Wednesday, September 19, 2012
IRS Issues Draft Form 706
On Aug. 16, the Internal Revenue Service released a draft version of a revised Form 706 (the 706), “United
States Estate (and Generation Skipping Transfer Tax) Return.” www.irs.gov/pub/irs-dft/f706--dft.pdf. It didn’t release instructions. The revisions implement two major changes in the law. First is the allocation of a decedent’s unused estate tax exemption to his surviving spouse under Internal
Revenue Code Section 2010(c)(4) beginning in 2011, the portability of the deceased spouse unused exemption (DSUE) under Treasury
Regulations Section 20.2010-2T. Second is the filing of protective refund claims for unresolved claims for debts and administration
expenses to take into account post-death events under the revisions to Treas. Regs. Section 20.2053-1 that apply to the estates
of decedents dying after Oct. 19, 2009.
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Conceptually, the DSUE revisions are the most remarkable. They allow the filing of the return when it’s
not required. The executor makes the portability election simply by filing the 706; the executor isn’t required to make
a specific election. Rather, a check-the-box option is provided for opting out of portability. The draft form permits other
elections to be made, including the qualified terminable interest property (QTIP) election for marital deduction purposes
and the election to apply the decedent’s generation-skipping transfer tax exemption to the QTIP property. The election
to take administration expense deductions for either estate or income tax purposes will also be required. The revisions may
force consistent positions to be taken for state tax purposes for decedents in states imposing estate taxes. And, the revisions
introduce the concept of estimated valuation for estate tax purposes in limited circumstances when property qualifies for the marital or charitable deductions.
Part 6 of the 706 addresses portability, on a new p. 4. The option to elect out is at Part A. The actual computation
of DSUE being ported to the surviving spouse is at Part C. And the calculation of DSUE available to claim by the estate of
the surviving spouse is set forth at Part D, taking into account the DSUE received from the most recent deceased spouse and
the DSUE received from one or more other deceased spouses and used by the current decedent. The result is then carried to
line 9b of the tax computation on p. 1.
The DSUE arising when property passes to a qualified
domestic trust (QDOT) for the decedent’s surviving spouse who’s a non-citizen of the United States becomes tentative,
subject to re-computation after the application of the tax due under IRC Section 2056A in the subsequent administration of
the QDOT. (See Section B of Part 6.)
The estimated valuation provision, referenced on almost
every schedule and at Parts 1 and 5 of the 706, is likely to be of limited use. While the regulations refer to a range of
estimated values being provided in the instructions to the 706, Treas. Regs. Section20.2010-2T(7)(ii)(B), the instructions
aren’t yet available. Estimated valuation only applies to property qualifying for either a marital deduction or a charitable
deduction when the value doesn’t affect the value passing to any other beneficiary or any elections to be made. (Treas.
Regs. Section 20.2010-2T(7)(ii)(A).) For bank and brokerage accounts, the actual valuation of the property is likely to be
readily available. For other assets, valuation may be required for other reasons, including establishing basis for income
tax purposes or for the application of state death taxes. An alternative tax planning strategy for charitable bequests is to give the asset to the surviving spouse, so that he may then make the donation and claim
a deduction for income tax purposes.
Schedule PC, “Protective Claim for Refund,” provides a permissive
method to preserve a claim for deduction under Treas. Regs. Section 20.2053-1(a)(5) for “unresolved claims” against
the estate for either administration expenses or for debts. Schedule PC is required: (1) to be completed separately for each
unresolved claim or expense that may not become deductible under IRC Section 2053 until the limitations period has expired;
and (2) to be filed in duplicate.
Schedule PC has three parts. Part 1 requests general
information concerning the estate, including the number of protective claims being filed with the 706. Part 2 requests information
about the specific claim being reported, including the amount in controversy, the parties, the basis for and a description
of the claim, its status and copies of relevant pleadings or other documents. Given the information requested and the space
provided on Schedule PC, attachments to substantiate the claim will likely be needed. No provision is made for a computation
of the amount of tax reduction or refund due, consistent with the regulatory provision that the protective claim doesn’t
need to state a particular dollar amount or demand an immediate refund.
Schedule PC appears
designed to be filed with the 706 and as a separate, stand-alone filing. It anticipates multiple filings with respect to specific
claims, with subsequent filings reporting either partial payment or complete resolution of the claim. (See Part 2, lines b
and c.) Once a claim is resolved, the regulations indicate that the resolution is to be reported within a reasonable time.
At Part 3, Schedule PC provides for a listing of any Schedules PC or Forms 843, Claim for Refund, previously filed with respect
to the unresolved claim. A necessary step in the estate administration process will be filing refund claims to follow up on
the estate’s payment of contingent expenses and liabilities as they get resolved. Since Form 843 does provide for the
computation of the refund amount due, in contrast to Schedule PC, it may be the preferred form to file. Hopefully, the instructions
will provide guidance on the coordination of filing these different forms.
Tuesday, September 4, 2012
Estate Planning for Same-Sex Couples and Domestic Partners
Estate Planning for Same-Sex Couples and Domestic Partners
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While few people enjoy talking about death or disability, basic estate planning is essential for “domestic partners.”
Environment in states where lesbian and gay couples cannot legally marry, the relationships of same-sex
partners are governed generally by contract law. Because of the confusing patchwork of rights afforded to same-sex couples
across state lines, having a comprehensive plan in place covering all aspects of planning is vital.
Estate planning is the
process of compiling a list of assets and obligations and making decisions in a will about how the estate will be distributed
after death. If an individual does not have a will, living trust, or any other legal designation for transferring property,
his or her property will be distributed under the state’s intestacy laws, generally requiring that property pass to
certain specified family members, such a spouse, children, or parents.In
order to protect each other, couples should plan ahead. If the relationship is not recognized by the law, the partners are
not related to each other and intestacy rules will not apply. Lack of proper planning could result in an individual’s
partner being evicted from their home, denied access to shared possessions, or having to wage legal battle against relatives.
Estate and Gift Tax
Under federal law, a married person can transfer unlimited assets to his or her spouse by gift during
his or her lifetime or by bequest at death with no federal gift or estate tax consequences. The same deductions are not available
to same-sex couples. With the passage of the same sex marriage bill, the State of Maryland could soon offer the same protections
from Maryland estate taxes for same-sex married couples. Until that law is enacted, it is important to plan for the potential
imposition of estate or inheritance tax.
Assets Requiring Special Planning
The distributions of retirement plan
assets are generally controlled by the beneficiary designations made by the plan participant.There are strategies available to stretch
out the distributions and resulting income taxes, but not all are available to unmarried partners. A surviving spouse may
roll over a deceased spouse’s retirement plan into his or her own plan, but this option is not available to unmarried
partners. This may result in the distributions (and resulting taxes) beginning sooner than would have been required by a surviving
Life insurance may be a useful tool for unmarried
individuals. Life insurance trusts are useful for a variety of estate planning needs. Properly employed, the proceeds of a
life insurance policy can avoid both income and estate taxes. The proceeds of life insurance are paid to the named beneficiary(ies).The proceeds can be used
to pay estate taxes for someone who did not want to make gifts during life. Also, naming a domestic partner as the beneficiary
in a life insurance policy or life insurance policy owned by a trust may protect their right to inherit if there is a possibility
that a will might be contested.
Powers of Attorney
A financial power of attorney requires that the person choose an agent to make decisions regarding financial
matters and property. This is essential to protect your assets in the event you become physically or mentally unable to handle
financial matters. By naming a partner as your agent for making financial decisions, he or she can act on your behalf to pay
expenses, collect benefits, watch over your investments and file taxes should you be unable. Without this, family members,
rather than your partner, may gain controlling interest in your affairs.
is important for unmarried partners to have legal documents such as wills and powers of attorney in place, and review all
beneficiary designations. Without these documents, partners may not be able to take care of one another in the event of illness
and the survivor may be left with nothing at the first partner’s death. Estate planning is often an uncomfortable topic
to discuss with loved ones. However, properly preparing for such contingencies will bring peace of mind to you and your family.