Estate Planning Perspectives After the 2001 Tax Law. (2002-3)

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© A. Hawkins 2002

 

 

The Nature of this Course

Part 1 of this course contains the teacher’s thoughts about the implications of the 2001 tax law for estate planners.  It contains personal reactions that reflect the teacher’s personal experiences and views.  It is written in the first person to reflect the nature of the course.  Part 2 is the statute itself, in bill form, with some emphasis added. You may wish to print this text and staple Parts 1 and 2 separately so you can refer to the bill as you study Part 1. You may also wish to refer to the prior law. The prior statute is not included in this text.

 

The Process

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The essence of the new law.

The estate tax exemption is increased.

The estate tax is repealed. 

The generation skipping tax is repealed.

The gift tax is retained.

There is some carryover basis and some “step up” in basis. 

Special valuation is repealed.

Installment payment is increased.

The estate tax is reinstated the way it was before the law was passed. 

The generation skipping tax is reinstated in lock step with the estate tax

 

The most dramatic changes are repeal of estate taxes and repeal of the repeal of estate taxes. Then, it reappears just the way it was before the law was passed.  Yes, the estate tax dies and comes back from the dead.  It really isn’t gone, it is merely on a tax holiday.

 

Prior to repeal, the estate tax is phased down. When it returns, it returns as it was before the law passed.  The phased in changes are gone.

 

This makes no sense.  It is bizarre.  It is lunacy.  It is the law. 

 

More Complicated

Repeal of the estate and generation skipping taxes should make estate planning less complicated. It should, but it didn’t.  Today estate planning is more complicated than it was when Congress convened in January, 2001.

 

Wills and Trusts, the Words Used

Estate plans may involve Wills, Trusts, and other tools.  This course refers to Wills because it is a nice, short word.  If you use revocable trusts, you can generally substitute “Trusts” or “Wills and Trusts” for Wills. . The word Will is capitalized to indicate a Will and Testament, as opposed to other uses of the word “will.”

 

A Warning and Call to Action!

Formula clauses tied to the tax law became a fad in the late 1970s.  They determine who gets what from the estate by reference to the estate tax. 

Oops. 

If there is no estate tax, who gets what?  If you wrote a will with any cross reference to the tax law, or with any formula which includes a factor based on the tax law, pull out the Will, read it, consider how it functions in 2010, 2011, and 2002-2009.  Then consider whether that makes sense.  If it doesn’t make sense, decide what you will do, and do it.

For example, if a Will gives the children by a prior marriage everything that can be given without estate tax, and gives the new spouse everything that causes a reduction in estate tax because of the marital deduction, but there is no estate tax or marital deduction at the time of death, who gets the estate?

For decades, I have been concerned about Wills that cross reference to the tax law.  My concern was not shared by many estate planners. The standard conclusive presumption of estate planning lawyers was that the estate tax would not be repealed or restructured.  I have always considered change inevitable and repeal realistic.  Twenty years ago President Reagan advocated it.  At times over the last few decades there was enough support in the Senate for repeal that I think it could have passed the Senate if the House and President had both been receptive.  A substantial minority in the House supported repeal.

Estate planners did not notice.  The first time in the last 20 years that I heard repeal mentioned was a few years ago when I heard Professor Stanley Johanson of the University of Texas School of Law at a CLE program attempting to tell a joke about it.  It didn’t work as a joke.  He said something about “who would get the property if the estate tax was repealed?”  The audience didn’t seem to follow him.  He explained that he was joking, that it won’t happen, and that it would really be a problem if it did happen. 

It has happened.  It isn’t funny.  It never was.  The professor’s joke was the first indication that the idea of repeal was registering.  But, it wasn’t taken seriously because . . . well, just because. 

Many estate planners failed to plan for this possibility.  Did you?  Let me say it again.  Can you tell who is given the property by the Wills you have written?  That is a very important question.  If your answer is “no,” or “I am not sure” there is a big problem.

Even during the phase outs before repeal, formula clauses create a big problem.  Does the testator want the spouse to get most of the estate if the death occurs this year, but  none of the estate if the death occurs in 2004 just because the exemption is increased?  Did you ask?

 

Bypass Trusts

Did you write Wills that provide bypass trusts just to save estate taxes at the second death?  If there is no estate tax at the second death, what is the purpose of the trust?  Is there a purpose other than taxes?  Does the plan make sense?  Does it make sense if the exemption is, say, $1.5 million?  If the combined estates are a $1 million dollars and the exemption is $1.5 million, does a bypass trust make sense?

 

People and Property

Estate planners focused on estate taxes, but sometimes neglected other issues.  There are reasons for trusts, gifts, and other planning that have nothing to do with taxes.  Maybe your client would like to put her property in a bypass trust because she knows that, if she dies, her husband will be enchanted with, and dominated by, a  floozy. Or maybe he is a spendthrift, a drunk, a fool, or all of these.  Think about the people and the property.  When you rethink estate planning, think about what is best if there is no tax of any kind.  Then think about how to achieve the goals despite taxes. 

 

Repeal of Repeal: Extraneity is  for the Byrds

Earlier I said that the law was lunacy.  It is.  There are reasons that Congress repealed the repeal.  Congress explains that the Byrd rule made them do it.  The Senate Finance Committee explained the Byrd rule as applied to estate tax termination and resurrection:

 

“The Byrd rule . . . is contained in section 313 of the Budget Act.  The Byrd rule generally permits members to raise a point of order against extraneous provisions (those which are unrelated to the goals of the reconciliation process) . . . .

“Under the Byrd rule, a provision is considered to be extraneous if it falls under one or more of the following six definitions:

. . . .

(5) It would increase net outlays or decrease revenues for a fiscal year beyond those covered by the reconciliation measure . . .

“This . . . bill contains language sunsetting each provision in the title in order to preclude each such provision from violating the fifth definition of extraneity of the Byrd rule. . . .”[1]

 

Here is the “thinking” behind killing and resurrecting the estate tax.  If the tax bill had was brought up in the usual way, a filibuster might stop it and other procedures might delay or maim it.  Instead, it was incorporated into the budget reconciliation process, which has special rules that limit those procedures.  The Byrd rule is part of the reconciliation process.  The death and resurrection of the estate tax is the result of the Byrd rule.

The Byrd rule required the estate tax to return from vacation, and to return just the was it was before the law was passed. 

But, it won’t return just the was it was. 

The law will be changed.

I don’t know what the changes will be.  The estate tax may be killed and not resurrected.  The tax may not be killed at all. 

I do know that the law won’t continue without change.  At least, it won’t unless congress really is crazy.  Come to think of it, they wouldn’t have passed it this way if they were sane.  Killing the estate tax for one year, and resurrecting it the following year is a symptom of institutional lunacy.

A cynic would say that Congress didn’t really repeal the estate tax.  They just pretended to do so, but they will repeal the repeal before it takes effect.  When you see what they did, it is hard to argue against cynicism.

 

Estate Planning Under the 2001 law

Estate planning is difficult.  It is planning for the future, not the present.  It is planning for deaths without knowing when people will die or who will survive a particular death.  It is planning for the disposition of assets without knowing what assets will exist, what they will be worth, or what income they will produce.  It is tax planning without knowing what the tax law will be at the time the plan takes effect.  Estate planning is difficult in the best of circumstances. Sensible estate planning may be impossible for some estates under the  2001 tax law.  But, planning is what planners do, so estate planners will continue to plan, whether the plans are sensible or not.

Estate planning is almost impossible because the law says that the estate tax ends, and is resurrected, but it probably will either end and not soon be resurrected, or not end at all. Yet, it is worse than that.  The strategies for estate planning under the old law and the strategies for estate planning when there is no estate tax, are incompatible.

 

The Three Phases

Phase One - Phase in and Phase Out

The new law has three phases.  In the first phase there are phase ins and phase outs as details change every year.  For example, the exclusion is increased in steps and the state death tax credit is phased out in steps, and eventually replaced with a deduction.  This phase lasts until 2010, when the phasing in/phasing out phase ends.

Phase Two - Repeal

In 2010, the gift tax continues but the estate tax and generation skipping tax are repealed.  Also, in 2010, “carryover basis” partially replaces basis[2]  at date of death. With carryover basis, the decedent’s “basis,” with all of its “character,” carries over to the beneficiary.  The decedent’s basis is not replaced with a date of death basis.  But, that isn’t true for most estates, because there are two separate grants of  basis.  The first is a $1,300,000 step up for every estate.  The second is an additional $3,000,000 step up for assets going to a spouse.  Both are increases in basis from the carryover basis. Therefore, if the full spousal basis step up is used, there is a $4,300,000 increase in basis from the basis in the decedent’s hands before death.  For example, if a decedent had assets worth $12 million with a basis of $7.5 million, and left them all to her husband, the basis after death is $11.8 million (7.5 + 4.3 =11.8).  If the basis before death was $8 million instead of $7.5 million, the basis after death would be $12 million, with $300,000 of potential step up unused.  Except for administrative requirements, carryover basis does not affect estates with less than $1.3 million of value that exceeds basis or estates with up to $3 million of value that exceeds basis passing to a spouse, and up to $1.3 million of value in excess of basis of additional assets regardless of the beneficiary. 

Therefore, in 2010, we can say that there is carryover basis. There is.  But, we can also stay that there is a step up in basis.  There is. The step up is limited, but the limits are high enough so that the limits will not affect the vast bulk of estates.  Carryover basis will affect very few estates. Basis step up will affect all estates that have significant appreciation.

 

Phase Three - Repeal The Repeal

In 2011, the third phase is that the new law expires.  The 2001 law comes back.  It will be like awakening from a 9 year dream and finding everything the way it was.

 

Mirror Image Strategies

Typically, under the old law, the goal of estate planning was keeping assets out of the estate of the future decedent in order to avoid estate taxes.  The benefit of step up in basis for assets in the estate was not enough to offset the cost of the estate tax.  Strategies included gifts from the prospective decedent, bypass trusts that avoid ownership by the decedent, and asset reorganizations that minimize the decedent’s ownership of valuable and appreciating assets.

After repeal, the goal is to maximize basis by achieving the maximum step up and allocating it to the optimum assets and beneficiaries.  There is no estate tax, so there is no harm in owning assets at death.  There is some step up in basis so owning appreciated assets at death is an advantage.  Strategies will include gifts to the prospective decedent, trusts that create incidents of ownership in the decedent, and asset reorganizations that maximize the decedent’s ownership of valuable and appreciating assets.

These strategies are mirror images.  Everything is the same, except that it is backwards. These strategies are precise opposites.

Example:

Assume that Mom and Daughter each own 1 share of ZoomieCorp. that is worth $10 and will be worth $1,000,000 in both 2010 and 2011. Mom has a few million in cash, but nothing else. Mom is terminal and will die in 2010 or 2011. Mom and Daughter love each other and hate everyone else.

What do you advise? 

• If Mom dies in 2011, under the old law, you advise Daughter to keep her stock and Mom to give her stock to Daughter now to avoid estate tax on the appreciation in the stock, because the estate tax does more harm than the step up in basis does good. 

• If Mom dies in 2010 while the estate tax is on vacation you advise Mom to keep her stock and Daughter to give her stock to Mom to achieve a step up in basis on the appreciation in the stock..  Mom will leave both shares to Daughter in her Will. 

 

In real life, you don’t know when Mom will die or what law will exist in 2010 or 2011.  The plans are inconsistent. What is best under one law is worst under the other.  But, if the law changes, what is best and what is worst depend on how the law changes.  What do you advise?  Estate planning isn’t easy.

 

Predicting the Future By Understanding the Past.

I digress to examine why the 2001 law exists.  There is a reason.  The key to estate planning is knowing what the future actually holds and planning for it.  The tax law will change. The fact that this law will change is the one and only certainty.  I don’t expect much change that will affect deaths through 2005.  Plans for deaths that may occur after 2009 face utterly unpredictable law.  In other words, if your client might live past 2005, estate planning should consider the changes in the law that may come.  If your client lives to 2010, predicting the future law is essential. If your client dies after 2005 and by 2009, the law may, or may not, change.  I will explain my reasoning for saying that the law will not change much through 2005, but first, we look at history because predicting future changes requires understanding the reasons for  the 2001 law.

Why did Congress pass this crazy law?  The answer is a combination of politics and computerization. 

 

Computerization

Computerization?  Yes.  Computers project government revenue and expenses.  They project deficits and surpluses.  They do it precisely.  They give precise data.  The data is incorrect, but it is precisely incorrect, so it is treated as if it is precisely correct.  There is something magical about computerized projections of the future that impresses people.  The accuracy may be less that of the Psychic Hotline, but the fact that the projections are wrong doesn’t seem to matter to the Congress.  This is one of the mysteries of our time.  Congress actually bases law on these faulty projections.

For the 2001 tax law, Congress started with the projected surpluses for each of the next 10 years.  It decided to change the tax law to reduce revenue by specified amounts each year.  The amount of revenue reduction was arbitrarily chosen for political reasons, and based on the projections.  This decision  created a pool of future “revenue” that could be “used” to “pay for” tax reductions.  The computer projected the effect of proposed changes in the tax law.  A tax law was drafted to fit the agreed revenue reductions. The law was tweaked until the computer’s revenue projections matched the revenue reduction agreement.   If you think that the particular timing of various changes is weird, blame it on the computer. The changes are timed to fit the projections, and the budget decision.  They don’t make sense, but why would they?  They aren’t based on common sense, good sense, or policy.  They are based on data generated by computers.

The original revenue and budget projections are wrong.  The projections of the effect of the tax law changes are wrong. That didn’t matter.  It didn’t matter that the whole process was flawed.  What did matter was that it complied with the computerized projections.  Why?  Well, that is the way they do it.  That is why.

I said that the projections were wrong.  I said it as a fact.  It is a fact.  I can’t tell you what the deficit will be in 2008.  I can tell you that no one else can tell you either. And, no computer can do it.  It is like projecting the weather in Austin, Texas on September 25, 2008.  The more precise the projection, the more likely the error.  If you predict a partly cloudy day with a high of 85 and low of 60, you might happen to be correct.  If you predict a high of 85.2, a low of 59.7, and that at 2 p.m. there will be a temperature of 73.3, 30% cloud cover, 54% humidity, and wind from the SSW at 14 mph, error is virtually certain.  Yet, predicting the weather is easy compared to the projections on which Congress based the tax law.  Projections of government revenue and expenses are based on a zillion variables.  Each variable has a margin of error. Some errors compound while others cancel out.  The result is inaccuracy.  I guarantee that the projections are wrong, and that they will change.  Actually, that is easy. They changed almost immediately after the law was enacted.  They routinely change.  Yet, the law is based on the projections that existed at the moment it was passed, as if they were precisely correct.

Let’s look at a relatively simple projection to see its accuracy.  In June, 2001 Minnesota passed a taxpayer rebate that was based on the state surplus for the year ending June 2001.  In other words, in the final month of the year they projected the surplus for the year that was about to end. What could be easier?  Most of the information was known so very little was a prediction. The prediction was for a surplus of $700 million. Certainly there is a margin of error.  You might expect a surplus of $695 million to $705 million or perhaps $690 million to $710 million.  There were only a few days to go, so the projection should be close.  Two weeks later, here is the story:

“Minnesota sales tax rebates will be bigger, not smaller, than expected, state revenue officials said today, the product of a state surplus that came in at $791 million at the end of the fiscal year June 30 -- $91 million more than was expected just last month.”[3]

 

Oops.

The error was over 11% even though 95% of the year was over when the prediction was made.

If in less than a month, the Minnesota surplus changed by over 11%, what is the margin of error for projections of the federal surplus 10 years in the future?  The margin of error may exceed the projected surplus. For example, if a projection was for a surplus of half a trillion dollars in the 10th year in the future, we could say that it is correct, give or take a trillion dollars or so.  The projections are almost meaningless.

There is an old phrase that sums it up:  Garbage in, garbage out.  In this case, the tax law is created to fit numbers that are garbage. 

In short, the law is designed to fit the projections, and even though everyone knows that the projections are wrong. 

If you expect the law to reflect common sense, don’t.  It doesn’t.  Common sense has been replaced by computerized nonsense.

If you think the specific annual changes in the law are based on policy, think again.  The timing of the changes was determined by what the computer allowed Congress to do.

 

Politics

The law is also the result of politics.  That isn’t surprising in itself, but some details may surprise you. Here is the story.

There is a political class that wields great power with low visibility.  They are the political consultants.  These are hired guns whose job is to elect candidates that employ them.  They may have been the critical factor that caused estate tax repeal.

Their traditional approach would be to take polls, decide what “sells” in the political marketplace and advocate advocating those policies.  The consultants don’t advocate enacting the policy as much as they advocate advocating it.  Campaign support and contributions can be solicited from those who want the change, and from those who oppose change.  Some of the campaign money goes to the consultants.  Potential change in governmental policy creates good business for the  business of politics. A classic example is a temporary tax provision which benefits certain businesses but “expires” in the future.  The provision can be “extended” every few years.  That keeps the money flowing. Campaign contributions are given to influence Congress to “extend” the law.  Lobbyist have something for which to lobby. If the law was “permanent” the money flow and lobbying would end.

Yes, some tax law is structured to generate political support and contributions.  The purpose of the law may not be to generate contributions, but the structure of the law as a temporary law is designed for that purpose.

If we apply this concept to the estate tax, the result could be advocacy of repeal of the estate tax; solicitation of donations from those wanting repeal; failure to achieve repeal, but moderate success in increasing the exemption equivalent.  That would make many voters happy while preserving the flow of campaign contributions from those who want repeal, and preserving the repeal issue to be advocated in the future.  The 2001 “Democratic alternative” proposal fit this pattern.  “Compromising” by agreeing on this result was a likely outcome.  It almost happened, but it didn’t. Something changed the process. What was it?

The answer lies in the winter of 1999-2000 in snowy New Hamshire.  For a few weeks, Senator John McCain was the hot political candidate.  He seemed to come from nowhere to capture the public imagination.  Most of the Republican political consulting class was in the Bush camp.  The consultants attended McCain rallies and watched on C-Span to see what the McCain phenomena was all about.  One of the things they saw was McCain advocating repeal of the “death tax” and routinely receiving spontaneous standing ovations.  The applause was mostly from people who would never pay the tax.  The political consultants were stunned. They had no idea that the issue resonated as it did.  Public support for repeal was broad and intense.  Suddenly estate tax repeal was promoted from a minor issue to mention, to a basic campaign plank that would be stressed as if the candidate really meant it.  The political equation changed.  McCain’s campaign failed, but the issue was established with the consultants.  The anecdotal evidence was confirmed by the polls, and the Republican controlled Congress passed outright repeal in 2000, knowing that it was good politics and it would be vetoed by President Clinton.  About the time of the national political conventions in 2000, Rasmussen Research’s Portrait of America poll[4] was published just before President Clinton vetoed the bill that repealed the estate tax.

 

“70% Want to Kill Inheritance Tax 

“Portrait of America finds 70% of America’s likely voters want President Clinton to sign legislation eliminating the inheritance tax. Only 16% do not want the President’s signature on the Republican sponsored legislation.

“Even among supporters of Vice President Al Gore, there is strong support for stopping the tax. 59% of Gore’s supporters want the President to sign the bill and eliminate the inheritance tax. Just 26% of Gore’s supporters favor a veto. 78% of Texas Governor George W. Bush’s supporters want the President to sign the bill; only 12% favor a veto.

“Opponents of the tax cut have cited figures showing only 2% of Americans will ever pay inheritance taxes. This has led some observers to wonder why the legislation is so popular. The Portrait of America telephone survey found the tax may have an impact beyond the number of people who actually pay it. 47% of all senior citizens say they have met with financial advisors to discuss ways of protecting their assets from inheritance taxes. Beyond that, a plurality of Americans under 65 say their parents or grandparents met with advisors to figure out ways around the inheritance tax. This includes 47% of those aged 30-49.

“Since most Americans probably consider meeting with lawyers and financial advisors about as much fun as paying taxes, this suggests opposition to the inheritance tax is deeply rooted in, and based upon, the experiences of millions of Americans. This view is supported by the fact that the highest support for eliminating the tax – 78%-comes from Americans aged 50-64. That’s precisely the time when financial planning to avoid estate taxes is most important.[5]

“A majority of Americans in all income groups want the President to sign the legislation. This includes 55% of those who earn less than $20,000 a year. Just 28% of these lower income Americans favor a veto.

“71% of white Americans and 61% of black Americans want the President to sign away the inheritance tax.

 

Question Wording:

1. President Clinton now has to decide if he will veto or sign the inheritance tax bill If he signs the bill, it will become law and the inheritance tax will be eliminated. What should the president Do? Veto the bill and preserve the tax or sign the bill and eliminate the inheritance tax?

 

16% Veto the bill

70% Sign the bill

14% Not sure

 

2. Have you ever met with a lawyer, accountant, or financial planner and discussed ways of protecting your assets from the inheritance tax?

 

33% yes

58% no

9% not sure

 

3. Have your parents or grandparents ever met with a lawyer, accountant or financial planner and discussed ways of protecting their assets from the inheritance tax?

 

35% yes

42% no

23% not sure

 

A political operation was established to advocate repeal.  It was remarkably effective.  Repeal passed the house.  The final horse trading was a close call. The estate tax and generation taxes were repealed, the gift tax was retained, and partial carryover basis was initiated. The estate tax repeal is only for 2010.  In 2011 the estate and gift tax law reappears just as it was 2001.  Why?  You may pick from these answers, or combine them:

1 The Byrd Rule and the computer projections. Permanent repeal would have violated the rule.

2. The members of Congress will tell voters that they repealed the estate tax.  They will leave out the rest of the story.

3. Follow the money.  A one year repeal with reversion to the current law means that money will flow to members of Congress.  It will come to supporters of repeal from wealthy families who support repeal.  It will come to opponents of repeal from charitable, insurance, trust, and estate planning interests.  The political consultants will end up with part of that money.

4. Before 2010, Congress can still “compromise” on something like the Democratic alternative that raises the exemption, but retains the estate tax.

 

Instructive Illusory Memories

This law evokes memories of two previous Tax illusions.  Some lawyers were not practicing when these situations arose and may not have heard about them.  Others share these memories.  They come to mind whenever I think about the belief of lawyers that reading the Internal Revenue Code will tell lawyers what the law is and what it will be. That isn’t always true.

The first memory is an old one from the late 1970s.  Yes, I am older than dirt, and was planning estates way back in the last millennium.  Someone had an idea.  It might have been a member of Congress.  It might have been a political consultant.  It didn’t need much support because it was the perfect law - it had very little real effect, but was wonderful for political brochures listing  accomplishments.  What could be better!  It was known as the Orphan’s Exclusion (or “deduction”).  The deduction allowed an estate to avoid tax on an arbitrary amount of estate assets, if the estate qualified.  There were three problems.  One was that estate plans needed to be changed in order for most estates to have a chance to qualify.  The second was that any benefit was probably small.  The third is that essentially no estate would qualify.  The only good feature of the law was its name. “Orphan” is an irresistible word.  Back then, my basic concept was that it wasn’t wise to mess up the basic estate plan in order to potentially qualify for an unlikely and minor benefit.  I never saw an estate that qualified, but that wasn’t rare.  I recall being at a major advanced estate planning CLE course where the lawyers attending were asked if they had ever seen a fact situation that would have potentially qualified if the law had been in effect and the plan had been created to take advantage of it.  I don’t recall now whether it was no lawyer, or one lawyer, who had seen such a situation, but it was less than two lawyers. 

I have another memory from the same seminar.  A different speaker suggested that it might be malpractice to fail to draft a Will to qualify for the Orphans deduction.  After a few years, despite the attractive “orphan” name, the law was repealed for a simple reason - no one qualified.  Well, not quite “no one.”  The rumor was that in the history of the Orphan’s Exclusion, precisely one estate actually benefited.  Clearly the public paid lawyers more to plan for this tax provision than it saved in taxes by qualifying.

The second memory is of carryover basis. This is not a new idea.  It was enacted before. It took effect.  Tax returns which were based on it were required. Compliance was impractical, or perhaps impossible.  It was so messy it couldn’t be done.  For that reason, it was repealed.  Repeal was retroactive to the beginning.  Tax returns that where filed in compliance with the carryover basis law required amendments to undo the compliance.  Tax returns that were (incorrectly) filed ignoring carryover basis were fine.

I call these illusory memories because they are memories of illusions that were in the Internal Revenue Code. Carryover basis was supposedly in effect, but it was written in the Code in erasable ink and it was erased so it was never there after all.  The Orphan’s Exclusion existed briefly, but was of no significance and was repealed soon enough that almost every testator who whose Will provided for an Orphan’s Exclusion was alive when the law was repealed.

I called these instructive memories because they teach.  They teach that Congress changes the law.  Sometimes it changes it retroactively.  And, some laws really don’t matter. 

Congress has again passed carryover basis.  This time it won’t take effect for a decade and it affects only a tiny sliver of estates.  Does that mean that it will take effect as written?  No.  It means that Congress has 10 years to tinker, and to use the prospect of carryover basis to solicit campaign support and contributions.  We know that the carryover basis law might take effect as written.  We also know that it might not. 

Advice:  Take the law as written seriously, but not too literally.  It will change.

 

No Change through 2005

I predict that estate tax repeal and phased in increases in the exemption will survive through 2005. After that changes will occur.  Why do I say that? It is because of economics and politics.

 

Economics

First, it isn’t entirely a tax reduction in the early years.  It is partially a shift in tax revenue from the states to the Federal government.  Really!  Did members of Congress forget to mention that in their press releases? 

Here is how it works.  Under the old law, part of the estate tax is diverted to the states by a credit for state death taxes which is matched by state[6]  estate taxes which equal the credit. That has been the law for many decades. The law phases out the credit. That probably doesn’t affect the tax that the taxpayer owes. It does affect how much of the tax is paid to the state and how much of it is paid to the federal government.  The phase out is a quarter of the credit per year in 2002, 2003, and 2004, with the remaining quarter extinguished in 2005.[7]  The result of the federal government getting the revenue that the states now get is that the “cost” to the federal treasury is reduced. Basically, Congress spends the money that comes from the states.  Thus, the law is tax reduction partly offset by a shift of money from states to the federal government. The net federal revenue effect is small through 2005. Congress’s annual revenue projection is below. Because the government functions on fiscal years and there is a delay between date of death and payment of estate tax, the annual revenue effect may surprise you.

 

         Year                   Net Revenue Reduction (billions)

         2001                   0

         2002                   0.105

         2003                   6.993

         2004                   5.590

         2005                   7.594

         2006                   4.570

         2007                   10.186

         2008                   12.358

         2009                   13.201

         2010                   23.523

         2011                   53.904

 

The total net effect over the five years 2001-2006 is 24.854 billion dollars.

The total net effect over the ten years  2001-2011 is 138,005 billion dollars.

The economic incentive for Congress to reduce the planned reductions in revenue is not significant prior to deaths occurring in 2006.  Repealing those reductions would be more bother than it is worth. After 2006, the amounts are noticeable. In 2010 and 2011 they are hard to miss. 

Politics

 In addition to economics, my prediction is based on the political environment and the political calendar.  Changes that take effect by January 1, 2005 are in effect before the inauguration of a newly elected president on January 20 and before the newly elected Congress convenes in early January.  It is hard to undo the law that is in effect.  In 2005 the exemption is $1,500,000 and the top estate tax rate is 47%.  Reduction to that level isn’t very controversial.

The president will oppose repealing the reduction that take effect through 2005. 

Before 2005, there is one new congress.  About one third of Senators are up for election.  Incumbents generally win. In 2003, the Senate may move left with greater opposition to estate tax repeal and fewer supporters. But, the consensus will probably strongly favor at least the relief scheduled for 2005.  One reason is the agricultural lobby.  Farmers and ranchers have little influence in the House, but substantial influence in the Senate.  Farmers and ranchers hate the estate tax, at least if it might affect them. Farmers and ranchers would be irate if the exemption did not move from $1 million in 2002-03 to $1.5 million in 2004-05. Those changes won’t be stopped.  If you doubt the power of farmers and ranchers, don’t.  Max Baucus, a Democrat from Montana is Chairman of the Senate Finance Committee. Charles Grassley, a Republican from Iowa is ranking Republican and was chairman when the law passed.  Tom Daschle, a Democrat from South Dakota is the third ranking Democrat on the committee and is also the Majority Leader of the Senate.  Kent Conrad, from North Dakota is the fifth ranking Democrat on the committee and a former North Dakota Tax Commissioner.  Republicans tend to be for reduction in estate taxes, or repeal.  Many Democratic Senators are from rural states with substantial farm and ranch interests. The combination should protect the at least the $1.5 million dollar exemption.

The House is closely divided with a slight Republican majority which voted for repeal of estate and gift tax.  Farmers have less influence in the House.  Many Democrats opposed it.  Redistricting after the census makes predictions more difficult.  The party that doesn’t hold the Presidency generally gains in the election two years after the President is elected.  The biggest effect of redistricting is that the politicians redistricted to further entrench the current members of the House  Only about 50 seats are likely to be in competitive districts.  All other seats are heavily Republican or Democrat.  Few incumbents lose, but some retire.  Huge change is rare. In 2003, if the Democrats have a House majority, it will probably be by a very small margin.  The result is likely to be a closely divided House that won’t push repeal of the phase in and out phase of the bill prior to the Congress that meets in 2005.

In 2005, after the next presidential election, and with two Congressional elections behind us something big might happen. 

Until 2005, any changes will be small or in favor of reduction of tax, or both.

At least, that is how I see it, and why I see it that way.

Actually, I suspect that any law to preserve the estate tax by repealing repeal will provide exemptions of at least $2 million to $4 million.  That would be a “compromise” and would help sell preservation of the tax.  It would exempt most estates and reduce the political pressure for repeal.  It would exempt most prosperous farmers and ranchers.  Special valuation of farms and ranches could exempt more.

The “tax the rich” lobby loves carryover basis.  They have pushed it for decades. It has been enacted, retroactively repealed and now reenacted in a different form.  Those wanting to tax the rich will advocate preserving the estate tax while exempting almost everyone, while imposing carryover basis with some exemptions.  If they succeed, it will probably be done between 2005 and 2009. By 2009, if not in 2005, there will be a new president and there will have been noticeable change in Congress because of retirements and an occasional defeat. Those who wish to make estate tax repeal permanent will be trying to do that.   Those who want an estate tax will try to repeal repeal.  Something is likely to happen.  Look for activity in 2005 and 2009, and perhaps the years in between.

 

How does this affect Estate Planning?

Understanding the political forces is the key to projecting the future.  We can be certain that members of Congress will claim that they “repealed the death tax” when they campaign.  They won’t mention the resurrection of the tax in their ads.  They won’t mention that the gift tax is retained.  They won’t mention that carryover basis is adopted.  We can be certain that some members of Congress will advocate “extension” of repeal while others, advocate “acceleration” of repeal by repealing it sooner  Others will advocate elimination of repeal.  Calling repeal a “loophole” for billionaires while neglecting to mention that people have to die to “enjoy” the “loophole.”  Each side will seek campaign contributions to elect a Congress that can achieve the goal it advocates.

You have to plan.  How do you counsel a client or draft a Will if you don’t know what the law will be?  Estate plans involve speculation on future action by Congress.  Better understanding of the process, means better  speculation about the future.

If you suspect that Congress will consider “extensions” and might pass some extensions, you are getting the idea. If you think members of Congress see personal benefit from the uncertainty, you are getting the idea.  If you expect them to clean up the mess once and for all, you haven’t been listening.

 

Estate Planning With the 2001 law as passed

You will need to know three separate laws. 

1. the old law that exists in 2001 (before the 2001 law takes effect) and after 2010 (after the law reverts to the 2001 law)

2. the law in 2010 (when the estate tax takes a vacation), and

3. the law from 2002 through 2009 when there are various phase ins and phase outs. 

Unless you know when your client will die, you won’t know which will apply to an estate.

 

Estate Planning With the 2001 law as revised

The 2001 law will be revised. You get to guess what the revisions will be, and when they will take effect. Isn’t this fun?

 

A Good Plan

Die in 2010.  The estate tax does not exist.

 

A Better Plan

Your client dies in 2010. You survive.

 

A Nifty Plan

Have your clients die by 2009 with appreciated assets but an estate that is less than the exemption.  Many of your clients will choose this option, and do it.  It is a good plan because they get a step up in basis and they have no estate tax. They even avoid the carryover basis paperwork.

 

The Best Plan

We call this the Strom Thurmond Plan, in honor of Senator Thurmond, who was a handsome young man before there was an estate tax, and a member of the Senate when he voted for this law. Strom’s plan is immortality.  The estate tax may die before Senator Thurmond. Good planning, Senator!

 

The Bad News

Estate planning under the new law is hard.  It may be impossible to do it “right.”  If the law changes between the time the Will is executed and the date of death, will the estate plan work well?  You may not know until it is too late.  That isn’t helpful, but it is the hard, cold, fact.

 

* * * * *

The key planning techniques when, and if, the Estate Tax Does Not Exist

 

In this section of the course we will assume that the estate tax is repealed.  We deal with the general themes, and first thoughts.  Some good planning under the old law and some good planning under the new law require the opposite actions. 

 

Beware of the Gift Tax

The gift tax continues. It is not repealed. There is an exemption and the tax rates are changed, but large gifts can create a large tax.  Retaining property until death avoids tax. A large gift triggers tax.  Are you sure you want to explain to your client why they are writing a big gift tax check to the IRS even though they could have avoided it?  I once wrote an estate tax check for a widow who wasn’t used to writing such a big number.  After three attempts to get the amount to fit in the blank, she gave up and asked me to fill it in for her.  Paying taxes is not fun.  When it is time to write the IRS check, will the client still think it is a good idea?  Be cautious about triggering a gift tax.

 

Gifts

Technique #1: Don’t make big taxable lifetime gifts that exceed the exemption.  Why pay a tax if you don’t have to pay one?

Technique #2: Don’t give appreciated property that will get a step up in basis. If a gift is made, give cash or other assets that have not appreciated.[8]

Technique #3:  Make gifts of appreciated property to the person who will die in order to get a step up in basis, but beware of the gift tax.

 

Yes, a strategy is to give assets to the person who will soon die.  This may almost sound familiar.  It is the reverse of some planning techniques under the old law. Traditionally, the idea was to give  assets away before death in order to have a smaller estate at death.   This particularly applied to assets that would appreciate before death.  With no estate tax, there is tax on a large estate, but there is an advantage in getting the step up in basis.  The result is an incentive to make gifts to the prospective decedent.  This particularly applies to assets that would appreciate before death.  Can this be true?  Yes, and, Congress knew it.  To close this “loophole” there is a special rule for gifts made to the decedent in the three years before death.  Yes, there is a rule for deathbed gifts to the prospective decedent.  Really.  This is the reverse of old restrictions on deathbed gifts from the decedent.  Isn’t this fun!

 

Technique #4:  Make gifts of income producing property to people or entities that have lower marginal tax brackets.  The lower brackets may be federal income tax brackets, or they may be lower state income tax brackets.  For example, a taxpayer in New York City might give assets that produce taxable income to a person or entity in Texas, Alaska, or South Dakota even if the federal tax bracket is the same.  The purpose is to remove the future income from the clutches of the New York City and New York State tax collectors.  Moving the situs of assets and income may become a big business.  There was concern in Congress that eliminating the gift tax or increasing the exemptions would result in massive income shifts from high tax to low tax states. This kind of technique may be part of the new business created by the new law for lawyers, accountants, and trust officers. This technique has been used in the past and may receive more attention now, especially since some in Congress do not want people to do it.  The Senate Majority Leader who is also on the Senate Finance Committee is from South Dakota, one of the states without an income tax that seeks trust business from those who want to avoid state income taxes imposed by other states.  He may not be impressed with the high tax states trying to hurt the economy of Sioux Falls, so it is likely that proposals to prevent this technique will have a difficult time in Congress.  It may become a big issue, and the attention it generates may cause more people to use this technique.

 

Income Tax

There is greater ability to give income producing assets because the increased estate tax exemption combines with willingness to use the gift tax exemption for gifts because there is no need to save it for a reduced or nonexistent estate tax, and because the rules related to the tax basis after death limit the potential step up in basis. 

For estates of up to a few million dollars, the step up in basis can be very important. 

For huge estates, the increase in basis may be insignificant, because of the dollar limits.  They get it, but it may not be important to them.

Planning will focus on shifting income to low bracket people and entities and maximizing the increase in basis from the basis step up.

 

Generation Skipping Tax

The generation skipping tax dies and is resurrected in lock step with the estate tax.  To the extent that events and acts that trigger generation skipping tax can be timed to occur when there is no tax, that seems like a great idea.  Planning may focus on timing to eliminate or minimize the tax. 

If the generation skipping tax really does go away, some generation skipping that is not tax motivated may become practical.

 

State Death Tax

What will the states do?  If my memory is correct, in 1975 most states had an inheritance tax that was calculated separately from the federal tax.  Gradually states switched to a tax equal to the state death tax credit on the federal estate tax.  Will states impose an inheritance tax?  There will be talk, but competition for wealthy retirees will restrict the states. 

The lack of a federal tax will highlight the state death taxes.  People may move to avoid state taxes.  Assets may be moved to avoid state taxes.  State death tax avoidance may become a bigger business.

 

Death Planning

Death planning may work better than estate planning.  The date of death may matter more that the estate plan. That raises four unpleasant scenarios.  Hopefully, the illustrations are absurd. But, they make the point that the timing of the death may determine the consequences.

1. If the billionaire maverick owner of a professional sports team gets excited at a game and has a stroke, then asks you, (during a rare lucid moment) if it would pay to be kept on life support in a vegetative state for a few years until the estate tax is repealed, and then allowed to die before the estate tax is resurrected, what do you say?  [See the CLE courses at YouKnowItAll.com on removal of life support.]

2. If the facts are those of situation #1 except that it is the billionaire’s Mom and sole beneficiary, rather that the billionaire, who asks you the question, because the billionaire is in a comma, what do you say?

3. If an elderly client consults you when the estate tax is on vacation (but is going to be back in effect in a few days)  and asks you whether to commit suicide, what do you say?

4. If the facts are those of situation #3 except that it is the daughter and sole beneficiary, rather that her elderly Mom, who asks you whether it would be wise tax planning to kill Mom while there is no estate tax. What would you say?[9]

 

Tax Returns and Planning for Tax Returns

You might think that, with no estate tax, there will be no estate tax returns and life will be simpler.  Think again. It may be messier.  Carryover basis is the excuse for informational returns that may make the estate tax return a fond memory.  Informational returns must be furnished for a “large estate.”  The executor does it.  Assets must be listed, but not merely with their value at the time of death.  That would be too easy.  Date of death valuation is required, but the adjusted basis in the hands of the descendent is also required along with the decedent’s holding period, and any information that shows the characterization of any gain as ordinary income.  The amount of step up in basis, the taxpayer identification number of beneficiaries and anything else required by the Secretary of the Treasury must be provided.  That sounds like a miserable and thankless task.  It isn’t about planning so much as it is about administration, so we won’t analyze it here except to note that planning may include gathering data for the executor before death.  You might encourage clients to maintain good and suitable records that the executor will understand.  You might also restructure assets to make reporting easier.  Assets could be placed in an entity so the entity is the asset owned instead of the individual items. There are many ramifications, but it is worth contemplating.

 

Penalties - 5%, $10,000, $500, and $50

There are various penalties for failing to report the information to the IRS. The executor, or other responsible person, pays them.  They are $50, 500, or $10,000 per failure, with the amount varying with the particular failure.  But those are the mild penalties. There is also a penalty of 5% of the fair market value of the gift or estate, if the failure to file is due to intentional disregard.  Ouch!

 

Executors on the Hot Seat

The 2001 law creates serious issues for the executor if the estate will not have enough combined step up and carryover basis to make the basis equal to the market value.  These are estate planning issues which should be considered when choosing the executor.  Some people might be disqualified as potential executors because of a conflict of interest.  They are also issues that affect the estate plan and the language in the Will.  The issues can even affect the choice of assets to be distributed to particular beneficiaries.

Example (1) there is no spouse, (2) date of death value is $5 million, (3) basis is $1 million ($900,000 of the basis is in farm land worth $2 million and $100,000 is in depreciated and depleted working interests in oil wells worth $3 million). Daughter is the sole executor. There are no specific bequests. The residue is equally divided between Daughter and Son. 

Situation A: Daughter and Son each receive equal undivided interests in the assets. Each half has a market value of $2.5 million and carryover basis of $500,000. In addition, Daughter, as executor, allocates $1.3 million of step up in basis.  She allocates it all to the half of the working interest which she receives.  The result is that her assets have a basis of $1.8 million and Son’s basis is $500,000.  They both receive assets with a market value of $2.5 million.  Did they really receive equal value?  May the Daughter legally do this?  Does doing it breach fiduciary duties?  Does state law prohibit Daughter from serving as executor because of the power to allocate basis in a self interested manner?  Does state law prohibit Daughter from allocating any basis to herself?  Is she required to allocate all of the basis to Son?  Regardless of state law, or because of state law, should you draft the Will to (1) prohibit either child from being executor, (2) make both children co-executors, (3) authorize unequal allocation of basis in the executor’s personal interest without consequences, (4) prohibit unequal allocation of basis, (5) require basis to be allocated by a formula you set out in the Will [don’t bet on getting it right], or (6) designate another person to make the basis allocation decision and require the executor to ministerially implement the decision?  There are probably many more possibilities. It is likely that no answer is completely satisfactory.  Isn’t this fun!

Situation B: If state law permits, Daughter allocates half of the value to Son and half to Daughter by allocating the farm and $500,000 in oil wells to herself and $2.5 million of oil wells to Son.  She allocates half of the step up to her assets and half to his. Basis is still not equal. In addition to some of the problems in Situation A, has there been a taxable “sale or exchange” which constitutes a capital gain?

Situation C: Daughter and Son agree to allocate half of the value to Son and half to Daughter by allocating the farm and $500,000 in oil wells to Daughter and $2.5 million of oil wells to Son.  Daughter allocates half of the step up to her assets and half to his. Basis is still not equal. Has there been a taxable “sale or exchange” which constitutes a capital gain?

Situation D:  Change the facts in this respect:  The Will gives the farm to Daughter and the oil wells to Son.  May Daughter allocate all of the basis step up to the farm?  Must she allocate all of the basis step up to the oil wells to avoid a personal benefit?  Is she disqualified from serving as executor?

Situation E: The facts are the same as Situation D. Daughter is a farmer. She operates the farm.  She doesn’t expect to ever sell it. She expects her daughter to farm it when she retires.  It is plain old flat dry farmland with no improvements. There are no fences or wells and  nothing to depreciate.  Son is in the oil business. Some of the basis allocated to the oil wells may be depleted or depreciated. Therefore, the present value of basis in the oil wells is significant, but the present value of the basis in the farm is insignificant. May Daughter allocate all of the step up in basis to Son’s oil wells, and offset that by making an “equitable adjustment” of cash from Son to herself?  If Son was the executor, could he do that?  If Son was the executor, could he allocate all of the basis without an equitable adjustment because the present value of the tax benefit is greater if Son gets the basis than it is if Daughter gets the basis?  [Equitable adjustments are covered in the Warms discussion.]

 

* * * * *

The Hot Topic of a Warms Adjustment for Allocation of Basis Step Up

For this discussion, we assume (1) that estate taxes are repealed; (2) carryover basis and limited step up in basis are in effect at death; and (3) property of the estate has appreciated in excess of the limited step up.  In other words, estate taxes are not a problem, but the limits on the step up mean that some gains will be absorbed by a step up and some gains will not be absorbed. 

The executor allocates the basis step up to particular assets. Some assets  receive a step up, while some do not.  Before death, some assets have a large built in gain, while some have a basis equal to, or exceeding, their value.  The three children, Dick, Jane, and Spot,  receive most of the estate. There is no spouse. Assume that each child receives $5 million of cash and in kind assets. Some assets are specific bequests with cash given to reach $5 million each. The residue goes to charity, but that is not the point of the example.  Dick gets $1 million in cash along with a ranch with a basis before death of $1 million and value of $4 million.   Jane gets $1 million in cash and producing oil and gas working interests with a basis of $5,000 and value of $4 million.  Spot gets $2 million in cash, zero basis raised grain in storage with a value of $500,000, and cattle with a basis of $500,000 and value of $2.5 million.  In the good old days of the prior law, the  value at date of death became the basis and the decedent’s basis no longer mattered. In the new world of carryover basis, the decedent’s basis continues, except for the limited step up. Let’s assume that the step up allowed is $1.3 million and the executor is not a family member. 

The issues:

Which assets gain the step up?

Which beneficiaries benefit?

Who decides?

What are the factors to consider when the step up in basis is allocated?

Are there conflicts of interest?  What effect do they have?

 

The answers:

The executor decides. Well, maybe.  The tax law says so.  But, my first thought is that a Will can provide otherwise.  The planning issues to consider when drafting the Will include: (1) who should have the power to decide, and (2) how does that decision affect who will be the executor.

The considerations are not clear. This is an issue of state law fiduciary duty,  not a tax issue.  Look to traditional concepts of state law governing executors.  The details of this issue are new, but there are analogies to previous issues.  This is not an area that has no law, but the law may not be clear, or it may be undecided.  It certainly may vary from state to state.  We will know the law in hindsight, but perhaps not until then.  A court may decide it in a case brought for instructions to the executor;  a suit against an executor for a decision that the executor made; or a suit against a lawyer for poor advice.

Are tax benefits a consideration?  Basis that is allocated to ranch land that will not be sold, producing oil working interests, royalties, grain grown on a farm, business inventory, or cattle, have different benefits.  Some may generate depreciation or depletion deductions or offset the proceeds of the sale of inventory of a business.  Some may merely create potential reduction in long term capital gain in the event of a sale that never happens. The present value of the benefit varies. 

Should tax brackets be considered?  Beneficiaries may be in different brackets. Jane, a rocket scientist, has high income.  Spot, a dog advocate at PITA, receives an earned income credit greater than his taxes. Jack, on death row, is in a zero bracket.

Should life expectancy matter?  If a beneficiary will die soon, that beneficiary’s executor may be able to cover the gain with step up resulting from that death. But, maybe not. It all depends on the circumstances.  Should the possibility be considered, and the odds calculated?

Should circumstances be considered?  Jack faces judgments from the families of the 256 victims of his murder spree. His inheritance may benefit them, not him. Therefore, what he gets, and the taxes, are academic.  But, if he disclaims, his inheritance passes to his daughter, a U.S. Senator. Is his potential disclaimer a consideration?  What are the executor’s duties? 

Should more basis be allocated to assets that have less carryover basis?  For example, should Jane get more basis because her assets have proportionately less basis?  Should depreciation recapture be a consideration?  If so, how?  Should equalizing basis be a goal of the allocation of basis? If so, can it be accomplished in a practical manner?

If equality is required, is it equality of basis, equality of allocated step up in basis, or equality of the present value of the benefit of the basis in the hands of the beneficiary? May the Will specify what shall be done, or the factors that will be considered? 

That brings us to the Warms  equitable adjustment issue, which may become a hot topic under the new law. Should equitable adjustments be made?  If so, are equitable adjustments made for the difference in carryover basis, or basis step up, or the present value of the basis, or what? Why? How? Who does it?  How is it done?  Does it create conflict of interest problems?  Does it disqualify an executor?

For those who are unfamiliar with a Warms equitable adjustment, I will digress to superficially explain it.  It may be the subject of a future YouKnowItAll.com course.  If you would like a course on Warms adjustments, please let us know.  A Warms adjustment is not tax law, it is state law.  It has to do with accounting for estate activity, including tax activity. It is named for the New York case of Matter of Warms.[10]   A Warms adjustment is an equitable adjustment between beneficiaries that is made to correct an inequity, such as one that arises from the tax law.  Tax rules do not always match state law estate concepts of  accounting and equity.  Under the tax law, one beneficiary may pay a higher tax than state law would provide while another beneficiary pays less tax than state law would provide.  The Warms adjustment is a payment from the beneficiary who comes out ahead to the beneficiary who comes out behind.  It is designed to make up for the inequity. 

Is a Warms adjustment called for by carryover basis since the carried over decedent’s basis may create inequity?  That may be unlikely.  Is a Warms adjustment called for by allocation of the $1.3 million basis step up by the executor?  That is more likely.  Can the Will determine the result?  Yes.  The Will can specify how this is handled. 

A comparison that may make this complicated issue more real is the allocation of generation skipping tax exemption by the executor of the Jacobs Estate.  The executor of the Jacobs Estate could allocate $1 million of exemption to various generation skipping bequests.  That was done.  It was done in a way that potentially maximized the overall tax benefit to everyone.  But, an alternative allocation would have potentially benefited an infant beneficiary at the expense of the residuary beneficiary.  The Will provided that the residuary beneficiary would pay the tax, so the infant was not affected by tax savings, but did potentially suffer from generation skipping tax that might be incurred in the future.  The Will gave the executor the power to allocate the generation skipping tax exemption.  Since the allocation potentially cost the infant future tax, should an equitable adjustment take money from the residuary which received a tax benefit? 

The Surrogate’s Court for New York County held that there would be no Warms adjustment because Jacob’s sophisticated 45 page Will provided for allocation of GST exemption in the executor’s discretion; did not provide for an equitable adjustment; and would have provided for it if the testator desired it. To show the complexity of the issue, we include the full Jacobs Estate opinion.  Some of you may find it fascinating, but others will find their eyes glazing over.  Let me assure you that this really is the kind of issue that will be faced in estate administration in every state and that it is dealt with in wills, either by affirmatively dealing with it or by omission.[11]  Yes, the Wills you have drafted in the past, and those you draft in the future, determine how this issue is resolved, even if you did not consider it or mention it when drafting the Will.

 

In the Matter of the Judicial Settlement of the Final Account of Proceedings of George DeSipio, as Executor of the Last Will and Testament of William K. Jacobs, Jr., Deceased, Surrogate's Court, New York County,  614 N.Y.S.2d 866 June 22, 1994.

 

“In connection with the judicial settlement of the final account of proceedings of the executor of the estate of William K. Jacobs, Jr., the guardian ad litem for an infant beneficiary raises a novel question as to whether an "equitable adjustment" is required as a result of the executor's allocation of the testator's $1,000,000 exemption from generation-skipping transfer ("GST") tax imposed by Chapter 13 of the Internal Revenue Code (26 USC).

“The testator died on July 30, 1991, leaving a will dated May 23, 1991 by which he disposes of his approximately $22,000,000 estate. He makes numerous preresiduary bequests, including outright bequests of $163,190.32 to skip persons,[12]  two $300,000 direct skips in trust and two $1,000,000 trusts for non-skip persons, with contingent remainders to skip persons. He leaves his residuary estate to charity. The interests of the guardian ad litem's ward, an infant grandchild of the testator, include an outright bequest, a $300,000 bequest in trust and a presumptive remainder interest in one-half of a $1,000,000 trust.

“The will directs that all taxes, including GST taxes, be paid out of the principal of the estate as an expense of administration, without apportionment, thereby allocating all taxes against the charitable residuary legatee. The will expressly authorizes the executor to allocate the GST exemption as he deems appropriate, in his absolute discretion. It also expressly authorizes the executor to make traditional equitable adjustment of principal and income interests with respect to any election to deduct administration expenses on fiduciary income tax returns,[13]  as he deems appropriate in his absolute discretion.

“The executor allocated $163,190.32 of the testator's GST exemption to outright bequests and $300,000 to each of the trusts for skip persons, fully sheltering all direct skips from tax.[14]  He allocated the balance of the exemption (i.e., $236,809.68) to the $1,000,000 trust of which the guardian ad litem's ward is a presumptive remainderman. Thus, said trust has an inclusion ratio[15]  of 76.32% and is partially sheltered from GST tax on a possible taxable termination at the death of the income beneficiary.[16]

“The guardian ad litem does not object to the executor's allocation of the exemption, which, admittedly, represents effective postmortem planning. The allocation maximized the use of the testator's exemption and saved approximately $1,000,000 in combined GST and estate tax otherwise payable at the testator's death. The allocation fully sheltered from GST tax the ward's outright bequest and her $300,000 bequest in trust and partially sheltered the $1,000,000 trust of which she is a presumptive remainderman. She was not disadvantaged by any disproportionate allocation of the exemption vis-a-vis any other similarly situated beneficiaries.

“Nonetheless, the guardian argues that his ward has been harmed, that the charity has reaped a windfall, and that equity requires an adjustment. His reasoning is as follows: Since the tax clause requires the charity to bear the entire tax burden, the direct skips to his ward would have been funded free of GST tax even if none of the GST exemption were allocated to them. From the ward's perspective, it would have been preferable to have the testator's entire exemption allocated to the $1,000,000 trust of which she is a presumptive remainderman and also to have had the charity bear the GST tax on her direct skips. The guardian's analysis assumes that, although the will charges the charity with GST taxes incurred on direct skips at the testator's death, GST taxes incurred on a subsequent taxable termination will be payable from the trust.[17]

“By way of adjustment, the guardian proposes that $37,700 of estate income otherwise payable to the charity be added, instead, to the ward's $300,000 trust. The calculation is a convoluted attempt to formulate the present value of an income stream for the ward's life on so much of the ward's theoretical future interest in the trust principal as might be consumed by GST tax upon a taxable termination. The calculation is based on a series of assumptions as to orders of deaths, actuarial life expectancies, likelihood of principal invasions from the trust, a presumed lack of trust appreciation or depreciation, and a presumed lack of any change in the GST tax laws or rates. Further calculations might also be required to adjust the interests of other similarly situated beneficiaries. In reality, depending upon the orders of deaths and/or the exercise by the trustee of discretionary powers of invasion, the ward may have no beneficial interest whatsoever in the trust.

“Traditionally, equitable adjustments have been granted to prevent gross inequities in instances where a fiduciary's tax election, made for the purpose of achieving overall tax savings for the estate, has the unjust consequence of unfairly burdening one beneficiary, while providing a windfall to another.[18]  However, courts have declined to require adjustment where it is too complicated, expensive or time consuming, or where the perceived inequity is minimal or conjectural.[19]  Here, there is no real inequity to the guardian's ward and no reason to require the executor to exploit the tax clause of the will to the detriment of the charity, particularly where there is no certainty that any GST tax will be imposed when the trust term ends.

“Moreover, since such adjustments purport to be reflective of the testator's presumed intention, they are not granted where the will provides otherwise.[20]  Here, the testator expressly conferred upon the executor the power to make appropriate allocation of the GST exemption, in his absolute discretion. The sophisticated testamentary plan reflected in the forty-five page will suggests that the testator would have provided for an adjustment had he desired that one be made.

“For the foregoing reasons, no such adjustment is required under the circumstances of this case. The executor shall supplement his account by affidavit, and as so supplemented the account is settled.”

 

The Jacobs Estate situation is comparable to the executor’s allocation of basis to assets under the new law. The assets and bequests in the Jacobs Estate are the size and mix that will raise the issue of equitable adjustments in the basis context. 

The carryover component of basis is set by the facts and the tax law.  The step up is allocated by the executor.  A court might require an equitable adjustment because of  the step up allocation, but not require an equitable adjustment because of  the carryover.  We don’t know if it will or won’t.  The answer may differ in various states or various courts in a state.  Most lawyers and most judges will have trouble understanding the issues, the facts, or their resolution.  If you draft a will that specifies how this is handled, you might find that a court like the Court of Appeals in El Paso Texas declares your finely crafted language “boilerplate” and disregards it.[21]  Yes, “sophisticate” estate planning in New York may be “boilerplate” to be ignored in El Paso.  In some states, including Texas, a jury may decide the result.  Pause and think about that for a moment.  A jury.  No matter what the executor does, someone may sue if they can find a lawyer who understands, or a lawyer who misunderstands, the issues. 

You may yearn for the old law with basis at date of death value and no discretion or allocation.  Those were the days!.  It won’t be a problem until the estate tax repeal and carryover basis take effect, if they ever do.  It may not be a problem if carryover basis is repealed again, like it was in the past, but furture carryover basis is in the law.  Do you deal with it in the Will you write this week?  Do you ignore it?  If you deal with it, how do you do it?  What result do you want?  Why?  If you don’t deal with it, what does your normal Will language say?  Does it say something that you haven’t thought about?  What is the law in your state?  What is the law in the state where probate will occur?  What law applies if a will is drafted in Arkansas by a Texas lawyer for a client from Oklahoma who executes it in Hawaii and moves to New York before he dies in France from injuries suffered on the ski slopes of  Switzerland?  Yes, it can get complicated.

___________

Reactions to Selected Specific Provisions in the Law.

___________

Houses in suburban D.C.

In the 1970s I came up with a fanciful method for predicting changes in the estate tax exemptions.  It has held up fairly well over the decades.  It is that the exemptions will be large enough to exempt the typical top staff member of the committees that write the tax law, with some room to spare. Cynical?  Perhaps, but it seems to be a useful guide. Houses in suburban Washington have become very expensive. 

How else do we explain the provision that lets an estate exclude gain on the sale of a principal residence?  Given that basis steps up, and $1.3 million to $4.3 million of step up is available when carryover basis begins, it seems peculiar that Congress bothered to pass this provision.

 

Fees Cost More

Repeal of estate tax makes legal fees for estate administration and other fees and costs of administration potentially more expensive.  I didn’t say that the fees are higher, I said that they are more expensive.  I am referring to the net cost after tax.  Fees can be deducted on the estate tax return. The cost to the client after taxes is the reciprocal of the tax rate. For example, if the tax rate is 55%, the after tax cost is 45% of the fee.  If the tax rate is 45%, the after tax cost is 55%.  If the tax rate is zero, the after tax cost of the fee is 100% unless it can be deducted when calculating another tax.  The rules for deduction on the income tax return have varied somewhat over the years; limitations may reduce the benefit; taxable income may be less than the fees; the timing of income and fees may not be optimal; and the income tax rate may be low or zero.  The tax benefit may be less. The after tax cost may be more.  It is always better to be able to choose from two ways to deduct the fee rather than having only one way to do it.

 

Special Valuation of special assets.

I omit this topic in this course, except to say that, if it is a factor in your planning, you need to review the new law and reconsider the plan.

 

Conservation Easements.

Estate tax conservation easement benefits are liberalized and extended to rural land.  But, do you care any more?  For a while it may matter in limited circumstances. But, with exemptions phased up and estate tax repeal looming, it seems peculiar that Congress bothered.   At least it seems peculiar until you think about the rural states represented by Senators on the Finance Committee.  Then it makes perfect sense.  Before rural land was left out.  Now it isn’t.

 

Deferral of Estate Tax

Some rules allowing deferral of the tax are liberalized.  I have never been fond of deferral as a public policy.  If the tax is too high, it should be reduced or eliminated.  A prohibitively high tax, combined with a loan from the government to pay the tax, is a strange notion.  I have used deferral.  I just don’t like it.  Under the new law, for a few years deferral may be easier.  But again, why did they bother with deferral in a bill that repeals the estate tax?

 

A Final Thought

You might reasonably assume that the increase in exemption to $1.5 million or so will stick and that basis in assets will step up in estates of that size. Maybe single people and couples with assets of $1 million or $1.5 million or even $2 million can plan on no applicable estate tax and a basis step up with the exemptions increased to those levels at the dates specified in the law.  That is speculation, but reasonable speculation.  For estates of that size or smaller, maybe life will be simpler.  Maybe estate planning can focus on what is good for people and property instead of what saves taxes.

 

* * * * *

Thank You

Thank you for your business!  We hope you found this course educational, interesting, and useful.  Please go to www.YouKnowItAll.com to observe the Discussion and to certify your actual study hours. se.

 

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Part 2 The Statute

We  begin by previewing the end of the statute.  The end of the statute is the end of the law.  It states:

“[After 2010] the Internal Revenue Code . . .  shall be applied and administered as if [this Act] had never been enacted.”

 

In the prose of the statute, it reads as follows.

 

TITLE IX--COMPLIANCE WITH CONGRESSIONAL BUDGET ACT

SEC. 901. SUNSET OF PROVISIONS OF ACT.

 

(a) IN GENERAL- All provisions of, and amendments made by, this Act shall not apply--

(1) to taxable. . .  years beginning after December 31, 2010, or

(2) in the case of title V, to estates of decedents dying, gifts made, or generation skipping transfers, after December 31, 2010.

(b) APPLICATION OF CERTAIN LAWS- The Internal Revenue Code . . .  shall be applied and administered to years, estates, gifts, and transfers described in subsection (a) as if the provisions and amendments [of this Act] had never been enacted.

 

As if the law is written in disappearing ink, this law disappears at the end of 2010.  As if it is on sabatical, the 2001 law reappears in 2011.

 

The language of the new law.

 

SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CONTENTS.

 

(a) SHORT TITLE- This Act may be cited as the `Economic Growth and Tax Relief Reconciliation Act of 2001'.

 

(b) AMENDMENT OF 1986 CODE- Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

 

(c) TABLE OF CONTENTS- The table of contents of this Act is as follows:

. . .

TITLE V--ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAX PROVISIONS

 

Subtitle A--Repeal of Estate and Generation-Skipping Transfer Taxes

 

Sec. 501. Repeal of estate and generation-skipping transfer taxes.

 

Subtitle B--Reductions of Estate and Gift Tax Rates

 

Sec. 511. Additional reductions of estate and gift tax rates.

 

Subtitle C--Increase in Exemption Amounts

 

Sec. 521. Increase in exemption equivalent of unified credit, lifetime gifts exemption, and GST exemption amounts.

 

Subtitle D--Credit for State Death Taxes

 

Sec. 531. Reduction of credit for State death taxes.

 

Sec. 532. Credit for State death taxes replaced with deduction for such taxes.

 

Subtitle E--Carryover Basis at Death; Other Changes Taking Effect With Repeal

 

Sec. 541. Termination of step-up in basis at death.

 

Sec. 542. Treatment of property acquired from a decedent dying after December 31, 2009.

 

Subtitle F--Conservation Easements

 

Sec. 551. Expansion of estate tax rule for conservation easements.

 

Subtitle G--Modifications of Generation-Skipping Transfer Tax

 

Sec. 561. Deemed allocation of GST exemption to lifetime transfers to trusts; retroactive allocations.

 

Sec. 562. Severing of trusts.

 

Sec. 563. Modification of certain valuation rules.

 

Sec. 564. Relief provisions.

 

Subtitle H--Extension of Time for Payment of Estate Tax

 

Sec. 571. Increase in number of allowable partners and shareholders in closely held businesses.

 

Sec. 572. Expansion of availability of installment payment for estates with interests qualifying lending and finance businesses.

 

Sec. 573. Clarification of availability of installment payment.

 

Subtitle I--Other Provisions

 

Sec. 581. Waiver of statute of limitation for taxes on certain farm valuations.

 

TITLE IX--COMPLIANCE WITH CONGRESSIONAL BUDGET ACT

 

Sec. 901. Sunset of provisions of Act.

 

* * * * * *

TITLE V--ESTATE, GIFT, AND GENERATION-SKIPPING TRANSFER TAX PROVISIONS

 

Subtitle A--Repeal of Estate and Generation-Skipping Transfer Taxes

 

SEC. 501. REPEAL OF ESTATE AND GENERATION-SKIPPING TRANSFER TAXES.

 

(a) ESTATE TAX REPEAL- Subchapter C of chapter 11 of subtitle B (relating to miscellaneous) is amended by adding at the end the following new section:

 

`SEC. 2210. TERMINATION.

 

`(a) IN GENERAL- Except as provided in subsection (b), this chapter shall not apply to the estates of decedents dying after December 31, 2009.

 

`(b) CERTAIN DISTRIBUTIONS FROM QUALIFIED DOMESTIC TRUSTS- In applying section 2056A with respect to the surviving spouse of a decedent dying before January 1, 2010--

 

`(1) section 2056A(b)(1)(A) shall not apply to distributions made after December 31, 2020, and

 

`(2) section 2056A(b)(1)(B) shall not apply after December 31, 2009.'

 

(b) GENERATION-SKIPPING TRANSFER TAX REPEAL- Subchapter G of chapter 13 of subtitle B (relating to administration) is amended by adding at the end the following new section:

 

`SEC. 2664. TERMINATION.

 

`This chapter shall not apply to generation-skipping transfers after December 31, 2009.'

 

(c) CONFORMING AMENDMENTS-

 

(1) The table of sections for subchapter C of chapter 11 is amended by adding at the end the following new item:

`Sec. 2210. Termination.'

 

(2) The table of sections for subchapter G of chapter 13 is amended by adding at the end the following new item:

 

`Sec. 2664. Termination.'

 

(d) EFFECTIVE DATE- The amendments made by this section shall apply to the estates of decedents dying, and generation-skipping transfers, after December 31, 2009.

 

Subtitle B--Reductions of Estate and Gift Tax Rates

 

SEC. 511. ADDITIONAL REDUCTIONS OF ESTATE AND GIFT TAX RATES.

 

(a) MAXIMUM RATE OF TAX REDUCED TO 50 PERCENT- The table contained in section 2001(c)(1) is amended by striking the two highest brackets and inserting the following:

 

`Over $2,500,000

$1,025,800, plus 50% of the excess over $2,500,000.'

 

(b) REPEAL OF PHASEOUT OF GRADUATED RATES- Subsection (c) of section 2001 is amended by striking paragraph (2).

 

(c) ADDITIONAL REDUCTIONS OF MAXIMUM RATE OF TAX- Subsection (c) of section 2001, as amended by subsection (b), is amended by adding at the end the following new paragraph:

 

`(2) PHASEDOWN OF MAXIMUM RATE OF TAX-

 

`(A) IN GENERAL- In the case of estates of decedents dying, and gifts made, in calendar years after 2002 and before 2010, the tentative tax under this subsection shall be determined by using a table prescribed by the Secretary (in lieu of using the table contained in paragraph (1)) which is the same as such table; except that--

 

`(i) the maximum rate of tax for any calendar year shall be determined in the table under subparagraph (B), and

 

`(ii) the brackets and the amounts setting forth the tax shall be adjusted to the extent necessary to reflect the adjustments under subparagraph (A).

 

`(B) MAXIMUM RATE-

The maximum rate is: `In calendar year:

2003 49 percent

2004 48 percent

2005 47 percent

2006 46 percent

2007, 2008, and 2009 45 percent.'

 

(d) MAXIMUM GIFT TAX RATE REDUCED TO MAXIMUM INDIVIDUAL RATE AFTER 2009- Subsection (a) of section 2502 (relating to rate of tax) is amended to read as follows:

 

`(a) COMPUTATION OF TAX-

 

`(1) IN GENERAL- The tax imposed by section 2501 for each calendar year shall be an amount equal to the excess of--

 

`(A) a tentative tax, computed under paragraph (2), on the aggregate sum of the taxable gifts for such calendar year and for each of the preceding calendar periods, over

 

`(B) a tentative tax, computed under paragraph (2), on the aggregate sum of the taxable gifts for each of the preceding calendar periods.

 

`(2) RATE SCHEDULE-

`If the amount with respect to which the tentative tax to be computed is:

 

The tentative tax is:

 

Not over $10,000

18% of such amount.

 

Over $10,000 but not over $20,000

$1,800, plus 20% of the excess over $10,000.

 

Over $20,000 but not over $40,000

$3,800, plus 22% of the excess over $20,000.

 

Over $40,000 but not over $60,000

$8,200, plus 24% of the excess over $40,000.

 

Over $60,000 but not over $80,000

$13,000, plus 26% of the excess over $60,000.

 

Over $80,000 but not over $100,000

$18,200, plus 28% of the excess over $80,000.

 

Over $100,000 but not over $150,000

$23,800, plus 30% of the excess over $100,000.

 

Over $150,000 but not over $250,000

$38,800, plus 32% of the excess over $150,000.

 

Over $250,000 but not over $500,000

@@@@@

Over $500,000

$155,800, plus 35% of the excess over $500,000.'

 

(e) TREATMENT OF CERTAIN TRANSFERS IN TRUST- Section 2511 (relating to transfers in general) is amended by adding at the end the following new subsection:

 

`(c) TREATMENT OF CERTAIN TRANSFERS IN TRUST- Notwithstanding any other provision of this section and except as provided in regulations, a transfer in trust shall be treated as a taxable gift under section 2503, unless the trust is treated as wholly owned by the donor or the donor's spouse under subpart E of part I of subchapter J of chapter 1.'

 

(f) EFFECTIVE DATES-

 

(1) SUBSECTIONS (a) AND (b)- The amendments made by subsections (a) and (b) shall apply to estates of decedents dying, and gifts made, after December 31, 2001.

 

(2) SUBSECTION (c)- The amendment made by subsection (c) shall apply to estates of decedents dying, and gifts made, after December 31, 2002.

 

(3) SUBSECTIONS (d) AND (e)- The amendments made by subsections (d) and (e) shall apply to gifts made after December 31, 2009.

 

Subtitle C--Increase in Exemption Amounts

 

SEC. 521. INCREASE IN EXEMPTION EQUIVALENT OF UNIFIED CREDIT, LIFETIME GIFTS EXEMPTION, AND GST EXEMPTION AMOUNTS.

 

(a) IN GENERAL- Subsection (c) of section 2010 (relating to applicable credit amount) is amended by striking the table and inserting the following new table:

`In the case of estates of decedents

--The applicable exclusion amount is:      dying during:

2002 and 2003 $1,000,000

2004 and 2005 $1,500,000

2006, 2007, and 2008 $2,000,000

2009 $3,500,000.'

 

(b) LIFETIME GIFT EXEMPTION INCREASED TO $1,000,000-

 

(1) FOR PERIODS BEFORE ESTATE TAX REPEAL- Paragraph (1) of section 2505(a) (relating to unified credit against gift tax) is amended by inserting `(determined as if the applicable exclusion amount were $1,000,000)' after `calendar year'.

 

(2) FOR PERIODS AFTER ESTATE TAX REPEAL- Paragraph (1) of section 2505(a) (relating to unified credit against gift tax), as amended by paragraph (1), is amended to read as follows:

 

`(1) the amount of the tentative tax which would be determined under the rate schedule set forth in section 2502(a)(2) if the amount with respect to which such tentative tax is to be computed were $1,000,000, reduced by'.

 

(c) GST EXEMPTION-

 

(1) IN GENERAL- Subsection (a) of 2631 (relating to GST exemption) is amended by striking `of $1,000,000' and inserting `amount'.

 

(2) EXEMPTION AMOUNT- Subsection (c) of section 2631 is amended to read as follows:

 

`(c) GST EXEMPTION AMOUNT- For purposes of subsection (a), the GST exemption amount for any calendar year shall be equal to the applicable exclusion amount under section 2010(c) for such calendar year.'

 

(d) REPEAL OF SPECIAL BENEFIT FOR FAMILY-OWNED BUSINESS INTERESTS- Section 2057 (relating to family-owned business interests) is amended by adding at the end the following new subsection:

 

`(j) TERMINATION- This section shall not apply to the estates of decedents dying after December 31, 2003.'

 

(e) EFFECTIVE DATES-

 

(1) IN GENERAL- Except as provided in paragraphs (2) and (3), the amendments made by this section shall apply to estates of decedents dying, and gifts made, after December 31, 2001.

 

(2) SUBSECTION (b)(2)- The amendments made by subsection (b)(2) shall apply to gifts made after December 31, 2009.

 

(3) SUBSECTIONS (c) AND (d)- The amendments made by subsections (c) and (d) shall apply to estates of decedents dying, and generation-skipping transfers, after December 31, 2003.

 

Subtitle D--Credit for State Death Taxes

 

SEC. 531. REDUCTION OF CREDIT FOR STATE DEATH TAXES.

 

(a) IN GENERAL- Section 2011(b) (relating to amount of credit) is amended--

 

(1) by striking `CREDIT- The credit allowed' and inserting `CREDIT-

 

`(1) IN GENERAL- Except as provided in paragraph (2), the credit allowed',

 

(2) by striking `For purposes' and inserting the following:

 

`(3) ADJUSTED TAXABLE ESTATE- For purposes', and

 

(3) by inserting after paragraph (1) the following new paragraph:

 

`(2) REDUCTION OF MAXIMUM CREDIT-

`(A) IN GENERAL- In the case of estates of decedents dying after December 31, 2001, the credit allowed by this section shall not exceed the applicable percentage of the credit otherwise determined under paragraph (1).

 

`(B) APPLICABLE PERCENTAGE-

`In the case of estates of decedents dying during:           The applicable percentage is:

2002 75 percent

2003 50 percent

2004 25 percent.'

 

(b) EFFECTIVE DATE- The amendments made by this subsection shall apply to estates of decedents dying after December 31, 2001.

 

SEC. 532. CREDIT FOR STATE DEATH TAXES REPLACED WITH DEDUCTION FOR SUCH TAXES.

 

(a) REPEAL OF CREDIT- Section 2011 (relating to credit for State death taxes) is amended by adding at the end the following new subsection:

 

`(g) TERMINATION- This section shall not apply to the estates of decedents dying after December 31, 2004.'

 

(b) DEDUCTION FOR STATE DEATH TAXES- Part IV of subchapter A of chapter 11 is amended by adding at the end the following new section:

 

`SEC. 2058. STATE DEATH TAXES.

 

`(a) ALLOWANCE OF DEDUCTION- For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of any estate, inheritance, legacy, or succession taxes actually paid to any State or the District of Columbia, in respect of any property included in the gross estate (not including any such taxes paid with respect to the estate of a person other than the decedent).

 

`(b) PERIOD OF LIMITATIONS- The deduction allowed by this section shall include only such taxes as were actually paid and deduction therefor claimed before the later of--

 

`(1) 4 years after the filing of the return required by section 6018, or

 

`(2) if--

 

`(A) a petition for redetermination of a deficiency has been filed with the Tax Court within the time prescribed in section 6213(a), the expiration of 60 days after the decision of the Tax Court becomes final,

 

`(B) an extension of time has been granted under section 6161 or 6166 for payment of the tax shown on the return, or of a deficiency, the date of the expiration of the period of the extension, or

 

`(C) a claim for refund or credit of an overpayment of tax imposed by this chapter has been filed within the time prescribed in section 6511, the latest of the expiration of--

 

`(i) 60 days from the date of mailing by certified mail or registered mail by the Secretary to the taxpayer of a notice of the disallowance of any part of such claim,

 

`(ii) 60 days after a decision by any court of competent jurisdiction becomes final with respect to a timely suit instituted upon such claim, or

 

`(iii) 2 years after a notice of the waiver of disallowance is filed under section 6532(a)(3).

 

Notwithstanding sections 6511 and 6512, refund based on the deduction may be made if the claim for refund is filed within the period provided in the preceding sentence. Any such refund shall be made without interest.'

 

(c) CONFORMING AMENDMENTS-

 

(1) Subsection (a) of section 2012 is amended by striking `the credit for State death taxes provided by section 2011 and'.

 

(2) Subparagraph (A) of section 2013(c)(1) is amended by striking `2011,'.

 

(3) Paragraph (2) of section 2014(b) is amended by striking `, 2011,'.

 

(4) Sections 2015 and 2016 are each amended by striking `2011 or'.

 

(5) Subsection (d) of section 2053 is amended to read as follows:

 

`(d) CERTAIN FOREIGN DEATH TAXES-

 

`(1) IN GENERAL- Notwithstanding the provisions of subsection (c)(1)(B), for purposes of the tax imposed by section 2001, the value of the taxable estate may be determined, if the executor so elects before the expiration of the period of limitation for assessment provided in section 6501, by deducting from the value of the gross estate the amount (as determined in accordance with regulations prescribed by the Secretary) of any estate, succession, legacy, or inheritance tax imposed by and actually paid to any foreign country, in respect of any property situated within such foreign country and included in the gross estate of a citizen or resident of the United States, upon a transfer by the decedent for public, charitable, or religious uses described in section 2055. The determination under this paragraph of the country within which property is situated shall be made in accordance with the rules applicable under subchapter B (sec. 2101 and following) in determining whether property is situated within or without the United States. Any election under this paragraph shall be exercised in accordance with regulations prescribed by the Secretary.

 

`(2) CONDITION FOR ALLOWANCE OF DEDUCTION- No deduction shall be allowed under paragraph (1) for a foreign death tax specified therein unless the decrease in the tax imposed by section 2001 which results from the deduction provided in paragraph (1) will inure solely for the benefit of the public, charitable, or religious transferees described in section 2055 or section 2106(a)(2). In any case where the tax imposed by section 2001 is equitably apportioned among all the transferees of property included in the gross estate, including those described in sections 2055 and 2106(a)(2) (taking into account any exemptions, credits, or deductions allowed by this chapter), in determining such decrease, there shall be disregarded any decrease in the Federal estate tax which any transferees other than those described in sections 2055 and 2106(a)(2) are required to pay.

 

`(3) EFFECT ON CREDIT FOR FOREIGN DEATH TAXES OF DEDUCTION UNDER THIS SUBSECTION-

 

`(A) ELECTION- An election under this subsection shall be deemed a waiver of the right to claim a credit, against the Federal estate tax, under a death tax convention with any foreign country for any tax or portion thereof in respect of which a deduction is taken under this subsection.

 

`(B) CROSS REFERENCE-

`See section 2014(f) for the effect of a deduction taken under this paragraph on the credit for foreign death taxes.'

 

(6) Subparagraph (A) of section 2056A(b)(10) is amended--

 

(A) by striking `2011,', and

 

(B) by inserting `2058,' after `2056,'.

 

(7)

(A) Subsection (a) of section 2102 is amended to read as follows:

 

`(a) IN GENERAL- The tax imposed by section 2101 shall be credited with the amounts determined in accordance with sections 2012 and 2013 (relating to gift tax and tax on prior transfers).'

 

(B) Section 2102 is amended by striking subsection (b) and by redesignating subsection (c) as subsection (b).

 

(C) Section 2102(b)(5) (as redesignated by subparagraph (B)) and section 2107(c)(3) are each amended by striking `2011 to 2013, inclusive,' and inserting `2012 and 2013'.

 

(8) Subsection (a) of section 2106 is amended by adding at the end the following new paragraph:

 

`(4) STATE DEATH TAXES- The amount which bears the same ratio to the State death taxes as the value of the property, as determined for purposes of this chapter, upon which State death taxes were paid and which is included in the gross estate under section 2103 bears to the value of the total gross estate under section 2103. For purposes of this paragraph, the term `State death taxes' means the taxes described in section 2011(a).'

 

(9) Section 2201 is amended--

 

(A) by striking `as defined in section 2011(d)', and

 

(B) by adding at the end the following new flush sentence:

 

`For purposes of this section, the additional estate tax is the difference between the tax imposed by section 2001 or 2101 and the amount equal to 125 percent of the maximum credit provided by section 2011(b), as in effect before its repeal by the Economic Growth and Tax Relief Reconciliation Act of 2001.'

 

 

(10) Section 2604 (relating to credit for certain State taxes) is amended by adding at the end the following new subsection:

 

`(c) TERMINATION- This section shall not apply to the generation-skipping transfers after December 31, 2004.'

 

(11) Paragraph (2) of section 6511(i) is amended by striking `2011(c), 2014(b),' and inserting `2014(b)'.

 

(12) Subsection (c) of section 6612 is amended by striking `section 2011(c) (relating to refunds due to credit for State taxes),'.

 

(13) The table of sections for part II of subchapter A of chapter 11 is amended by striking the item relating to section 2011.

 

(14) The table of sections for part IV of subchapter A of chapter 11 is amended by adding at the end the following new item:

`Sec. 2058. State death taxes.'

 

(15) The table of sections for subchapter A of chapter 13 is amended by striking the item relating to section 2604.

 

(d) EFFECTIVE DATE- The amendments made by this section shall apply to estates of decedents dying, and generation-skipping transfers, after December 31, 2004.

 

Subtitle E--Carryover Basis at Death; Other Changes Taking Effect With Repeal

 

SEC. 541. TERMINATION OF STEP-UP IN BASIS AT DEATH.

 

Section 1014 (relating to basis of property acquired from a decedent) is amended by adding at the end the following new subsection:

 

`(f) TERMINATION- This section shall not apply with respect to decedents dying after December 31, 2009.'

 

SEC. 542. TREATMENT OF PROPERTY ACQUIRED FROM A DECEDENT DYING AFTER DECEMBER 31, 2009.

 

(a) GENERAL RULE- Part II of subchapter O of chapter 1 (relating to basis rules of general application) is amended by inserting after section 1021 the following new section:

 

`SEC. 1022. TREATMENT OF PROPERTY ACQUIRED FROM A DECEDENT DYING AFTER DECEMBER 31, 2009.

 

`(a) IN GENERAL- Except as otherwise provided in this section--

 

`(1) property acquired from a decedent dying after December 31, 2009, shall be treated for purposes of this subtitle as transferred by gift, and

 

`(2) the basis of the person acquiring property from such a decedent shall be the lesser of--

 

`(A) the adjusted basis of the decedent, or

 

`(B) the fair market value of the property at the date of the decedent's death.

 

`(b) BASIS INCREASE FOR CERTAIN PROPERTY-

 

`(1) IN GENERAL- In the case of property to which this subsection applies, the basis of such property under subsection (a) shall be increased by its basis increase under this subsection.

 

`(2) BASIS INCREASE- For purposes of this subsection--

 

`(A) IN GENERAL- The basis increase under this subsection for any property is the portion of the aggregate basis increase which is allocated to the property pursuant to this section.

 

`(B) AGGREGATE BASIS INCREASE- In the case of any estate, the aggregate basis increase under this subsection is $1,300,000.

 

`(C) LIMIT INCREASED BY UNUSED BUILT-IN LOSSES AND LOSS CARRYOVERS- The limitation under subparagraph (B) shall be increased by-

 

`(i) the sum of the amount of any capital loss carryover under section 1212(b), and the amount of any net operating loss carryover under section 172, which would (but for the decedent's death) be carried from the decedent's last taxable year to a later taxable year of the decedent, plus

 

`(ii) the sum of the amount of any losses that would have been allowable under section 165 if the property acquired from the decedent had been sold at fair market value immediately before the decedent's death.

 

`(3) DECEDENT NONRESIDENTS WHO ARE NOT CITIZENS OF THE UNITED STATES- In the case of a decedent nonresident not a citizen of the United States--

 

`(A) paragraph (2)(B) shall be applied by substituting `$60,000' for `$1,300,000', and

 

`(B) paragraph (2)(C) shall not apply.

 

`(c) ADDITIONAL BASIS INCREASE FOR PROPERTY ACQUIRED BY SURVIVING SPOUSE-

 

`(1) IN GENERAL- In the case of property to which this subsection applies and which is qualified spousal property, the basis of such property under subsection (a) (as increased under subsection (b)) shall be increased by its spousal property basis increase.

 

`(2) SPOUSAL PROPERTY BASIS INCREASE- For purposes of this subsection--

 

`(A) IN GENERAL- The spousal property basis increase for property referred to in paragraph (1) is the portion of the aggregate spousal property basis increase which is allocated to the property pursuant to this section.

 

`(B) AGGREGATE SPOUSAL PROPERTY BASIS INCREASE- In the case of any estate, the aggregate spousal property basis increase is $3,000,000.

 

`(3) QUALIFIED SPOUSAL PROPERTY- For purposes of this subsection, the term `qualified spousal property' means--

 

`(A) outright transfer property, and

 

`(B) qualified terminable interest property.

\

`(4) OUTRIGHT TRANSFER PROPERTY- For purposes of this subsection--

 

`(A) IN GENERAL- The term `outright transfer property' means any interest in property acquired from the decedent by the decedent's surviving spouse.

 

`(B) EXCEPTION- Subparagraph (A) shall not apply where, on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur, an interest passing to the surviving spouse will terminate or fail--

 

`(i)

(I) if an interest in such property passes or has passed (for less than an adequate and full consideration in money or money's worth) from the decedent to any person other than such surviving spouse (or the estate of such spouse), and

 

`(II) if by reason of such passing such person (or his heirs or assigns) may possess or enjoy any part of such property after such termination or failure of the interest so passing to the surviving spouse, or

 

`(ii) if such interest is to be acquired for the surviving spouse, pursuant to directions of the decedent, by his executor or by the trustee of a trust.

 

For purposes of this subparagraph, an interest shall not be considered as an interest which will terminate or fail merely because it is the ownership of a bond, note, or similar contractual obligation, the discharge of which would not have the effect of an annuity for life or for a term.

 

`(C) INTEREST OF SPOUSE CONDITIONAL ON SURVIVAL FOR LIMITED PERIOD- For purposes of this paragraph, an interest passing to the surviving spouse shall not be considered as an interest which will terminate or fail on the death of such spouse if--

 

`(i) such death will cause a termination or failure of such interest only if it occurs within a period not exceeding 6 months after the decedent's death, or only if it occurs as a result of a common disaster resulting in the death of the decedent and the surviving spouse, or only if it occurs in the case of either such event, and

 

`(ii) such termination or failure does not in fact occur.

 

 

`(5) QUALIFIED TERMINABLE INTEREST PROPERTY- For purposes of this subsection--

 

`(A) IN GENERAL- The term `qualified terminable interest property' means property--

 

`(i) which passes from the decedent, and

 

`(ii) in which the surviving spouse has a qualifying income interest for life.

 

`(B) QUALIFYING INCOME INTEREST FOR LIFE- The surviving spouse has a qualifying income interest for life if--

 

`(i) the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, or has a usufruct interest for life in the property, and

 

`(ii) no person has a power to appoint any part of the property to any person other than the surviving spouse.

 

Clause (ii) shall not apply to a power exercisable only at or after the death of the surviving spouse. To the extent provided in regulations, an annuity shall be treated in a manner similar to an income interest in property (regardless of whether the property from which the annuity is payable can be separately identified).

 

`(C) PROPERTY INCLUDES INTEREST THEREIN- The term `property' includes an interest in property.

 

`(D) SPECIFIC PORTION TREATED AS SEPARATE PROPERTY- A specific portion of property shall be treated as separate property. For purposes of the preceding sentence, the term `specific portion' only includes a portion determined on a fractional or percentage basis.

 

`(d) DEFINITIONS AND SPECIAL RULES FOR APPLICATION OF SUBSECTIONS (b) AND (c)-

 

`(1) PROPERTY TO WHICH SUBSECTIONS (b) AND (c) APPLY-

 

`(A) IN GENERAL- The basis of property acquired from a decedent may be increased under subsection (b) or (c) only if the property was owned by the decedent at the time of death.

 

`(B) RULES RELATING TO OWNERSHIP-

 

`(i) JOINTLY HELD PROPERTY- In the case of property which was owned by the decedent and another person as joint tenants with right of survivorship or tenants by the entirety--

 

`(I) if the only such other person is the surviving spouse, the decedent shall be treated as the owner of only 50 percent of the property,

 

`(II) in any case (to which subclause (I) does not apply) in which the decedent furnished consideration for the acquisition of the property, the decedent shall be treated as the owner to the extent of the portion of the property which is proportionate to such consideration, and

 

`(III) in any case (to which subclause (I) does not apply) in which the property has been acquired by gift, bequest, devise, or inheritance by the decedent and any other person as joint tenants with right of survivorship and their interests are not otherwise specified or fixed by law, the decedent shall be treated as the owner to the extent of the value of a fractional part to be determined by dividing the value of the property by the number of joint tenants with right of survivorship.

 

`(ii) REVOCABLE TRUSTS- The decedent shall be treated as owning property transferred by the decedent during life to a qualified revocable trust (as defined in section 645(b)(1)).

 

`(iii) POWERS OF APPOINTMENT- The decedent shall not be treated as owning any property by reason of holding a power of appointment with respect to such property.

 

`(iv) COMMUNITY PROPERTY- Property which represents the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State or possession of the United States or any foreign country shall be treated for purposes of this section as owned by, and acquired from, the decedent if at least one-half of the whole of the community interest in such property is treated as owned by, and acquired from, the decedent without regard to this clause.

 

`(C) PROPERTY ACQUIRED BY DECEDENT BY GIFT WITHIN 3 YEARS OF DEATH-

 

`(i) IN GENERAL- Subsections (b) and (c) shall not apply to property acquired by the decedent by gift or by inter vivos transfer for less than adequate and full consideration in money or money's worth during the 3-year period ending on the date of the decedent's death.

 

`(ii) EXCEPTION FOR CERTAIN GIFTS FROM SPOUSE- Clause (i) shall not apply to property acquired by the decedent from the decedent's spouse unless, during such 3-year period, such spouse acquired the property in whole or in part by gift or by inter vivos transfer for less than adequate and full consideration in money or money's worth.

 

`(D) STOCK OF CERTAIN ENTITIES- Subsections (b) and (c) shall not apply to--

 

`(i) stock or securities of a foreign personal holding company,

 

`(ii) stock of a DISC or former DISC,

 

`(iii) stock of a foreign investment company, or

 

`(iv) stock of a passive foreign investment company unless such company is a qualified electing fund (as defined in section 1295) with respect to the decedent.

 

`(2) FAIR MARKET VALUE LIMITATION- The adjustments under subsections (b) and (c) shall not increase the basis of any interest in property acquired from the decedent above its fair market value in the hands of the decedent as of the date of the decedent's death.

 

`(3) ALLOCATION RULES-

 

`(A) IN GENERAL- The executor shall allocate the adjustments under subsections (b) and (c) on the return required by section 6018.

 

`(B) CHANGES IN ALLOCATION- Any allocation made pursuant to subparagraph (A) may be changed only as provided by the Secretary.

 

`(4) INFLATION ADJUSTMENT OF BASIS ADJUSTMENT AMOUNTS-

 

`(A) IN GENERAL- In the case of decedents dying in a calendar year after 2010, the $1,300,000, $60,000, and $3,000,000 dollar amounts in subsections (b) and (c)(2)(B) shall each be increased by an amount equal to the product of--

 

`(i) such dollar amount, and

 

`(ii) the cost-of-living adjustment determined under section 1(f)(3) for such calendar year, determined by substituting `2009' for `1992' in subparagraph (B) thereof.

 

`(B) ROUNDING- If any increase determined under subparagraph (A) is not a multiple of--

 

`(i) $100,000 in the case of the $1,300,000 amount,

 

`(ii) $5,000 in the case of the $60,000 amount, and

 

`(iii) $250,000 in the case of the $3,000,000 amount,

 

such increase shall be rounded to the next lowest multiple thereof.

 

`(e) PROPERTY ACQUIRED FROM THE DECEDENT- For purposes of this section, the following property shall be considered to have been acquired from the decedent:

 

`(1) Property acquired by bequest, devise, or inheritance, or by the decedent's estate from the decedent.

 

`(2) Property transferred by the decedent during his lifetime--

 

`(A) to a qualified revocable trust (as defined in section 645(b)(1)), or

 

`(B) to any other trust with respect to which the decedent reserved the right to make any change in the enjoyment thereof through the exercise of a power to alter, amend, or terminate the trust.

 

`(3) Any other property passing from the decedent by reason of death to the extent that such property passed without consideration.

 

`(f) COORDINATION WITH SECTION 691- This section shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691.

 

`(g) CERTAIN LIABILITIES DISREGARDED-

 

`(1) IN GENERAL- In determining whether gain is recognized on the acquisition of property--

 

`(A) from a decedent by a decedent's estate or any beneficiary other than a tax-exempt beneficiary, and

 

`(B) from the decedent's estate by any beneficiary other than a tax-exempt beneficiary,

 

and in determining the adjusted basis of such property, liabilities in excess of basis shall be disregarded.

 

`(2) TAX-EXEMPT BENEFICIARY- For purposes of paragraph (1), the term `tax-exempt beneficiary' means--

 

`(A) the United States, any State or political subdivision thereof, any possession of the United States, any Indian tribal government (within the meaning of section 7871), or any agency or instrumentality of any of the foregoing,

 

`(B) an organization (other than a cooperative described in section 521) which is exempt from tax imposed by chapter 1,

 

`(C) any foreign person or entity (within the meaning of section 168(h)(2)), and

 

`(D) to the extent provided in regulations, any person to whom property is transferred for the principal purpose of tax avoidance.

 

`(h) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.'

 

(b) INFORMATION RETURNS, ETC-

 

(1) LARGE TRANSFERS AT DEATH- So much of subpart C of part II of subchapter A of chapter 61 as precedes section 6019 is amended to read as follows:

 

`Subpart C--Returns Relating to Transfers During Life or at Death

 

`Sec. 6018. Returns relating to large transfers at death.

`Sec. 6019. Gift tax returns.

 

`SEC. 6018. RETURNS RELATING TO LARGE TRANSFERS AT DEATH.

 

 

`(a) IN GENERAL- If this section applies to property acquired from a decedent, the executor of the estate of such decedent shall make a return containing the information specified in subsection (c) with respect to such property.

 

`(b) PROPERTY TO WHICH SECTION APPLIES-

 

`(1) LARGE TRANSFERS- This section shall apply to all property (other than cash) acquired from a decedent if the fair market value of such property acquired from the decedent exceeds the dollar amount applicable under section 1022(b)(2)(B) (without regard to section 1022(b)(2)(C)).

 

`(2) TRANSFERS OF CERTAIN GIFTS RECEIVED BY DECEDENT WITHIN 3 YEARS OF DEATH- This section shall apply to any appreciated property acquired from the decedent if--

 

`(A) subsections (b) and (c) of section 1022 do not apply to such property by reason of section 1022(d)(1)(C), and

 

`(B) such property was required to be included on a return required to be filed under section 6019.

 

`(3) NONRESIDENTS NOT CITIZENS OF THE UNITED STATES- In the case of a decedent who is a nonresident not a citizen of the United States, paragraphs (1) and (2) shall be applied--

 

`(A) by taking into account only--

 

`(i) tangible property situated in the United States, and

 

`(ii) other property acquired from the decedent by a United States person, and

 

`(B) by substituting the dollar amount applicable under section 1022(b)(3) for the dollar amount referred to in paragraph (1).

 

`(4) RETURNS BY TRUSTEES OR BENEFICIARIES- If the executor is unable to make a complete return as to any property acquired from or passing from the decedent, the executor shall include in the return a description of such property and the name of every person holding a legal or beneficial interest therein. Upon notice from the Secretary, such person shall in like manner make a return as to such property.

 

`(c) INFORMATION REQUIRED TO BE FURNISHED- The information specified in this subsection with respect to any property acquired from the decedent is--

 

`(1) the name and TIN of the recipient of such property,

 

`(2) an accurate description of such property,

 

`(3) the adjusted basis of such property in the hands of the decedent and its fair market value at the time of death,

 

`(4) the decedent's holding period for such property,

 

`(5) sufficient information to determine whether any gain on the sale of the property would be treated as ordinary income,

 

`(6) the amount of basis increase allocated to the property under subsection (b) or (c) of section 1022, and

 

`(7) such other information as the Secretary may by regulations prescribe.

 

`(d) PROPERTY ACQUIRED FROM DECEDENT- For purposes of this section, section 1022 shall apply for purposes of determining the property acquired from a decedent.

 

`(e) STATEMENTS TO BE FURNISHED TO CERTAIN PERSONS- Every person required to make a return under subsection (a) shall furnish to each person whose name is required to be set forth in such return (other than the person required to make such return) a written statement showing--

 

`(1) the name, address, and phone number of the person required to make such return, and

 

`(2) the information specified in subsection (c) with respect to property acquired from, or passing from, the decedent to the person required to receive such statement.

 

The written statement required under the preceding sentence shall be furnished not later than 30 days after the date that the return required by subsection (a) is filed.'

 

(2) GIFTS- Section 6019 (relating to gift tax returns) is amended--

 

(A) by striking `Any individual' and inserting `(a) IN GENERAL- Any individual', and

 

(B) by adding at the end the following new subsection:

 

`(b) STATEMENTS TO BE FURNISHED TO CERTAIN PERSONS- Every person required to make a return under subsection (a) shall furnish to each person whose name is required to be set forth in such return (other than the person required to make such return) a written statement showing--

 

`(1) the name, address, and phone number of the person required to make such return, and

 

`(2) the information specified in such return with respect to property received by the person required to receive such statement.

 

The written statement required under the preceding sentence shall be furnished not later than 30 days after the date that the return required by subsection (a) is filed.'

 

(3) TIME FOR FILING SECTION 6018 RETURNS-

 

(A) RETURNS RELATING TO LARGE TRANSFERS AT DEATH- Subsection (a) of section 6075 is amended to read as follows:

 

`(a) RETURNS RELATING TO LARGE TRANSFERS AT DEATH- The return required by section 6018 with respect to a decedent shall be filed with the return of the tax imposed by chapter 1 for the decedent's last taxable year or such later date specified in regulations prescribed by the Secretary.'

 

(B) CONFORMING AMENDMENTS- Paragraph (3) of section 6075(b) is amended--

 

(i) by striking `ESTATE TAX RETURN' in the heading and inserting `SECTION 6018 RETURN', and

 

(ii) by striking `(relating to estate tax returns)' and inserting `(relating to returns relating to large transfers at death)'.

 

(4) PENALTIES- Part I of subchapter B of chapter 68 (relating to assessable penalties) is amended by adding at the end the following new section:

 

`SEC. 6716. FAILURE TO FILE INFORMATION WITH RESPECT TO CERTAIN TRANSFERS AT DEATH AND GIFTS.

 

`(a) INFORMATION REQUIRED TO BE FURNISHED TO THE SECRETARY- Any person required to furnish any information under section 6018 who fails to furnish such information on the date prescribed therefor (determined with regard to any extension of time for filing) shall pay a penalty of $10,000 ($500 in the case of information required to be furnished under section 6018(b)(2)) for each such failure.

 

`(b) INFORMATION REQUIRED TO BE FURNISHED TO BENEFICIARIES- Any person required to furnish in writing to each person described in section 6018(e) or 6019(b) the information required under such section who fails to furnish such information shall pay a penalty of $50 for each such failure.

 

`(c) REASONABLE CAUSE EXCEPTION- No penalty shall be imposed under subsection (a) or (b) with respect to any failure if it is shown that such failure is due to reasonable cause.

 

`(d) INTENTIONAL DISREGARD- If any failure under subsection (a) or (b) is due to intentional disregard of the requirements under sections 6018 and 6019(b), the penalty under such subsection shall be 5 percent of the fair market value (as of the date of death or, in the case of section 6019(b), the date of the gift) of the property with respect to which the information is required.

 

`(e) DEFICIENCY PROCEDURES NOT TO APPLY- Subchapter B of chapter 63 (relating to deficiency procedures for income, estate, gift, and certain excise taxes) shall not apply in respect of the assessment or collection of any penalty imposed by this section.'

 

(5) CLERICAL AMENDMENTS-

 

(A) The table of sections for part I of subchapter B of chapter 68 is amended by adding at the end the following new item:

`Sec. 6716. Failure to file information with respect to certain transfers at death and gifts.'

 

(B) The item relating to subpart C in the table of subparts for part II of subchapter A of chapter 61 is amended to read as follows:

 

`Subpart C. Returns relating to transfers during life or at death.'

 

(c) EXCLUSION OF GAIN ON SALE OF PRINCIPAL RESIDENCE MADE AVAILABLE TO HEIR OF DECEDENT IN CERTAIN CASES- Subsection (d) of section 121 (relating to exclusion of gain from sale of principal residence) is amended by adding at the end the following new paragraph:

 

`(9) PROPERTY ACQUIRED FROM A DECEDENT- The exclusion under this section shall apply to property sold by--

 

`(A) the estate of a decedent,

 

`(B) any individual who acquired such property from the decedent (within the meaning of section 1022), and

 

`(C) a trust which, immediately before the death of the decedent, was a qualified revocable trust (as defined in section 645(b)(1)) established by the decedent,

determined by taking into account the ownership and use by the decedent.'

 

(d) TRANSFERS OF APPRECIATED CARRYOVER BASIS PROPERTY TO SATISFY PECUNIARY BEQUEST-

 

(1) IN GENERAL- Section 1040 (relating to transfer of certain farm, etc., real property) is amended to read as follows:

 

`SEC. 1040. USE OF APPRECIATED CARRYOVER BASIS PROPERTY TO SATISFY PECUNIARY BEQUEST.

 

`(a) IN GENERAL- If the executor of the estate of any decedent satisfies the right of any person to receive a pecuniary bequest with appreciated property, then gain on such exchange shall be recognized to the estate only to the extent that, on the date of such exchange, the fair market value of such property exceeds such value on the date of death.

 

`(b) SIMILAR RULE FOR CERTAIN TRUSTS- To the extent provided in regulations prescribed by the Secretary, a rule similar to the rule provided in subsection (a) shall apply where--

 

`(1) by reason of the death of the decedent, a person has a right to receive from a trust a specific dollar amount which is the equivalent of a pecuniary bequest, and

 

`(2) the trustee of a trust satisfies such right with property.

 

`(c) BASIS OF PROPERTY ACQUIRED IN EXCHANGE DESCRIBED IN SUBSECTION (a) OR (b)- The basis of property acquired in an exchange with respect to which gain realized is not recognized by reason of subsection (a) or (b) shall be the basis of such property immediately before the exchange increased by the amount of the gain recognized to the estate or trust on the exchange.'

 

(2) The item relating to section 1040 in the table of sections for part III of subchapter O of chapter 1 is amended to read as follows:

`Sec. 1040. Use of appreciated carryover basis property to satisfy pecuniary bequest.'

 

(e) AMENDMENTS RELATED TO CARRYOVER BASIS-

 

(1) RECOGNITION OF GAIN ON TRANSFERS TO NONRESIDENTS-

 

(A) Subsection (a) of section 684 is amended by inserting `or to a nonresident alien' after `or trust'.

 

(B) Subsection (b) of section 684 is amended to read as follows:

 

`(b) EXCEPTIONS-

 

`(1) TRANSFERS TO CERTAIN TRUSTS- Subsection (a) shall not apply to a transfer to a trust by a United States person to the extent that any United States person is treated as the owner of such trust under section 671.

 

`(2) LIFETIME TRANSFERS TO NONRESIDENT ALIENS- Subsection (a) shall not apply to a lifetime transfer to a nonresident alien.'

 

(C) The section heading for section 684 is amended by inserting `and nonresident aliens' after `estates'.

 

(D) The item relating to section 684 in the table of sections for subpart F of part I of subchapter J of chapter 1 is amended by inserting `and nonresident aliens' after `estates'.

 

(2) CAPITAL GAIN TREATMENT FOR INHERITED ART WORK OR SIMILAR PROPERTY-

 

(A) IN GENERAL- Subparagraph (C) of section 1221(a)(3) (defining capital asset) is amended by inserting `(other than by reason of section 1022)' after `is determined'.

 

(B) COORDINATION WITH SECTION 170- Paragraph (1) of section 170(e) (relating to certain contributions of ordinary income and capital gain property) is amended by adding at the end the following: `For purposes of this paragraph, the determination of whether property is a capital asset shall be made without regard to the exception contained in section 1221(a)(3)(C) for basis determined under section 1022.'

 

(3) DEFINITION OF EXECUTOR- Section 7701(a) (relating to definitions) is amended by adding at the end the following:

 

`(47) EXECUTOR- The term `executor' means the executor or administrator of the decedent, or, if there is no executor or administrator appointed, qualified, and acting within the United States, then any person in actual or constructive possession of any property of the decedent.'

 

(4) CERTAIN TRUSTS- Subparagraph (A) of section 4947(a)(2) is amended by inserting `642(c),' after `170(f)(2)(B),'

 

(5) OTHER AMENDMENTS-

 

(A) Section 1246 is amended by striking sub-section (e).

 

(B) Subsection (e) of section 1291 is amended--

 

(i) by striking `(e),'; and

 

(ii) by striking `; except that' and all that follows and inserting a period.

 

(C) Section 1296 is amended by striking sub-section (i).

 

(6) CLERICAL AMENDMENT- The table of sections for part II of subchapter O of chapter 1 is amended by inserting after the item relating to section 1021 the following new item:

`Sec. 1022. Treatment of property acquired from a decedent dying after December 31, 2009.'

 

(f) EFFECTIVE DATE-

 

(1) IN GENERAL- Except as provided in paragraph (2), the amendments made by this section shall apply to estates of decedents dying after December 31, 2009.

 

(2) TRANSFERS TO NONRESIDENTS- The amendments made by subsection (e)(1) shall apply to transfers after December 31, 2009.

 

(3) SECTION 4947- The amendment made by subsection (e)(4) shall apply to deductions for taxable years beginning after December 31, 2009.

 

Subtitle F--Conservation Easements

 

SEC. 551. EXPANSION OF ESTATE TAX RULE FOR CONSERVATION EASEMENTS.

 

(a) REPEAL OF CERTAIN RESTRICTIONS ON WHERE LAND IS LOCATED- Clause (i) of section 2031(c)(8)(A) (defining land subject to a qualified conservation easement) is amended to read as follows:

 

`(i) which is located in the United States or any possession of the United States,'.

 

(b) CLARIFICATION OF DATE FOR DETERMINING VALUE OF LAND AND EASEMENT- Section 2031(c)(2) (defining applicable percentage) is amended by adding at the end the following new sentence: `The values taken into account under the preceding sentence shall be such values as of the date of the contribution referred to in paragraph (8)(B).'

 

(c) EFFECTIVE DATE- The amendments made by this section shall apply to estates of decedents dying after December 31, 2000.

 

Subtitle G--Modifications of Generation-Skipping Transfer Tax

 

SEC. 561. DEEMED ALLOCATION OF GST EXEMPTION TO LIFETIME TRANSFERS TO TRUSTS; RETROACTIVE ALLOCATIONS.

 

(a) IN GENERAL- Section 2632 (relating to special rules for allocation of GST exemption) is amended by redesignating subsection (c) as subsection (e) and by inserting after subsection (b) the following new subsections:

 

`(c) DEEMED ALLOCATION TO CERTAIN LIFETIME TRANSFERS TO GST TRUSTS-

 

`(1) IN GENERAL- If any individual makes an indirect skip during such individual's lifetime, any unused portion of such individual's GST exemption shall be allocated to the property transferred to the extent necessary to make the inclusion ratio for such property zero. If the amount of the indirect skip exceeds such unused portion, the entire unused portion shall be allocated to the property transferred.

 

`(2) UNUSED PORTION- For purposes of paragraph (1), the unused portion of an individual's GST exemption is that portion of such exemption which has not previously been--

 

`(A) allocated by such individual,

 

`(B) treated as allocated under subsection (b) with respect to a direct skip occurring during or before the calendar year in which the indirect skip is made, or

 

`(C) treated as allocated under paragraph (1) with respect to a prior indirect skip.

 

`(3) DEFINITIONS-

 

`(A) INDIRECT SKIP- For purposes of this subsection, the term `indirect skip' means any transfer of property (other than a direct skip) subject to the tax imposed by chapter 12 made to a GST trust.

 

`(B) GST TRUST- The term `GST trust' means a trust that could have a generation-skipping transfer with respect to the transferor unless--

 

`(i) the trust instrument provides that more than 25 percent of the trust corpus must be distributed to or may be withdrawn by one or more individuals who are non-skip persons--

 

`(I) before the date that the individual attains age 46,

 

`(II) on or before one or more dates specified in the trust instrument that will occur before the date that such individual attains age 46, or

 

`(III) upon the occurrence of an event that, in accordance with regulations prescribed by the Secretary, may reasonably be expected to occur before the date that such individual attains age 46,

 

`(ii) the trust instrument provides that more than 25 percent of the trust corpus must be distributed to or may be withdrawn by one or more individuals who are non-skip persons and who are living on the date of death of another person identified in the instrument (by name or by class) who is more than 10 years older than such individuals

 

`(iii) the trust instrument provides that, if one or more individuals who are non-skip persons die on or before a date or event described in clause (i) or (ii), more than 25 percent 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 of such individuals,

 

`(iv) the trust is a trust any portion of which would be included in the gross estate of a non-skip person (other than the transferor) if such person died immediately after the transfer,

 

`(v) the trust is a charitable lead annuity trust (within the meaning of section 2642(e)(3)(A)) or a charitable remainder annuity trust or a charitable remainder unitrust (within the meaning of section 664(d)), or

 

`(vi) the trust is a trust with respect to which a deduction was allowed under section 2522 for the amount of an interest in the form of the right to receive annual payments of a fixed percentage of the net fair market value of the trust property (determined yearly) and which is required to pay principal to a non-skip person if such person is alive when the yearly payments for which the deduction was allowed terminate.

 

For purposes of this subparagraph, the value of transferred property shall not be considered to be includible in the gross estate of a non-skip person or subject to a right of withdrawal by reason of such person holding a right to withdraw so much of such property as does not exceed the amount referred to in section 2503(b) with respect to any transferor, and it shall be assumed that powers of appointment held by non-skip persons will not be exercised.

 

`(4) AUTOMATIC ALLOCATIONS TO CERTAIN GST TRUSTS- For purposes of this subsection, an indirect skip to which section 2642(f) applies shall be deemed to have been made only at the close of the estate tax inclusion period. The fair market value of such transfer shall be the fair market value of the trust property at the close of the estate tax inclusion period.

 

`(5) APPLICABILITY AND EFFECT-

 

`(A) IN GENERAL- An individual--

 

`(i) may elect to have this subsection not apply to--

 

`(I) an indirect skip, or

 

`(II) any or all transfers made by such individual to a particular trust, and

`(ii) may elect to treat any trust as a GST trust for purposes of this subsection with respect to any or all transfers made by such individual to such trust.

 

`(B) ELECTIONS-

 

`(i) ELECTIONS WITH RESPECT TO INDIRECT SKIPS- An election under subparagraph (A)(i)(I) shall be deemed to be timely if filed on a timely filed gift tax return for the calendar year in which the transfer was made or deemed to have been made pursuant to paragraph (4) or on such later date or dates as may be prescribed by the Secretary.

 

 

`(ii) OTHER ELECTIONS- An election under clause (i)(II) or (ii) of subparagraph (A) may be made on a timely filed gift tax return for the calendar year for which the election is to become effective.

 

`(d) RETROACTIVE ALLOCATIONS-

 

`(1) IN GENERAL- If--

 

`(A) a non-skip person has an interest or a future interest in a trust to which any transfer has been made,

 

`(B) such person--

 

`(i) is a lineal descendant of a grandparent of the transferor or of a grandparent of the transferor's spouse or former spouse, and

 

`(ii) is assigned to a generation below the generation assignment of the transferor, and

 

`(C) such person predeceases the transferor,

 

then the transferor may make an allocation of any of such transferor's unused GST exemption to any previous transfer or transfers to the trust on a chronological basis.

 

`(2) SPECIAL RULES- If the allocation under paragraph (1) by the transferor is made on a gift tax return filed on or before the date prescribed by section 6075(b) for gifts made within the calendar year within which the non-skip person's death occurred--

 

`(A) the value of such transfer or transfers for purposes of section 2642(a) shall be determined as if such allocation had been made on a timely filed gift tax return for each calendar year within which each transfer was made,

 

`(B) such allocation shall be effective immediately before such death, and

 

`(C) the amount of the transferor's unused GST exemption available to be allocated shall be determined immediately before such death.

 

`(3) FUTURE INTEREST- For purposes of this subsection, a person has a future interest in a trust if the trust may permit income or corpus to be paid to such person on a date or dates in the future.'

 

(b) CONFORMING AMENDMENT- Paragraph (2) of section 2632(b) is amended by striking `with respect to a prior direct skip' and inserting `or subsection (c)(1)'.

 

(c) EFFECTIVE DATES-

 

(1) DEEMED ALLOCATION- Section 2632(c) of the Internal Revenue Code of 1986 (as added by subsection (a)), and the amendment made by subsection (b), shall apply to transfers subject to chapter 11 or 12 made after December 31, 2000, and to estate tax inclusion periods ending after December 31, 2000

 

(2) RETROACTIVE ALLOCATIONS- Section 2632(d) of the Internal Revenue Code of 1986 (as added by subsection (a)) shall apply to deaths of non-skip persons occurring after December 31, 2000.

 

SEC. 562. SEVERING OF TRUSTS.

 

(a) IN GENERAL- Subsection (a) of section 2642 (relating to inclusion ratio) is amended by adding at the end the following new paragraph:

`(3) SEVERING OF TRUSTS-

 

`(A) IN GENERAL- If a trust is severed in a qualified severance, the trusts resulting from such severance shall be treated as separate trusts thereafter for purposes of this chapter.

 

`(B) QUALIFIED SEVERANCE- For purposes of subparagraph (A)--

 

`(i) IN GENERAL- The term `qualified severance' means the division of a single trust and the creation (by any means available under the governing instrument or under local law) of two or more trusts if--

 

`(I) the single trust was divided on a fractional basis, and

 

`(II) the terms of the new trusts, in the aggregate, provide for the same succession of interests of beneficiaries as are provided in the original trust.

 

`(ii) TRUSTS WITH INCLUSION RATIO GREATER THAN ZERO- If a trust has an inclusion ratio of greater than zero and less than 1, a severance is a qualified severance only if the single trust is divided into two trusts, one of which receives a fractional share of the total value of all trust assets equal to the applicable fraction of the single trust immediately before the severance. In such case, the trust receiving such fractional share shall have an inclusion ratio of zero and the other trust shall have an inclusion ratio of 1.

 

`(iii) REGULATIONS- The term `qualified severance' includes any other severance permitted under regulations prescribed by the Secretary.

 

`(C) TIMING AND MANNER OF SEVERANCES- A severance pursuant to this paragraph may be made at any time. The Secretary shall prescribe by forms or regulations the manner in which the qualified severance shall be reported to the Secretary.'

 

(b) EFFECTIVE DATE- The amendment made by this section shall apply to severances after December 31, 2000.

 

SEC. 563. MODIFICATION OF CERTAIN VALUATION RULES.

 

(a) GIFTS FOR WHICH GIFT TAX RETURN FILED OR DEEMED ALLOCATION MADE- Paragraph (1) of section 2642(b) (relating to valuation rules, etc.) is amended to read as follows:

 

`(1) GIFTS FOR WHICH GIFT TAX RETURN FILED OR DEEMED ALLOCATION MADE- If the allocation of the GST exemption to any transfers of property is made on a gift tax return filed on or before the date prescribed by section 6075(b) for such transfer or is deemed to be made under section 2632 (b)(1) or (c)(1)--

 

`(A) the value of such property for purposes of subsection (a) shall be its value as finally determined for purposes of chapter 12 (within the meaning of section 2001(f)(2)), or, in the case of an allocation deemed to have been made at the close of an estate tax inclusion period, its value at the time of the close of the estate tax inclusion period, and

 

`(B) such allocation shall be effective on and after the date of such transfer, or, in the case of an allocation deemed to have been made at the close of an estate tax inclusion period, on and after the close of such estate tax inclusion period.'

 

(b) TRANSFERS AT DEATH- Subparagraph (A) of section 2642(b)(2) is amended to read as follows:

 

`(A) TRANSFERS AT DEATH- If property is transferred as a result of the death of the transferor, the value of such property for purposes of subsection (a) shall be its value as finally determined for purposes of chapter 11; except that, if the requirements prescribed by the Secretary respecting allocation of post-death changes in value are not met, the value of such property shall be determined as of the time of the distribution concerned.'

 

(c) EFFECTIVE DATE- The amendments made by this section shall apply to transfers subject to chapter 11 or 12 of the Internal Revenue Code of 1986 made after December 31, 2000.

 

SEC. 564. RELIEF PROVISIONS.

 

(a) IN GENERAL- Section 2642 is amended by adding at the end the following new subsection:

 

`(g) RELIEF PROVISIONS-

 

`(1) RELIEF FROM LATE ELECTIONS-

 

`(A) IN GENERAL- The Secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make--

 

`(i) an allocation of GST exemption described in paragraph (1) or (2) of subsection (b), and

 

`(ii) an election under subsection (b)(3) or (c)(5) of section 2632.

 

Such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of this paragraph.

 

`(B) BASIS FOR DETERMINATIONS- In determining whether to grant relief under this paragraph, the Secretary shall take into account all relevant circumstances, including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the Secretary deems relevant. For purposes of determining whether to grant relief under this paragraph, the time for making the allocation (or election) shall be treated as if not expressly prescribed by statute.

 

`(2) SUBSTANTIAL COMPLIANCE- An allocation of GST exemption under section 2632 that demonstrates an intent to have the lowest possible inclusion ratio with respect to a transfer or a trust shall be deemed to be an allocation of so much of the transferor's unused GST exemption as produces the lowest possible inclusion ratio. In determining whether there has been substantial compliance, all relevant circumstances shall be taken into account, including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the Secretary deems relevant.'

 

(b) EFFECTIVE DATES-

 

(1) RELIEF FROM LATE ELECTIONS- Section 2642(g)(1) of the Internal Revenue Code of 1986 (as added by subsection (a)) shall apply to requests pending on, or filed after, December 31, 2000.

 

(2) SUBSTANTIAL COMPLIANCE- Section 2642(g)(2) of such Code (as so added) shall apply to transfers subject to chapter 11 or 12 of the Internal Revenue Code of 1986 made after December 31, 2000. No implication is intended with respect to the availability of relief from late elections or the application of a rule of substantial compliance on or before such date.

 

Subtitle H--Extension of Time for Payment of Estate Tax

 

SEC. 571. INCREASE IN NUMBER OF ALLOWABLE PARTNERS AND SHAREHOLDERS IN CLOSELY HELD BUSINESSES.

 

(a) IN GENERAL- Paragraphs (1)(B)(ii), (1)(C)(ii), and (9)(B)(iii)(I) of section 6166(b) (relating to definitions and special rules) are each amended by striking `15' and inserting `45'.

 

(b) EFFECTIVE DATE- The amendments made by this section shall apply to estates of decedents dying after December 31, 2001.

 

SEC. 572. EXPANSION OF AVAILABILITY OF INSTALLMENT PAYMENT FOR ESTATES WITH INTERESTS QUALIFYING LENDING AND FINANCE BUSINESSES.

 

(a) IN GENERAL- Section 6166(b) (relating to definitions and special rules) is amended by adding at the end the following new paragraph:

 

`(10) STOCK IN QUALIFYING LENDING AND FINANCE BUSINESS TREATED AS STOCK IN AN ACTIVE TRADE OR BUSINESS COMPANY-

 

`(A) IN GENERAL- If the executor elects the benefits of this paragraph, then--

 

`(i) STOCK IN QUALIFYING LENDING AND FINANCE BUSINESS TREATED AS STOCK IN AN ACTIVE TRADE OR BUSINESS COMPANY- For purposes of this section, any asset used in a qualifying lending and finance business shall be treated as an asset which is used in carrying on a trade or business.

 

`(ii) 5-YEAR DEFERRAL FOR PRINCIPAL NOT TO APPLY- The executor shall be treated as having selected under subsection (a)(3) the date prescribed by section 6151(a).

 

`(iii) 5 EQUAL INSTALLMENTS ALLOWED- For purposes of applying subsection (a)(1), `5' shall be substituted for `10'.

 

`(B) DEFINITIONS- For purposes of this paragraph-

 

`(i) QUALIFYING LENDING AND FINANCE BUSINESS- The term `qualifying lending and finance business' means a lending and finance business, if--

 

`(I) based on all the facts and circumstances immediately before the date of the decedent's death, there was substantial activity with respect to the lending and finance business, or

 

`(II) during at least 3 of the 5 taxable years ending before the date of the decedent's death, such business had at least 1 full-time employee substantially all of whose services were the active management of such business, 10 full-time, nonowner employees substantially all of whose services were directly related to such business, and $5,000,000 in gross receipts from activities described in clause (ii).

 

`(ii) LENDING AND FINANCE BUSINESS- The term `lending and finance business' means a trade or business of--

 

`(I) making loans,

 

`(II) purchasing or discounting accounts receivable, notes, or installment obligations,

 

`(III) engaging in rental and leasing of real and tangible personal property, including entering into leases and purchasing, servicing, and disposing of leases and leased assets,

 

`(IV) rendering services or making facilities available in the ordinary course of a lending or finance business, and

 

`(V) rendering services or making facilities available in connection with activities described in subclauses (I) through (IV) carried on by the corporation rendering services or making facilities available, or another corporation which is a member of the same affiliated group (as defined in section 1504 without regard to section 1504(b)(3)).

 

`(iii) LIMITATION- The term `qualifying lending and finance business' shall not include any interest in an entity, if the stock or debt of such entity or a controlled group (as defined in section 267(f)(1)) of which such entity was a member was readily tradable on an established securities market or secondary market (as defined by the Secretary) at any time within 3 years before the date of the decedent's death.'

 

(b) EFFECTIVE DATE- The amendment made by this section shall apply to estates of decedents dying after December 31, 2001.

 

SEC. 573. CLARIFICATION OF AVAILABILITY OF INSTALLMENT PAYMENT.

 

(a) IN GENERAL- Subparagraph (B) of section 6166(b)(8) (relating to all stock must be non-readily-tradable stock) is amended to read as follows:

 

`(B) ALL STOCK MUST BE NON-READILY-TRADABLE STOCK-

 

`(i) IN GENERAL- No stock shall be taken into account for purposes of applying this paragraph unless it is non-readily-tradable stock (within the meaning of paragraph (7)(B)).

 

`(ii) SPECIAL APPLICATION WHERE ONLY HOLDING COMPANY STOCK IS NON-READILY-TRADABLE STOCK- If the requirements of clause (i) are not met, but all of the stock of each holding company taken into account is non-readily-tradable, then this paragraph shall apply, but subsection (a)(1) shall be applied by substituting `5' for `10'.'

 

(b) EFFECTIVE DATE- The amendment made by this section shall apply to estates of decedents dying after December 31, 2001.

 

Subtitle I--Other Provisions

 

SEC. 581. WAIVER OF STATUTE OF LIMITATION FOR TAXES ON CERTAIN FARM VALUATIONS.

 

If on the date of the enactment of this Act (or at any time within 1 year after the date of the enactment) a refund or credit of any overpayment of tax resulting from the application of section 2032A(c)(7)(E) of the Internal Revenue Code of 1986 is barred by any law or rule of law, the refund or credit of such overpayment shall, nevertheless, be made or allowed if claim therefor is filed before the date 1 year after the date of the enactment of this Act.

 

TITLE IX--COMPLIANCE WITH CONGRESSIONAL BUDGET ACT

 

Economic Growth and Tax Relief Reconciliation Act of 2001[22]

 

SEC. 901. SUNSET OF PROVISIONS OF ACT.

I

(a) IN GENERAL- All provisions of, and amendments made by, this Act shall not apply--

 

(1) to taxable, plan, or limitation years beginning after December 31, 2010, or

 

(2) in the case of title V, to estates of decedents dying, gifts made, or generation skipping transfers, after December 31, 2010.

 

(b) APPLICATION OF CERTAIN LAWS- The Internal Revenue Code of 1986 . . .  shall be applied and administered to years, estates, gifts, and transfers described in subsection (a) as if the provisions and amendments described in subsection (a) had never been enacted.

 


[1]  Restoring Earnings to Life Individuals and Empower Families (Relief) Act of 2001, Technical explanation of provisions approved by the committee on May 15, 2001, Committee on Finance, U.S. Senate, May 2001, page 43.

[2]  If you know what “basis” means, ignore this footnote.  If you do not know,  for the purposes of this course, assume that it is sort of the cost of an asset, adjusted by depreciation, depletion, etc.  It is what is used to calculate capital gains, depreciation, depletion, etc.  Don’t think of this as the precise meaning, but it is the general concept, and is good enough for this course. Even thinking of it as the decedent’s cost for assets may be good enough for this course, although it isn’t quite right.  With the importance of “basis” under the new law, YouKnowItAll.com might create a course on “basis.” 

[3]  Star Tribune, Tuesday, July 17, 2001

[4]  Rasmussen Research conducted this national telephone survey of 1000 randomly selected adults on July 18, 2000. The margin of sampling error is +/- 3 percentage points with a 95% level of confidence.”

[5]  Yes, one reason for the public support for repeal of the estate tax is to get estate tax lawyers out of their lives.  This may be an important insight. 

[6]  In most states.  Some states don’t have an estate tax and this concept does not apply.  Some states have a higher tax so the discussion is applicable although the wording would be different.

[7]  In 2005, it is replaced by a deduction for state death taxes.

[8]  If there is a loss, it may be best to take the loss by selling the asset and giving the proceeds.  There is a step up in basis, but it has limits.  But, there are special basis rules for loss carryforwards and negative basis at death.  They may be changed before they take effect. 

[9]  See the courses on the Slayer’s Rule and removal of life support at YouKnowItAll.com.

[10]  140 N.Y.S.2d 169

[11]  Omission is not necessarily bad.  Sometimes the best thing for a will to say about an issue is nothing.

[12]  (see, Internal Revenue Code [26 USC] § 2613)

[13]  (see, EPTL 11-1.2)

[14]  (see, Internal Revenue Code [26 USC] § 2632)

[15]  (see, Internal Revenue Code [26 USC] § 2642)

[16]  (see, Internal Revenue Code [26 USC] §§ 2612 and 2622)

[17]  (see, Internal Revenue Code [26 USC] § 2603[a][2]

[18]  (see, Matter of Holloway, 68 Misc.2d 361, 327 N.Y.S.2d 865, modifying 67 Misc.2d 132, 323 N.Y.S.2d 534; Matter of Warms, 140 N.Y.S.2d 169; EPTL 11-1.2)

[19]  (see, Matter of Sheridan, 32 Misc.2d 38, 222 N.Y.S.2d 751; Carrico and Bondurant, Equitable Adjustments: A Survey and Analysis of Precedents and Practice, 36 Tax Lawyer 545, 602-603 [1983]; Dobris, Limits on the Doctrine of Equitable Adjustment in Sophisticated Postmortem Tax Planning, 66 Iowa L.Rev. 273, 340 [1981].

[20]  (see, EPTL 11-1.2)

[21]  See the Floyd case discussed in YouKnowItAll.com’s Will Drafting Errors to Avoid course.

[22]  H.R.1836

An Act to provide for reconciliation pursuant to section 104 of the concurrent resolution on the budget for fiscal year 2002.