4. Selected Aspects of Family Wealth Transfer

4. SELECTED ASPECTS OF FAMILY WEALTH
TRANSFER

A. Tax Implications of Family Wealth Transfer B. Testamentary Gifts C. Intervivos Gifts D. Gifts to Minors E. Charitable Planning F. The Irrevocable Life Insurance Trust G. ERISA and Qualified Plan Benefits

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4A. Tax Implications of Family Wealth Transfer

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September 2013

ESTATE PLANNING UPDATE

By: Sanford J. Schlesinger, Esq. and Martin R. Goodman, Esq.
Schlesinger Gannon & Lazetera LLP

TABLE OF CONTENTS

I.

THE AMERICAN TAXPAYER RELIEF ACT OF 2012 ..................................................2

A. B.
Federal Transfer Tax Provisions............................................................................. 2 Federal Income Tax Provisions .............................................................................. 2

II.

THE TAX RELIEF, UNEMPLOYMENT INSURANCE REAUTHORIZATION,

AND JOB CREATION ACT OF 2010 ...............................................................................3

A.

Federal Transfer Tax Provisions............................................................................. 3

1. 2. 3. 4.
Federal Estate Tax Provisions..................................................................... 3 Federal Gift Tax Provisions........................................................................ 6 Federal Generation-Skipping Transfer Tax Provisions .............................. 6 Federal Portability Provisions..................................................................... 7 (a) General ................................................................................................ 7 (b) Portability and the Future of Bypass Trusts...................................... 10 (c) Portability and Prenuptial Agreements ............................................. 11 Other Provisions........................................................................................ 11 Summary Chart ......................................................................................... 12 Omitted Transfer Tax Provisions.............................................................. 13 IRS Publication 950.................................................................................. 13
5. 6. 7. 8.
B. C.
Federal Income Tax Provisions ............................................................................ 13 Estates of 2010 Decedents, Form 8939 and 2010 Transfers................................. 13

1.

Notice of 2011-66 and Rev. Proc. 2011-41 .............................................. 14

(a) Electing the Carryover Basis Regime ............................................... 14 (b) Relief Provisions for Form 8939....................................................... 15 (c) Amount of Basis Increase ................................................................. 16 (d) Allocating Increases in Basis ............................................................ 17 (e) Reporting to Beneficiaries................................................................. 19 (f) Coordination With Other Income Tax Provisions ............................ 20 (g) GST Tax in 2010............................................................................... 21 Notice 2011-76 and IR-2011-91............................................................... 21 (a) Estate Tax Return Extensions ........................................................... 21 (b) Form 8939 ......................................................................................... 22 (c) GST Taxes......................................................................................... 22 (d) Income Tax Returns and Gift Tax Returns ....................................... 23 (e) Penalty Relief.................................................................................... 23
2.

D.

State Transfer Tax Considerations........................................................................ 23

(a) New York.......................................................................................... 23 (b) Connecticut ....................................................................................... 25 (c) New Jersey ........................................................................................ 25

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(d) Pennsylvania ..................................................................................... 26 (e) Florida ............................................................................................... 26 (f) Delaware ........................................................................................... 26 (g) Other States ....................................................................................... 26 (h) State QTIP Elections......................................................................... 26

Obama Administration and Congressional 2013 Proposals.................................. 27

E.

III. IV.
MEDICARE TAX ON ESTATES, TRUSTS AND INDIVIDUALS...............................29 IMPORTANT IRS REGULATIONS, ANNOUNCEMENTS AND COURT DECISIONS........................................................................................................29 A. B.
2013 Inflation Adjustments................................................................................... 29 Tax Returns........................................................................................................... 30 1. 2. 3. 4. 5. 6. 7. 8. 9.
Draft Form 8690 ....................................................................................... 30 Estate Tax Returns for 2012 Decedents.................................................... 30 2012 Gift Tax Returns .............................................................................. 30 Estate Tax Returns for 2011 Decedents.................................................... 30 2011 Gift Tax Returns .............................................................................. 31 2011 Generation-Skipping Transfer Tax Forms....................................... 31 Estate Tax Returns for 2010 Decedents.................................................... 31 2010 Gift Tax Return................................................................................ 31 2010 Generation-Skipping Transfer Tax Forms....................................... 31
C. D. E. F. G. H. I.
Estate Tax and Gift Tax Audits and Collections .................................................. 31 Request for Discharge From Personal Liability – Form 5495.............................. 34 Form 990 and Form 8940 ..................................................................................... 34 Qualified Personal Residence Trusts .................................................................... 35 Private Trust Companies and Family Offices....................................................... 35 Restricted Management Accounts ........................................................................ 36 Estate Tax Deductions for Claims and Expenses - Section 2053......................... 36 Section 6166 Court Decisions and Announcements............................................. 38 2% Floor for Miscellaneous Itemized Deductions................................................ 42 Alternate Valuation Date Election........................................................................ 44 Generation-Skipping Transfer Taxes.................................................................... 45
J. K. L. M.
1. 2. 3. 4. 5.
Exercise or Lapse of Power of Appointment............................................ 45 Qualified Severances ................................................................................ 46 Allocation of GST Tax Exemption........................................................... 47 Transactions of Interest............................................................................. 48 GST Taxes and Code Section 6166 .......................................................... 48
N. O. P. Q. R. S. T. U. V.
Intentionally Defective Grantor Trusts ................................................................. 48 GRATs and GRITs ............................................................................................... 50 Gifts, Gift Tax, and Estate Tax Includibility of Gift Tax ..................................... 53 Same-Sex Marriages ............................................................................................. 55 IRAs and Qualified Retirement Plans................................................................... 55 Special Valuation Rules – Chapter 14 .................................................................. 60 Ruling Procedures................................................................................................. 61 No Ruling Areas ................................................................................................... 61 Priority Guidance Plan.......................................................................................... 65

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W. X. Y. Z.
Basis Reporting Requirements.............................................................................. 65 Change of Address Notification............................................................................ 65 Circular 230 .......................................................................................................... 66 Internal Revenue Bulletins and Cumulative Bulletins.......................................... 66

V.

DIGITAL ASSETS............................................................................................................66

FDIC INSURANCE INCREASES....................................................................................67

VI.

VII. SIGNIFICANT FLORIDA LEGISLATION AND CASE LAW DEVELOPMENTS .....67
A. B. C. D. E. F. G. H. I.
Repeal of Florida's Intangible Tax........................................................................ 67 Creation of Dynasty Trusts................................................................................... 67 Intestate Shares ..................................................................................................... 68 Separate Writings.................................................................................................. 68 Chapter 738: Principal and Income Act............................................................... 68 UTMA Transfers................................................................................................... 68 Uniform Disclaimer of Property Interests Act...................................................... 68 Anatomical Gift Law ............................................................................................ 69 Fiduciary Responsibility for Life Insurance ......................................................... 69 Avoiding Unintended Consequences of Estate Tax Repeal ................................. 70 Creditors' Claims................................................................................................... 70 Homestead Law .................................................................................................... 71 Attorney-Client Privilege...................................................................................... 72 Privity.................................................................................................................... 72 Reformation and Construction of Wills................................................................ 72 Powers of Attorney ............................................................................................... 72 Personal Representatives and Administrators....................................................... 73 Standing to Contest Will or Challenge Trust Distributions.................................. 73 Enforcement of Alimony and Child Support Orders ............................................ 73 Waiver of Spousal Rights ..................................................................................... 74 Ademption of Bequests......................................................................................... 74 Former Spouse and Non-Probate Assets............................................................... 74 Gifts and Bequests to Clients’ Attorneys.............................................................. 74 Disposition of Decedents’ Wills........................................................................... 74 Florida Jurisdiction and Trusts.............................................................................. 75 Limited Liability Companies................................................................................ 75
J. K. L. M. N. O. P. Q. R. S. T. U. V. W. X. Y. Z.

VIII. SIGNIFICANT NEW JERSEY LEGISLATION, REGULATIONS
AND CASE LAW DEVELOPMENTS.............................................................................75 A. B. C. D. E. F.
Domestic Partnership Act ..................................................................................... 75 Civil Unions and Same-Sex Marriage .................................................................. 76 Domestic Partners ................................................................................................. 77 Uniform Prudent Management of Institutional Funds Act ................................... 77 New Jersey Estate Tax.......................................................................................... 78 New Jersey Gross Income Tax ............................................................................. 79

New Jersey Resident Trusts.................................................................................. 79

G.

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H.

Perelman v. Cohen: Alleged Incompetence; Alleged Fraudulent

Transfers and Undue Influence; Oral Promise to Make a Will; Gifts vs. Loans; and Sanctions for Frivolous Litigation....................................... 79 Support Trusts and Alimony................................................................................. 80 Trust Reimbursement of Settlor’s Income Taxes ................................................. 80 Revised Uniform Limited Liability Company Act ............................................... 80 Prenuptial Agreements.......................................................................................... 81
I. J. K. L.

IX.

NEW YORK STATUTORY AND CASE LAW DEVELOPMENTS..............................81

A. B.
Powers of Attorney ............................................................................................... 81 Same Sex Couples................................................................................................. 83 1. 2. 3. 4.
General...................................................................................................... 83 New York Taxes ....................................................................................... 84 New York Estate Tax................................................................................ 84 New York Income Tax.............................................................................. 84
C. D.
Other New York Estate Tax Changes................................................................... 85 Other New York Income Tax Changes................................................................. 87 1. 2. 3. 4. 5. 6.
Modified Carryover Basis......................................................................... 87 New York Source Income......................................................................... 87 Income Tax Rates ..................................................................................... 87 Income Tax Return Extensions................................................................. 88 New York Residency................................................................................ 88 New York Resident Trusts........................................................................ 90
E. F. G. H. I. J. K. L.
Statute of Limitations for Tax Collections............................................................ 91 Principal and Income Act...................................................................................... 91 Attorney Engagement Letters ............................................................................... 96 Disclosure Requirements of Attorney-Fiduciaries................................................ 98 Relaxation of Strict Privity Doctrine .................................................................. 102 No Fault Divorce................................................................................................. 103 In Terrorem Clauses............................................................................................ 103 Other Significant Legislation.............................................................................. 104 1.

2. 3.
Significant 2008 Legislation................................................................... 104 (a) Small Estates ................................................................................... 104 (b) Revocation of Incompetent’s Will .................................................. 105 (c) Revocatory Effect of Divorce ......................................................... 105 Significant 2009 Legislation................................................................... 105 (a) Loss of Health Insurance Coverage in Divorce .............................. 105 (b) Simultaneous Deaths....................................................................... 105 (c) Sale of Life Insurance ..................................................................... 105 Significant 2010 Legislation................................................................... 106 (a) Formula Bequests............................................................................ 106 (b) Life Sustaining Measures................................................................ 106 (c) Renunciations.................................................................................. 106 (d) Proof of Paternity............................................................................ 107 (e) Pet Trusts......................................................................................... 107 (f) Uniform Prudent Management of Institutional Funds Act ............. 107 (g) Family Exemption........................................................................... 108

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4. 5.
Significant 2011 Legislation................................................................... 108 (a) Decanting ........................................................................................ 108 (b) Formula Bequests............................................................................ 108 Proposed Significant 2012 Legislation ................................................... 109 (a) Uniform Trust Code ........................................................................ 109 (b) EPTL and SCPA Amendments to Conform to the Marriage
Equality Act .................................................................................... 109
(c) Trust Advisors and Protectors......................................................... 109 Significant 2013 Legislation................................................................... 109 Proposed Significant 2013 Legislation ................................................... 110 (a) Interest on Bequests ........................................................................ 110 (b) “Small Estates”................................................................................ 110 (c) Power to Adjust and Trustee’s Commissions ................................. 110
6. 7.

M.

Other Case Law Developments .......................................................................... 111

1. 2. 3. 4. 5. 6. 7. 8.
Fiduciary Investments-Diversification and Self-Dealing ....................... 111 Qualification and Removal of Fiduciaries .............................................. 115 Right of Election..................................................................................... 115 Jurisdiction and Charitable Trusts .......................................................... 116 Presumption Against Suicide.................................................................. 116 Forced Heirship and New York Property ............................................... 116 Executor’s Commissions and Trustee's Commissions............................ 117 Prenuptial and Postnuptial Agreements.................................................. 117 Payment of Fiduciary's Attorney's Fees.................................................. 117 Loans vs. Gifts ........................................................................................ 118 Health Care Proxies ................................................................................ 119 Statute of Limitations.............................................................................. 119 Rule Against Perpetuities........................................................................ 119 Surcharge Computations......................................................................... 119 Exoneration of Fiduciaries...................................................................... 120 Slayer Inheritance ................................................................................... 120 Delaware Trusts ...................................................................................... 120 Equitable Deviation ................................................................................ 121
9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

X.

CONNECTICUT GIFT TAX, ESTATE TAX AND OTHER

PERTINENT LEGISLATION.........................................................................................121