On June 9, 2017, the Internal Revenue Service issued Revenue Procedure 2017-34, which is effective immediately and provides a simplified method to obtain permission for an extension of time under Reg. 301.9100-3 to file Form 706 (Federal Estate Tax Return) and elect portability without the need to apply for a private letter ruling and pay the associated user fee.

Revenue Procedure 2017-34 applies to estates that are not normally required to file an estate tax return because the value of the gross estate and adjusted taxable gifts is under the filing threshold.

Portability of the estate tax exemption means that if one spouse dies and does not make full use of his or her $5,490,000 (in 2017) federal estate tax exemption, then the surviving spouse can make an election to utilize the unused exemption (deceased spousal unused exclusion (DSUE)), add it to the surviving spouse’s own exemption.  The DSUE is also available for application to the surviving spouse’s subsequent gifts during life.

In February 2014, the IRS issued Revenue Procedure 2014-18 that provided a simplified method for obtaining an extension of time under the “9100 relief” provisions to make a portability election that was available to estates of decedents dying after 2010, if the estate was not required to file an estate tax return and if the decedent was survived by a spouse.  This simplified method was available only on or before December 31, 2014.

After 2014, the IRS issued “numerous letter rulings” granting an extension of time to elect portability under §2010(c)(5)(A) when the decedent’s estate was not required to file an estate tax return.

The IRS acknowledged in Revenue Procedure 2017-34 that it has determined that the “considerable number of ruling requests” for an extension of time to elect portability “indicates a need for continuing relief for the estates of decedents having no filing requirement.”   Accordingly, Revenue Procedure 2017-34 allows for use of a simplified method to obtain an extension of time under the 9100 relief provisions to elect portability (provided that certain requirements are satisfied).

The IRS has made this simplified method available for all eligible estates through January 2, 2018, or the second anniversary of the decedent’s date of death.  The simplified method provided in Revenue Procedure 2017-34 is to be used in lieu of the letter ruling process.  No user fee is required for submissions filed under this revenue procedure.

The fall is upon us: is your new or soon-to-be adult (child) going off to college?  Besides taking with him or her the extra long sheets and a new credit card, should your child be leaving you with something too: the right to control his or her finances and medical decisions?

When a child reaches the long-awaited age of 18, everything changes and nothing changes at the same time.  Suddenly, your child is a legal adult, yet the child still depends on you for financial and emotional support.  Legally, the rules have changed.  The former legal minor is an adult, who is expected to make financial and medical decisions on his or her own behalf and you, as the parent for the last 18 years, can no longer make those decisions for him or her.

In fact, you are now not even legally required, or allowed, to be notified if your child is in the hospital emergency room, without the child’s consent.  You cannot generally make medical decisions for your child even if your child is not able to make those decisions for himself or herself, without the child’s consent.  And, what if the child suddenly becomes incapacitated and cannot give consent for you to assist in making those decisions?  You still cannot make decisions for your child without a legal document giving you this permission (even if you will ultimately pick up the bill).  Your child needs a health care directive, which authorizes parents to obtain medical information and make medical decisions for the child if the child is unable to make such decisions for himself or herself.

What about his or her finances?  The same is true.  Now the child has the right to sign a contract, such as for a credit card, but you have no right to file for disability benefits on his or her behalf in case of an accident, to file a legal complaint or complete more mundane tasks, such as renew a car registration on his or her behalf.

While in some states the closest living relatives—parents if the child is unmarried—will be allowed to make medical and financial decisions on behalf of a child over 18 without official papers, this is not guaranteed and instead the parents may have to seek guardianship in court.  A health care directive and/or a power of attorney grants and delineates the parent’s authority to act on behalf of the adult child, and obviates the need to resort to extreme measures, such as guardianship proceedings.

The health care designation should also include a living will.  A living will outlines an individual’s advance care directive about life-sustaining medical treatment, and can also cover organ donations.  Since parents and children may disagree on this topic, and parents understandably struggle to make the decision in such a dire situation, it should be discussed in advance and memorialized in a living will.  The health care directive will also include a Health Insurance Portability and Accountability Act (HIPAA) release allowing disclosure of sensitive medical information to parents in the event of a medical emergency.

Both the power of attorney and the health care directive can be tailored to each family’s particular situation.  For example, parents can be granted access to private medical records while the child is competent as well as in an emergency, or full financial power at all times (in a “durable” power of attorney) or only in the event of the child’s incapacity, or, while the child is competent, only over certain types and sizes of accounts and contracts.

This fall, as your children leave for college and become adults, power of attorney and health care directive/ living will documents should be on their college packing lists, ensuring their well-being and your peace of mind.

 

 

The IRS has at last issued long-anticipated proposed regulations under Code §2704.  We perceive the proposed regulations as an attempt by the IRS to curtail the use of discounts – such as minority interest and lack of marketability discounts – in valuing transfers of interests in family-controlled entities for gift and estate tax purposes.

“Family limited partnerships” – that is, family investment entities usually structured as LLCs or limited partnerships – have been a popular estate planning technique for years.  Generally speaking, a client can transfer non-voting, non-marketable interests in these types of entities to children or a trust, and claim a valuation discount due to the restrictions that apply to the interest transferred.

Code §2704 provides that certain “applicable restrictions” on ownership interests in family entities, ie, entities where the transferor and family members control the entity, should be disregarded for valuation purposes.  The statute also permits the IRS to issue regulations providing for other restrictions (as determined by the IRS) to be disregarded in determining the value of a transfer to a family member, if a restriction has the effect of reducing the value of the transferred interest but does not ultimately reduce the value of such interest to the transferee.

The proposed regulations make two overarching changes.  First, changes under Code §2704(a) create new rules relating to a lapse of a liquidating right.  These changes are less relevant, at least in our practice, as we generally do not structure entities to include liquidation or other rights that lapse.

Second, changes under Code §2704(b) create a new concept of “Disregarded Restrictions.”  Under the proposed regulations, a restriction that will lapse at any time after the transfer, or a restriction that may be removed or overridden by the transferor (or the transferor and family members acting together) will be disregarded for gift and estate tax valuation purposes.  This is the case even if the restriction on the interest is pursuant to state law rather than a governing business agreement.  There are certain exceptions – for example, an owner’s right to liquidate or “put” his or her interest to the entity and receive cash within six months is not considered a “disregarded restriction.”

The effect of this rule appears to be that it would eliminate minority interest discounts, because the holder of any interest would be deemed to be able to liquidate his or her interest in the entity without restrictions.  The effect of the proposed regulations on lack of marketability discounts is unclear, although it seems the IRS similarly could argue for a small or zero lack of marketability discount on the theory that the holder of the interest is deemed to be able to liquidate the interest.

Thus, if the proposed regulations are adopted in their current form, they likely will increase the value for gift and estate tax purposes of transfers of interests in family-controlled entities.

The proposed regulations are controversial.  Commentators already have questioned whether the Treasury has exceeded its statutory authority in issuing the proposed regulations.  The proposed regulations are (at least in this author’s opinion) complicated and ambiguous, and perhaps unfair.  For example, if a client creates an LLC to purchase and manage a commercial property, and the client transfers an interest in the LLC to his or her child, and the interest is subject to typical restrictions on sale of the interest or the ability of a member to liquidate (largely because the asset owned by the LLC is illiquid and perhaps leveraged), then it seems that the true value of the interest transferred to the child would be reduced due to these restrictions (think about what a willing buyer would really pay the child for the LLC interest); however, under the proposed regulations, the value of the LLC interest transferred would be artificially inflated for gift tax purposes.

The proposed regulations are not effective until they are finalized.  Treasury has requested written comments by November 2, 2016 and a public hearing on the regulations is scheduled for December 1, 2016.

The Supreme Court has recently struck down state bans on same-sex marriage as unconstitutional in Obergefell v. Hodges, 576 US ___ (2015), after previously striking down the federal exclusion of same-sex couples from marriage-related laws in US v. Windsor, 570 US ___ (2013).  The Internal Revenue Service (IRS) has now followed suit to recognize same-sex marriage for all federal tax purposes, including income, estate, gift, generation-skipping, and employment tax.

On October 23, proposed regulations were published in the Federal Register, which redefine the terms “husband” and “wife” under Section 7701(17).  Both terms will now mean an individual lawfully married to another individual, and the term “husband and wife” will mean two individuals lawfully married to each other. These definitions would apply regardless of sex.  Prop Reg § 301.7701-18(a).  The IRS is accepting comments for a limited time.

However, the proposed regulations redefining marriage will not apply to domestic partnerships, civil unions or other relationships. Prop Reg § 301.7701-18(c).  The couples’ choice to remain unmarried is respected by the IRS as deliberate, for example, for purposes of preserving eligibility for government benefits or avoiding the tax marriage penalty.  Preamble to Prop Reg 10/21/2015.  In addition, a marriage conducted in a foreign jurisdiction will be recognized for federal tax purposes only if the marriage would be recognized in at least one state, possession, or territory of the United States.  Preamble to Prop Reg 10/21/2015.

Many people look to set up Section 529 plans to provide higher education funding for their family’s future use.  In so doing, questions sometimes arise as to whether these funds are protected from creditors.  Generally, a determination of whether protection is provided depends on the state in which the plan’s participants reside.

Section 529 plans are named after Section 529 of the Internal Revenue Code, a provision of the Code covering qualified tuition programs.  The plans are sponsored by states and/or educational institutions, and allow tax-advantaged savings for future college costs incurred by the plan’s beneficiary.  Basically, the amounts contributed to a Section 529 fund are allowed to grow tax-free under the Section 529 rules. 

Three principal parties are involved with Section 529 accounts: the account donor, the account owner, and the account beneficiary.  An account donor contributes funds to the account.  Each Section 529 account also has an account owner, who manages the use of funds contributed.  The account donor and account owner will often, but not always, be the same person.  Typically, the account owner is a parent of the account’s beneficiary.  The beneficiary of the account is the party for whose future use funds are invested.  Beneficiaries of an account can be changed if changed circumstances arise (i.e. the beneficiary decides not to attend college, or receives a substantial scholarship).  Of note, contributions to a Section 529 plans by parents or grandparents for a child’s benefit are deemed to be completed gifts, and are not included in the account donor or owner’s estate for estate tax purposes.

Protection of Section 529 plans from creditors is a state-specific issue, with slightly over one-half of states providing some type of protection.  Under New Jersey law, funds in a Section 529 account are granted protection from creditors of the account donor and the beneficiary.  However, protection is not explicitly provided for the account owners.  Other states, such as Pennsylvania and Florida, explicitly provide this protection. 

New York offers more limited protection for Section 529 plans than New Jersey.  If  the owner of a New York account is not both a minor and the account’s beneficiary, only $10,000 of the account balance will be protected from creditor claims.  The remainder of the account’s funds will not be protected.

In most states, creditor protection for 529 accounts is provided only for accounts established within the state.  A few states (such as Florida, Texas, and Tennessee) have statutes which could potentially offer protection to Section 529 plans established under the laws of any state.  For example, a resident of Florida who holds an account in New York may be offered protection by Florida law.  However, New Jersey and New York’s respective statutes follow the typical approach of only protecting plans established within the state.

The level of protection which can be provided to a resident of one state who holds a 529 plan in a different state is unclear.  As an example, a New York resident establishing a 529 account under Florida law will not receive protection in New York (as mentioned above), and also may or may not receive protection in Florida.  A determination as to whether protection would be granted under these circumstances would be made under Full Faith and Credit principles.  However, different standards are used for different Full Faith and Credit decisions.  This issue has not yet been tested in Court decisions.  Because of this level of uncertainty, establishing Section 529 plans in the state in which the participants reside appears to be the safest route to ensure some level of protection.