treat the payment of income tax on the income of a grantor trust as a gift occurring on Dec. 31 of the year in which the income tax is paid, unless the trust reimburses the deemed owner during the same year.

Under Sec. 671, grantors of a grantor trust must include in their income their grantor trust’s items of income, deductions, and credits; therefore, the tax on the income of the grantor trust is the grantor’s obligation and does not constitute a gift from the grantor to the beneficiaries of the trust. In Rev. Rul. 2004-64, the IRS confirmed that the grantor’s payment of his or her grantor trust’s income tax liability is not a gift. This provision would invalidate this position.

Requiring consistent valuation of promissory notes: This provision would require consistency in the valuation of promissory notes. It would also require the interest rate and other terms of a promissory note connected with family loans and/or other transactions (e.g., the length of the note) to be consistently valued for federal estate and gift tax purposes. It is designed to eliminate the friction created between the Sec. 7872 rules (regarding below-market loans) and generally accepted valuation principles. The Sec. 7872 rules were enacted as the result of the Supreme Court’s decision in Dickman,⁷ holding that the interest-free use of money is a gift. To prevent the application of Sec. 7872, taxpayers must charge a minimum interest rate (depending on the length of the loan) for loans between certain taxpayers. The interest rate is based on the applicable federal rates (AFRs), which the IRS publishes monthly. These rates are significantly lower than prevailing market rates and are generally used in related-party transactions, which creates the friction. Taxpayers who engage in related-party loans charge the AFR to avoid Sec. 7872. However, when these notes are transferred or are part of a taxpayer’s estate, they are valued using FMV principles . Which requires taking into consideration prevailing market rates, not the AFR used when the note was executed. This would cause the value of the note to be significantly discounted . A discounting that is not the result of normal market conditions.

Expand the definition of executor: This provision would expand the definition of an executor, which it would move from Sec. 2203 to Sec. 7701, “expressly making it applicable for all tax purposes, and [authorizing] such an executor to do anything on behalf of the decedent in connection with the decedent’s pre-death tax liabilities or other tax obligations that the decedent could have done if still living.”⁸ Multiple parties could serve as executor, so the proposal would authorize Treasury to adopt rules to resolve potential conflicts among multiple executors. The proposal would make the definition applicable for all tax purposes, not just estate tax purposes. Currently, it is not clear that an executor can handle tax matters that may have arisen before the death of the taxpayer. E.g., an income tax audit or final income/gift tax return.

Increase cap on qualified real property: This provision would increase the cap to $11.7 million on the maximum valuation decrease for qualified real property that may be treated as special-use property, noting that this property generally includes real property used in family farms, ranches, timberland, and similar property. This amount is currently $1.23 million. Sec. 2032A allows real property used in a farm or business to be valued for estate tax purposes based on its actual use rather than on its best use.

Extend automatic lien period: This provision would also extend the duration of the 10-year automatic lien period “to continue during any deferral or installment period for unpaid estate and gift taxes.”⁹ This extension would apply to 10-year liens currently in effect, as well as to future liens. This proposal would extend the general estate tax lien that applies to all estate tax liabilities under Sec. 6324 to continue past the normal 10-year period until the expiration of the deferral period the decedent’s estate has elected under Sec. 6166. This proposal responds to the Tax Court’s holding in Estate of Roski¹⁰ that the IRS had abused its discretion by requiring all estates electing to pay estate tax in installments under Sec. 6166 to provide a bond or lien. The Tax Court held that Congress intended for the IRS to determine on a case-by-case basis whether the government’s interest is at risk before requiring security from an estate making an election under Sec. 6166.

Certain trust reporting: This provision would require certain trusts administered in the United States, whether domestic or foreign, to annually report certain information to the IRS “to facilitate the appropriate analysis of tax data, the development of appropriate tax policies, and the administration of the tax system.”¹¹ This new reporting requirement would apply to any trust with (1) an estimated total value exceeding $300,000 on the last day of the tax year or (2) gross income exceeding $10,000 for the tax year. The reporting would be done on the trust’s annual income tax return or as otherwise provided by Treasury. The trust would have to provide general information, including the name, address, and taxpayer identification number of each trustee and grantor, as well as the general nature and estimated total value of the trust’s assets.

Limit duration of generation-skipping transfer exemption: This provision would limit the GST exemption to “(a) direct skips and taxable distributions to beneficiaries no more than two generations below the transferor, and to younger generation beneficiaries who were alive at the creation of the trust; and (b) taxable terminations occurring while any person described in (a) is a beneficiary of the trust,”¹² although Sec. 2653 (regarding the taxation of multiple skips) would not apply for these purposes. For purposes of determining the duration of GST exemption, a trust created before the date of enactment (i. e., a grandfathered trust) would be deemed to have been created on the date of enactment. As a result, trust assets would be exempted from GST tax only during the life of any beneficiary who is no younger than the grandchild of the transferor or a beneficiary who is a member of a younger generation who was alive at the creation of the trust. After this period, the inclusion ratio of the trust would increase to 1, and the entire trust would no longer be exempt from GST tax.

Inflation adjustments

The IRS released Rev. Proc. 2021-45, setting forth inflation adjustments for various tax items for 2022, and, for 2023, inflation-adjusted amounts are set forth in Rev. Proc. 2022-38.¹³ The following may be of interest to estate planning professionals:

Unified credit against estate tax: The basic exclusion amount is $12,060,000 for determining the amount of the unified credit against estate tax under Sec. 2010. For decedents dying in calendar 2023, the basic exclusion amount is $12,920,000.

Valuation of qualified real property in decedent’s gross estate: If the executor elects to use the special-use valuation method under Sec. 2032A for qualified real property, the aggregate decrease in the value of the qualified real property resulting from electing to use Sec. 2032A for purposes of the estate tax cannot exceed $1,230,000. The amount for decedents dying in 2023 is $1,310,000.

Gift tax annual exclusion: The gift tax annual exclusion for gifts of a present Interest is $16,000 ($17,000 for 2023). The gift tax annual exclusion for gifts of a present interest to a spouse who is not a U.S. citizen is $164,000 ($175,000 for 2023) .

Interest on a certain portion of estate tax payable in installments: The dollar amount used to determine the “2% portion” (for purposes of calculating interest under Sec. 6601(j)) of the estate tax, extended as provided in Sec. 6166, is $1,640,000. For 2023, the dollar amount is $1,750,000.

Footnotes

¹Regs. Sec. 301.9100-3(b)(1)(v).

²With Sec. 2632(c), enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16.

³See, e.g., IRS Letter Ruling 200736002.

⁴As defined in Sec. 2651.

⁵Rev. Proc. 2021-40.

⁶Budget of the U.S Government: Fiscal Year 2023; with revenue measures described in Treasury’s General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals (Greenbook).

⁷Dickman, 466 U.S. 330 (1984).

⁸Greenbook, p. 47.

⁹Id.

¹⁰Estate of Roski, 128 T.C. 113 (2007).

¹¹Greenbook, p. 47.

¹²Greenbook, p. 48.

¹³Although Rev. Proc. 2022-38 was issued on Oct. 18, 2022, after the period covered by this article, its corresponding amounts are included here for reference and comparison.

Contributors

Justin Ransome, CPA, J.D., MBA, is a partner in the National Tax Department of Ernst & Young LLP in Washington, D.C. He would like to thank his colleagues in the firm’s National Tax Department in Private Tax for their contributions to this article, as well as Fran Schafer for her thoughtful comments on the article. The views expressed here are those of the author and do not necessarily reflect the views of Ernst & Young LLP. For more information about this article, contact thetaxadviser@aicpa.org.

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2022 Individual, Estate, and Gift Tax Cheat Sheet

CPE self-study

Estate & Trust Primer — Tax Staff Essentials

Estate Planning Certificate Program (Exam + Course)

For more information or to make a purchase, visit aicpa.org/cpe-learning or call the Institute at 888-777-7077.