The following article originally appeared in the newsletter of the Kansas Bar Association Real Estate, Probate and Trust Law Section. It is reprinted here by permission.
By Kent A. Meyerhoff
Fleeson, Gooing, Coulson & Kitch, L.L.C.
1. SECURE Act Makes Significant Changes to Retirement Plans and Distribution Rules
Effective January 1, 2020, the rules relating to required minimum distributions from IRAs, 401ks, and other retirement plans changed dramatically. The SECURE Act, which was signed by President Trump on December 20, 2019, replaces the “life expectancy” payout option with a 10-year payout for most designated beneficiaries of retirement plans and eliminates the popular “stretch IRA”. Although the definition of “designated beneficiary” and the rules for treating a “see through” trust as a designated beneficiary have not changed, the payout rules for designated beneficiaries have changed. For most designated beneficiaries of a retirement plan, they will be required to withdraw their share of the retirement plan benefits within 10 years after the death of the IRA owner or plan participant. Only five categories of beneficiaries – surviving spouses, minor children, disabled beneficiaries, chronically ill beneficiaries, and beneficiaries who are less than 10 years younger than the participant – have options other than the 10-year rule. A surviving spouse still has the option to roll over the inherited benefits into the surviving spouse’s own IRA.
With respect to deaths that occurred prior to 2020, if benefits are being paid out over the life expectancy of the designated beneficiary that payout may continue, but upon the death of the designated beneficiary the 10-year rule will kick in. The prior distribution rules that applied when there was not a designated beneficiary have not changed. In those cases, the 5-year rule still applies, requiring the distribution of all funds from the retirement plan within 5 years after the death of the IRA owner or plan participant.
The SECURE Act also raised the age when an IRA owner or plan participant must begin taking required minimum distributions from 70½ to 72, and it removed the age cap for contributions to traditional IRAs.
2. Final Regulations Confirm No "Clawback" for Gifts Made Prior to January 1, 2026
The IRS has issued final regulations that confirm there will be no “clawback” as a result of a potential reduction of the applicable exclusion amount in 2026 or beyond. The final regulations are generally consistent with proposed regulations issued last year.
The Tax Cuts and Jobs Act amended Code Section 2010(c)(3) to provide that for decedents dying and gifts made after December 31, 2017, and before January 1, 2026, the basic exclusion amount was increased from $5 million (indexed for inflation) to $10 million (indexed for inflation). However, on January 1, 2026, the basic exclusion amount will revert to $5 million (indexed for inflation).
The final regulations provide a special rule that allows an estate to compute its estate tax credit using the higher of the basic exclusion amount applicable to gifts made during life or the basic exclusion amount applicable on the date of death. The final regulations provide that in computing the estate tax, the increased basic exclusion amount is applied first against the decedent’s taxable lifetime gifts. To the extent any basic exclusion amount remains at death, it is applied against the decedent’s estate. Therefore, in the case of a decedent who had made enough gifts to cause the total basic exclusion amount allowable in computing gift tax payable to equal or exceed the date of death basic exclusion amount there is no remaining basic exclusion amount available to be applied to reduce the estate tax.
The final regulations also provide that if the decedent’s spouse died before January 1, 2026, and the spouse’s executor made a portability election, the decedent’s applicable exclusion amount includes the full amount of the DSUE, and this amount is available to offset the decedent’s transfer tax liability regardless of when the transfers are made.
3. IRS Announces Cost of Living Adjustments for Retirement Plan Contribution Limits
In Notice 2019-59, the IRS announced cost of living adjustments for many retirement plan contribution limits, effective January 1, 2020. Among the plan limits addressed in the Notice are:
4. IRS Announces Inflation Adjustments Affecting Transfer Tax Items
In Rev. Proc. 2019-44, the IRS released the 2020 inflation adjustments for certain transfer tax items. They are as follows:
5. No Tax on Transfer of IRA Assets to New IRA of Charitable Beneficiary
In PLR 201943020, the IRS held that there was no tax on the transfer of assets held in a decedent’s IRA to a new IRA established for a charitable beneficiary of the decedent’s IRA.
Decedent had established an IRA and named a charity as beneficiary. Decedent died, and original IRA custodian required the charity to create a new IRA into which the custodian transferred the assets from original IRA in a trustee-to-trustee transfer. In creating the IRA for the charity, the custodian used paperwork specific to inherited IRAs. The charity was listed as the owner of new IRA, and its taxpayer identification number was used on the paperwork creating the IRA. The paperwork creating the new IRA provided that only beneficiaries of decedent’s IRA at the time of his death could transfer amounts from the IRA to an inherited IRA.
The IRS determined that the trustee-to-trustee transfer of assets from dedecent’s IRA to the new IRA did not constitute a payment or distribution includible in gross income. Therefore, the transfer to the new IRA was not a distribution subject to federal income tax.
6. Surviving Spouse Can Roll Over Distribution From Decedent's Governmantal Retirement Plan
In PLR 201936009, the IRS allowed a surviving spouse to roll over a distribution from decedent's governmental retirement plan into her own IRA, even though the plan named the decedent's estate as beneficiary of the plan. The rollover was not required to be treated as a taxable distribution.
The decedent was a participant in a retirement plan established under Code Sec. 457(b). The decedent died before turning 70-1/2. Decedent named his estate as the sole beneficiary of his account in the plan. Decedent’s surviving spouse was the sole beneficiary of his estate. The spouse sought to roll over the decedent's account to an IRA established in her name. The plan disallowed the rollover because the decedent's estate, and not his surviving spouse, was the named beneficiary of the decedent's account in the plan. The IRS determined that the surviving spouse could roll over the distribution from decedent’s account under the plan under Code Section 402(c). Therefore, she was not required to include the distribution from the plan in income in the year in which it was received.
7. Surviving Spouse Can Rolle Over Distribution From Decedent's IRA Even Though No Designated Beneficiary
In PLR 201931006, the IRS allowed a surviving spouse to roll over a distribution from a deceased spouse’s IRA even though the deceased spouse did not designate a beneficiary.
The decedent established an IRA but did not designate a beneficiary. Under the IRA custodian’s policies, if no beneficiary is designated for the IRA, the account balance remaining at decedent’s death is payable to decedent’s estate. The decedent died without a will and, under relevant state law, decedent’s surviving spouse was the sole heir of decedent’s estate.
The surviving spouse, who also was administrator of the estate, wanted to distribute the IRA to the estate, pay the proceeds of the IRA to himself, and then within 60 days roll over the IRA proceeds into one or more IRAs in his own name.
According to the PLR, because the surviving spouse was the sole heir and administrator of decedent’s estate, for purposes of applying Code Sec. 408(d)(3)(A) to the IRA, he is effectively the individual for whose benefit the account is maintained. As a result, if the surviving spouse received a distribution of the proceeds from the IRA, he could roll over the distribution into his own IRA and not be taxed, provided the rollover occurred within 60 days after the proceeds were received by the surviving spouse in his capacity as administrator of the estate.
8. Determination of Value of Disclaimed Life Estates When Taxpayer Making the Disclaimer Is Terminally Ill
In PLR 201928003, the IRS discussed the valuation of a disclaimed life estate when the taxpayer was terminally ill at the time of the disclaimer.
Taxpayer was the income beneficiary of three trusts. Taxpayer disclaimed her income interests (treated as life estates) using the disclaimer provisions set forth in each of the trust documents. At the time she made the disclaimers, the taxpayer had cancer and was in hospice care. She was diagnosed as terminally ill, and there was at least a 50% probability that she would die within one year of the date on which she made the disclaimers. She died five days later.
The IRS determined an actuarial factor of .00043 should be used to value the taxpayer's disclaimers of her life estates. The IRS noted that the disclaimers were completed gifts to the remainder beneficiaries of the trusts and, at the time the gifts were made, the taxpayer had been diagnosed as terminally ill with at least a 50% probability that she would die within one year of the date of the disclaimers. Because the taxpayer was terminally ill within the meaning of Reg. §25.7520-3(b)(3) at the time of the disclaimer, the mortality component under Code Sec. 7520 for ordinary life estates could not be used to determine the present value of the life estate interests that taxpayer disclaimed.
9 Alternative Valuation Date Not Available to Estate
In a Chief Counsel Advice, the IRS concluded that where its audit determined that estate and GST taxes on the date of the decedent's death were lower than on a date six months after death, an executor who had elected to use an alternate valuation date for purposes of valuing estate assets for estate and GST tax purposes could not use that date but had to use the date of death for valuation purposes.
Under Code Section 2031(a), property is typically valued for estate tax purposes as of the date of a decedent’s death. However, under Code Section 2032 an executor may elect to use an alternate valuation date six months after the date of death in certain circumstances. When such an election is made, it applies to all estate property and cannot be used on an item-by-item basis. The election to use the alternate valuation date is effective, however, only if using that date results in the decrease of both the value of the gross estate, and the amount of estate and GST tax imposed on the estate and on property included in the gross estate. Because that was not the case, the alternate valuation date could not be used.
10. Distribution Period Determined for IRA Divided Into Four Separate IRAs
In PLR 201924013, the IRS determined the period over which distributions could be taken from an IRA that was divided into four separate IRAs. The IRS determined that a decedent's IRA could be split into four separate IRAs for the benefit of each of the decedent's children, who were the beneficiaries of a trust that was the designated beneficiary of the IRA. The resulting separate IRAs would be considered inherited IRAs, and the life expectancy of the oldest child had to be used to determine the distribution period for all four IRAs.
The decedent owned an IRA and designated a trust that she established as beneficiary. The decedent died after her required beginning date. She had four children living at the time of her death. The beneficiary trust provided that on the death of the decedent, the trust's assets, including the IRA, would be divided into four separate trusts for each of the children. The trust's co-trustees proposed to divide the IRA into four separate IRAs by trustee-to-trustee transfers, with one IRA for the benefit of each of the decedent's children. These IRAs would be maintained in the name of the decedent for the benefit of the children, to be paid out over the life expectancy of the oldest child. The IRS ruled that the separate IRAs established by the co-trustees constituted inherited IRAs under Code Sec. 408(d)(3)(C), because each of the decedent's children acquired an interest in the IRA by reason of the death of the decedent. The creation of these IRAs by trustee-to-trustee transfers did not constitute taxable distributions.
11. Spouse Treated as Designated Beneficiary of Roth IRA for Purposes of Minimum Distribution Rules
In PLR 201923016, the IRS determined that the surviving spouse was the designated beneficiary of the decedent’s Roth IRA for purposes of the required minimum distribution rules.
The decedent had created a revocable trust that became irrevocable at his death. It was divided into a marital trust for his spouse and two other subtrusts for his daughter and family. At his death, the decedent owned a Roth IRA that designated the marital trust as its beneficiary. The decedent died after his required beginning date for distributions from the Roth IRA. The trust provided that all amounts of any subtrust that was the beneficiary of a retirement plan were to be paid outright to the designated beneficiary of the subtrust. It also provided that an independent trustee could make an irrevocable election to render this provision inoperative to a subtrust that was a plan beneficiary. Such an election would have allowed the subtrust to accumulate assets rather than paying all amounts to the beneficiary. Although no independent trustee was designated, a state court later designated the decedent’s daughter to act as independent trustee of the marital trust and to retroactively elect to treat the marital trust as an accumulation trust.
If the election were valid, the surviving spouse would not be the sole beneficiary of the marital trust, which would have negated application of the spousal beneficiary rules. However, the IRS concluded that the tax consequences under federal law applicable at the date of decedent’s death remained applicable, notwithstanding later retroactive modification by the state court. The IRS determined that the marital trust was valid and became irrevocable on the death of the decedent, its beneficiaries were identifiable (the surviving spouse), and appropriate documentation had been provided to the trust's administrator. As a result, the trust was a "see-through" trust under Reg. §1.401(a)(9)-4, Q&A-5. Therefore, the spouse, as beneficiary of the marital trust, was treated as designated beneficiary of the Roth IRA for purposes of the Code Sec. 401(a)(9) required minimum distribution rules. This included the determination of the distribution period under Code Sec. 401(a)(9). Pursuant to Reg. §1.401(a)(9)-5, Q&A-5(a), required minimum distributions from the Roth IRA were calculated based on the spouse’s life expectancy, determined under Reg. §1.401(a)(9)-5, Q&A-5(c)(2).
12. Failure to File Penalty Abated for Estate: Estate of Skeba, 2019 WL 4885697 (D.N.J. Oct. 3, 2019)
The federal estate tax return for Agnes Skeba’s estate was due on March 10, 2014. Before the return’s due date, the estate filed Form 4768, Application for Extension to File a Return and/or Pay U.S. Estate Taxes, requesting additional time to file the estate tax return and pay any estate taxes due. The estate included with this request an estimated payment and a detailed explanation of why it needed more time to file the return. On March 18, 2014, Estate made a second estate tax payment, which paid the estate tax in full, and on July 8, 2014, the IRS approved the estate’s request to extend the due date to file the estate tax return and to pay the estate tax to September 10, 2014.
The estate tax return was not filed until June 2015. The return reported an estate tax overpayment of $941,162. In August 2015, the IRS imposed a failure to file penalty on estate of 25% of the amount of tax unpaid on March 10, 2014. The estate asked the IRS to abate the penalty, explaining that the estate continued to have delays in filing due to the pending and anticipated completion of litigation over the validity of the decedent's Will. The IRS refused the estate’s request.
The estate argued that under Code Sec. 6651(a)(1) and Code Sec. 6651(b)(1), the late filing penalty is calculated based on the "net amount due" on the "date prescribed for payment". Under Code Sec. 6651(a)(2) the "date prescribed for payment" was the extended payment date of September 10, 2014. Thus, there was no "net amount due" on the "date prescribed for payment," because the estate paid the estate tax due in full on March 18, 2014. Therefore, the estate argued, the penalty should be abated even though estate didn't file its return by the extended due date.
The IRS took the position that under Code Sec. 6151 the last day for payment of the estate tax was March 10, 2014, which was nine months after the decedent’s death. Because there was tax due and the return was filed after the extended filing date, the IRS argued, a late-filing penalty was properly calculated using the tax due on March 10, 2014.
The court rejected the IRS’s argument and found its refusal to abate the failure to file penalties assessed against estate was arbitrary and capricious. Contrary to the IRS’s argument, the “date prescribed for payment” was found in Code Sec. 6651(a)(2), which takes into account any extension of time to file the return, and not Code Sec. 6151, which does not. The IRS granted the estate an extension until September 10, 2014, to file the estate tax return and to pay the tax. Because the estate paid the tax in full on March 18, 2014, there was no “net amount due” on September 10, 2014, that could be used to calculate the late-filing penalty.
13. No Tax Liability Where Untimely Rollover of IRA Distribution Due to Bookkeeping Error: Burack v. Commissioner, TC Memo 2019-83, 2019 WL 2930002 (July 8, 2019)
The Tax Court held that an IRA owner was not liable for taxes on a distribution from an IRA where the IRA distribution was not rolled over into a new IRA within the 60-day rollover period allowed under Code Section 408(d)(3).
Nancy Burack established an IRA with Capital Guardian. On June 25, 2014, she received a distribution from the IRA that she intended to roll back into her IRA within 60 days. On August 21, 2014, she received a cashier's check to redeposit the distribution back into the IRA. On August 21, 2014, Burack sent the check via overnight delivery to Capital Guardian. The check arrived at Capital Guardian on August 22, 2014, which was 58 days after she had received the IRA distribution. On August 26, 2014, 62 days after she received the IRA distribution, the check was deposited into Burack's IRA account.
In 2017, the IRS determined that Burack did not repay the IRA distribution until more than 60 days after she received it. Burack argued the rollover was timely but was not recorded as timely because of a bookkeeping error by Capital Guardian. The court held in favor of Burack. Because the rollover payment was received by Capital Guardian within the 60-day rollover period but not book-entered by Capital Guardian until after, the court found that the late recording was due to a bookkeeping error. Therefore, the rollover payment was entitled to tax-free treatment as a rollover contribution.
14. Charitable Contribution Deduction Denied for Conservation Easement Where Conservatoin Purposes Not Protected in Perpetuity: Coal Property Holdings, LLC v. Commissioner, 153 T.C. No. 7, 2019 WL 5549313 (Oct. 28, 2019)
The Tax Court held in favor of the IRS in denying a conservation easement where the conservation purposes were not “protected in perpetuity.”
In 2013 the taxpayer donated a conservation easement to a qualified organization. The easement deed provided that, if the property were sold following judicial extinguishment of the easement, the donee organization would receive a share of the proceeds, “after the satisfaction of prior claims,” determined by a formula. Under the formula, the donee’s share was equal to the property’s fair market value (FMV) at the time of sale, “minus any increase in value after the date of th[e] grant attributable to improvements,” multiplied by a fraction specified in Regs. Section 1.170A-14(g)(6)(ii). Alternatively, if this formula produced a result “different from” that required by the regulation, the deed provided that the donee would receive a share of the proceeds as determined by the regulation.
The Tax Court held the easement did not satisfy Regs. Section 1.170A-14(g)(6), because the portion of the proceeds to which the qualified organization was entitled was improperly reduced by amounts paid in satisfaction of prior claims against the taxpayer and amounts inuring to the taxpayer that are attributable to appreciation in the value of improvements existing when the easement was granted plus the fair market value of improvements subsequently made to the property. The alternative calculation of proceeds specified in the deed, which was applicable only if the deed’s formula was determined to be “different from” that required by the regulation, constituted a condition subsequent that would not be judicially enforced. The court held that the IRS properly disallowed the charitable contribution deduction in its entirety, because the conservation purpose of the easement was not “protected in perpetuity” as required by Code Section 170(h)(5)(A).