Estate, Gift & Trust Tax Articles

The Estate, Gift & Trust section is a compilation of alerts and articles written by members of the ICPAS Estate, Gift & Trust Committee as well as links to websites and other resources of interest to the estate, gift & trust community. Follow the links below for more information on these topics.

Estate, Gift & Trust Committee Articles

Tax Basis of Assets Inherited from Grantor Trusts

June 9, 2022

Gary S. Hart

Mowery & Schoenfeld, LLC

Tax Basis of Assets Inherited from Grantor Trusts

Last year, when various pieces of tax legislation were winding their way through Congress, the ability to create new grantor trusts and even to continue existing grantor trusts was very much in doubt. There was even legislation that would have eliminated the step-up in basis rules available to inherited assets throughout the history of the estate tax.

While some or all of these provisions may appear in future tax proposals, since none of these provisions passed, this seems like a good time to review how tax basis should be determined for assets received from a grantor trust upon death that are NOT includible in a decedent’s gross estate. Such grantor trusts sometimes are referred to as intentionally defective grantor trusts.

The view taken by most practitioners is that when a grantor dies, the tax basis of assets received from a grantor trust, but not includible in the gross estate, should be carryover basis. That view is based on the position that the assets were not includible in the gross estate and, therefore, should not receive the benefit of stepped-up basis.

The well-known estate planner, Jonathan Blattmachr, has taken a different view. He has espoused a position in the past for stepping up the basis of assets held in a grantor trust, but not includible in the gross estate. He has been quoted as saying, “It is a fundamental rule that if property is transferred at death, there is a change in basis unless the property is income in respect of a decedent under Code Section 691.” The IRS has not acquiesced to this position.

Section 1014 of the Internal Revenue Code generally provides that the basis of property acquired from a decedent is the fair market value of the property at the date of the decedent’s death. Property acquired from a decedent is defined as property acquired by bequest, devise, or inheritance from the decedent.

The IRS, in Revenue Procedure 2015-37, indicated the issue of whether assets receive a Section 1014 basis adjustment when those assets are not included in the gross estate is under study and they will not rule on the issue until they resolve it through publication of a Revenue Ruling, Revenue Procedure, Regulations, or otherwise. That position has been updated most recently without change in Revenue Procedure 2022-3.

It remains to be seen whether the IRS will provide additional guidance on this issue or, perhaps, request legislation clarifying the position. For those willing to consider stepping up the basis of assets received from a grantor trust, disclosure of this position should be seriously considered.

Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

IRS Announces 2021 Inflation-Adjustments

December 7, 2020

Beth Cwik
Huck Bouma, P.C.
[email protected]

The Internal Revenue Service recently announced the 2021 Inflation Adjustments in Revenue Procedure 2020-45. By law, the dollar amounts for a variety of tax provisions are required to be revised each year to keep up with inflation. The result of this is that certain tax benefits are subject to inflation adjustments each year. However, since recent inflation factors have been minimal, many of these benefits will stay the same or change only slightly for 2021. Key provisions affecting 2021 estate, gift, and trust returns, filed by most taxpayers in early 2022, include the following:

• ADJUSTED - Estate and Trust Tax Rate Tables - for taxable years beginning in 2021 the 10% rate applies to income not over $2,650 and the maximum 37% rate applies to income over $13,050 with graduated rates in between.
• ADJUSTED - Valuation of Qualified Real Property in Decedent's Gross Estate - for an estate of a decedent dying in calendar year 2021, if the executor elects to use the special use valuation method under § 2032A for qualified real property, the aggregate decrease in the value of qualified real property resulting from electing to use § 2032A for purposes of the estate tax cannot exceed $1,190,000. The 2020 amount was $1,180,000.
• ADJUSTED - Unified Credit Against Estate Tax - for an estate of any decedent dying during calendar year 2021, the basic exclusion amount is $11,700,000 for determining the amount of the unified credit against estate tax under § 2010. The 2020 amount was $11,580,000.
• UNADJUSTED – Annual gift exclusion - for calendar year 2021, the first $15,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts under § 2503 made during that year.
• ADJUSTED – Annual gift exclusion for gifts to a spouse who is not a US Citizen - for calendar year 2021, the first $159,000 of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) are not included in the total amount of taxable gifts under § 2503 and § 2523(i)(2) made during that year. The 2020 amount was $157,000.
• ADJUSTED - Notice of Large Gifts Received from Foreign Persons - for taxable years beginning in 2021, recipients of gifts from certain foreign persons may be required to report these gifts under § 6039F if the aggregate value of gifts received in a taxable year exceeds $16,815. The 2020 amount was $16,649.
• ADJUSTED - Interest on a Certain Portion of the Estate Tax Payable in Installments - for an estate of a decedent dying in calendar year 2021, the dollar amount used to determine the "2-percent portion" (for purposes of calculating interest under § 6601(j)) is $1,590,000. The 2020 amount was $1,570,000.
• ADJUSTED - Net Investment Income Tax - for taxable years beginning in 2021, if a trust has undistributed Net Investment Income and also has adjusted gross income over $13,050 the investment income will be subject to the 3.8% Net Investment Income Tax. The 2020 adjusted gross income amount was $12,950.
• ADJUSTED – Maximum Capital Gains Rate - for taxable years beginning in 2021, the maximum zero amount of capital gains for an estate or trust is $2,700. The maximum 15% rate amount is $13,250.

Consider Using your Lifetime Gift Exclusion This Year !!

September 9, 2020

Gary Hart
Tax Partner, Mowery & Schoenfeld

Use Your Lifetime Gift Exclusion in 2020

The Tax Cuts and Jobs Act increased the estate, gift and generation-skipping tax exclusion from $5 million to $10 million, indexed for inflation. In 2020, the inflation-adjusted exclusion is $11.58 million per person, $23.16 million combined for a married couple. The increased exclusion went into effect in 2018 and is scheduled to sunset at the end of 2025, with the amount reverting to $5 million per person, indexed for inflation, beginning in 2026.

Many wealthy taxpayers have been biding their time, not in any particular hurry to use the increased exemption, content to wait and see what happens as 2026 nears. However, rarely are even permanent tax provisions truly permanent and in this Presidential election year, it behooves clients and their advisors to consider whether to use their lifetime exclusion this year.

Although the elimination of the higher exclusion is not specifically mentioned in the Biden tax platform, there has been ongoing angst about the increased exclusion, particularly from Democrats, since it was passed back in 2017. Therefore, there is reason to be concerned that it could be on the chopping block if Democrats take control of all three branches of the Federal government after this fall’s elections.

Importantly, final regulations were adopted in November 2019 clarifying there would be no “clawback”, or additional estate tax upon death, if and/or when the exclusion amount reverts back to a lower threshold. For example, assume a taxpayer makes a gift of $11 million this year and later dies at a time when the exclusion is $6 million. Prior to the final regulations, there was concern that the estate tax would be calculated as if the $6 million exclusion had always applied. The Regs clarify that the estate tax will be calculated, in the above example, giving effect to the $11 million transfer as tax-free.

For very sizable gifts like those needed to utilize an $11.58 million exemption, outright gifts typically would not be the preferred method. Often, very large gifts are made to generation-skipping trusts, which not only permit the avoidance of estate tax in the current generation, but also in future generations. To further enhance the benefit of such gifts, one might also explore the creation of a family LLC.

Whatever the vehicle used to make gifts, whether outright or in trust, whether using a family LLC or not, now is the time to think about utilizing today’s lifetime gift exclusion. Waiting until after the election may leave too little time to properly plan for such large transfers.

Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

The SECURE Act in a Nutshell

February 10, 2020

Beth Cwik
Huck Bouma, P.C.
[email protected]

Americans struggle with saving for their retirement. About one-fourth of Americans have no retirement savings which includes 13% of workers age 60 and older. On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The primary purpose of the SECURE Act is to provide tax friendly benefits to help spur the increase in retirement savings. The SECURE Act will impact your retirement savings in the following ways:

1. The Required Minimum Distributions change to age 72 from age 70 ½.

2. Under the prior law, non-spouse beneficiaries of an IRA were allowed to stretch the Required Minimum Distributions (“RMDs”) from inherited accounts over their lifetime. The SECURE Act cuts back this stretch provision by requiring that inherited IRAs and 401(k)s by non-spouse beneficiaries must be distributed within 10 years of the owner’s death. There are certain exceptions if the non-spouse beneficiary is not more than 10 years younger than the deceased IRA/401(k) owner. These exceptions also apply if they are a minor, disabled or chronically ill.

3. Under the prior law, part-time workers (under 1,000 hours per year) were not allowed to participate in a 401(k). Starting in 2021, the SECURE Act allows employees who have worked 500 hours per year for 3 consecutive years the ability to participate in a 401(k) plan so long as they are age 21 by the end of the third year.

4. If you continue to work into your 70s or later, you are allowed to continue contributing to a traditional IRA. The SECURE Act repealed the rule that you could not contribute to a traditional IRA if you were 70 ½ or older. There are no age restrictions if you want to contribute to a ROTH IRA.

5. Plan sponsors have more flexibility with 401(k) offerings such as a 401(k) annuity.

6. The SECURE Act provides incentives for small businesses to offer 401(k) plans to their employees such as: a) the tax credit for 401(k) start-up costs increased from $500 per year to $5,000 per year; b) if a new 401(k) plan and Simple IRA plan includes automatic enrollment, they are eligible for a new $500 tax credit; and c) starting in 2021, unrelated employers can join together to participate in pooled plans which can help reduce administrative costs.

7 Each plan participant can withdraw up to $5,000 following the birth or adoption of a child without incurring the typical 10% penalty. If you are married, each plan participant spouse can withdraw $5,000.

8. Plan participants will receive “lifetime income disclosure statements” annually from the plan administrator which will help the participant understand what their estimated monthly income will be after they retire.

9. Generally, to contribute to a retirement account, your contribution is limited to earned income. The SECURE Act treats monies received as fellowship, stipends or similar amounts for graduate or post-doctoral programs as income which allows these students to start saving for retirement earlier.

10. Currently, companies can automatically enroll their employees in the company 401(k) plan. This is referred to as the Qualified Automatic Contribution Arrangement (“QACA”). The employee can opt out but most often, they stay in the plan. Under the prior law, an employer could not set a QACA contribution rate in excess of 10%. It has been increased to 15% under the SECURE Act.

You current estate plan, 401(k) and IRA beneficiary designations should be reviewed to identify and address any changes which should be made to comply with the new rules under the SECURE Act.

Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.

Issue Resolved: How to Treat the Tax Basis of Assets Inherited from a Grantor Trust

July 25, 2023

Gary S. Hart - Mowery & Schoenfeld, LLC

The IRS rules on whether Assets Inherited from a Grantor Trust Qualify for a Step-Up in Basis

In an article that ran last year on June 9, 2022, we discussed the uncertainty of whether assets acquired through inheritance from a defective grantor trust would qualify for a step-up in basis under IRC Section 1014. Most practitioners were of the opinion that a step-up was not available because the assets were not includible in the decedent’s gross estate. Other estate tax practitioners advocated for a more aggressive view.

In 2015, the IRS had indicated the technical issue referred to above was under study and said they would not rule on the issue until they had completed their study. That position remained in effect until earlier this year when the IRS in Revenue Ruling 2023-2 concluded that assets received from a grantor trust which were not includible in the decedent’s estate would NOT qualify for the basis adjustment contained in Section 1014. Even though the owner of the grantor trust, in such a circumstance, is responsible for the payment of income tax on trust income during lifetime, the IRS position is that the assets of the grantor trust are not considered as acquired or passed from a decedent by bequest, devise, inheritance, or otherwise within the meaning of Section 1014(b). As a result, the assets would not qualify for the basis adjustment under Section 1014(a).

From a planning perspective, it is worth remembering that, in order to qualify for grantor trust status, many grantor trusts contain a power of substitution. If circumstances were to permit, this substitution power would allow the grantor to remove assets from the trust that carry a low tax basis and substitute back into the trust assets with a higher tax basis. This planning in advance of death would enable a taxpayer to capture some of the benefit of stepping up the tax basis of assets otherwise lost due to the issuance of Revenue Ruling 2023-2.

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