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Recent Developments In Estate Planning

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Recent Developments In Estate Planning

Written by Charles Newland on . Posted in Probate and Estate Planning

A house, estate planningEstate tax laws were overhauled by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (“Improvement Act”), by IRS proposed regulation § 2801, and by a series of cases which addressed estate planning issues. These recent developments, while not expansive, could significantly impact some estate and individual tax returns. Furthermore, Congress expanded the number of tax returns that could be subjected to penalties and interest for improper or late filings.

The Improvement Act of 2015

The Improvement Act of 2015 introduced several fundamental changes. First, section 1014(f) prevents taxpayers from assuming a higher basis on inherited property.

Under the original section 1014, beneficiaries who receive property must set the basis of the asset as the fair market value at the time of the decedent’s death. However, some taxpayers successfully argued that they should be permitted to use the fair market value at the date of inheritance. Section 1014(f) put a stop to this practice.

Now taxpayers must use the lower basis which means more of the gain in value in the property is subject to the estate tax.

IRS Proposed Regulations on § 2081

Section 2081 imposed a tax on gifts received by a US citizen or resident from certain expatriates. An expatriate falls under the law if:

  1. They make $124,000 a year, adjusted for inflation, over the past five years;
  2. Own at least $2M in property, or
  3. Fail to certify under penalties of perjury that he or she complied with all US tax obligations for the past five years.

If a taxpayer receives a gift from an expatriate that meets any of those factors, they are required to pay a tax on the gift.

Cases

Whenever there is an exchange of goods or services, there must be adequate consideration. Consideration is the ‘thing’ that is bargained for in exchange. If there is no consideration, then the law presumes there were a gift and the gift tax applies.

In two cases, the Tax Court clarified that consideration is acceptable, even if provided by a third party, provided it was in the ordinary course of business. However, in a similar case, the court ruled that no consideration was given because it was not done in the ordinary course of business because it wasn’t an arm’s length transaction. Moreover, testimony revealed that the transfer was made with donative, rather than business, intent.

The court then construed the transaction as a gift and applied the gift tax.

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