WHO TO CONTACT DURING THE LIVE PROGRAM For Additional Registrations: -Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN. IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 ext. 1 (or 404-881-1141 ext. 1). Strafford accepts American Express, Visa, MasterCard, Discover. • Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code. • To earn full credit, you must remain connected for the entire program. Critical Elections for Trust, Gift and Estate Returns: Forms 1041, 709 and 706; GST, QTIP, 663(b), 645 WEDNESDAY, JULY 10, 2019, 1:00-2:50 pm Eastern FOR LIVE PROGRAM ONLY
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WHO TO CONTACT DURING THE LIVE PROGRAM
For Additional Registrations:
-Call Strafford Customer Service 1-800-926-7926 x1 (or 404-881-1141 x1)
For Assistance During the Live Program:
-On the web, use the chat box at the bottom left of the screen
If you get disconnected during the program, you can simply log in using your original instructions and PIN.
IMPORTANT INFORMATION FOR THE LIVE PROGRAM
This program is approved for 2 CPE credit hours. To earn credit you must:
• Participate in the program on your own computer connection (no sharing) – if you need to register
additional people, please call customer service at 1-800-926-7926 ext. 1 (or 404-881-1141 ext. 1).
Strafford accepts American Express, Visa, MasterCard, Discover.
• Listen on-line via your computer speakers.
• Respond to five prompts during the program plus a single verification code.
• To earn full credit, you must remain connected for the entire program.
Critical Elections for Trust, Gift and Estate Returns: Forms
1041, 709 and 706; GST, QTIP, 663(b), 645WEDNESDAY, JULY 10, 2019, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
Tips for Optimal Quality FOR LIVE PROGRAM ONLY
Sound Quality
When listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, please e-mail [email protected]
• Ability to treat any distribution made within first 65 days of subsequent
tax year as having been made in the prior year (by March 5, 2020 for
2019)
− If the amount(s) distributed within the first 65 days of the subsequent
year exceed the amount needed for the election, only the portion for
which the election is desired needs to be included in the election
• Shift income out of compressed trust/estate income tax brackets to
beneficiaries (try to avoid highest tax rates and Medicare surtax)
− 37% rate once taxable income over $12,750 for 2019
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65 Day Election (IRC 663(b))
• Allows for “hindsight planning” to determine if shifting income out of the
estate to the beneficiaries is desirable
− Communication between the fiduciary return preparer and
beneficiaries’ individual income tax return preparer(s) is key
• Maximum amount for which the election can be made is the greater of
FAI or DNI
• Check the box in the Other Information section on page 2 of Form 1041
and attach election statement
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65 Day Election (IRC 663(b))
▪ Sample election for a trust
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65 Day Election (IRC 663(b))
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IRC 645 Election
− Inclusion of qualified revocable trust with estate income tax return
– Qualified revocable trust is a trust that was treated as owned by the decedent under IRC
676 due to a power to revoke that was exercisable by the decedent
− Allows fiscal year-end instead of calendar for trust activity
− Reduces administrative burden of filing two separate income tax returns
− Allows the trust to take advantage of certain income tax provisions that are only
allowable for estates
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IRC 645 Election
▪ Allows the trust to take advantage of certain income tax provisions
that are only allowable for estates
• The allowance to deduct up to $25,000 of losses from rental real
estate activities against non-passive income for the first two
years after the deceased owner’s death (provided the decedent
actively participated in the rental real estate activity)
• Not having a two-year deadline for qualifying as an eligible S
corporation shareholder if the trust owns S corporation stock.
• Being eligible to deduct losses for funding pecuniary bequests
with noncash property distributions.
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IRC 645 Election
Making the election
- Check the box on page 1 of Form 1041 and include trust’s EIN (new EIN
obtained following the death of the decedent)
- Attach Form 8855, Election to Treat a Qualified Revocable Trust as Part of
an Estate, to the timely filed (including extensions) tax return for the first
tax year of the related estate
- Irrevocable election once made
- Election period – begins on the date of the decedent’s death and ends on
the earlier of:
- the day on which the electing trust and related estate have distributed
all of their assets or
- the day before the applicable date.
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IRC 645 Election
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IRC 645 Election
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IRC 645 Election
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IRC 645 Election
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− Option to use any month for year-end (cannot be more than a 12 month year)
− Election made when Form 1041 is filed, not upon applying for the estate EIN or upon filing the extension
− Deferring Income/Accelerating Deductions
– Choosing optimal fiscal year – income deferral, acceleration of deductions, avoidance of wasting deductions, timing of income inclusion on the beneficiaries’ income tax returns vs the estate’s income tax return
– Fiscal year beginning 2/1/18 ending 1/31/19 defers income reporting (assuming distributions made) by beneficiary to 2019
– 11/30/18 estate year-end - 12/31/18 Schedule K-1 from a pass-through entity would be included in the 11/30/19 year-end
Choice of Fiscal Year
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▪ Example: The Estate of Jane Doe’s current fiscal year
ends 11/30/18. Jane’s estate owns an interest in a
partnership, Jane Doe, LLC, that has a calendar year-
end. The Schedule K-1 for the partnership’s year ending
12/31/18 will be included in the estate’s income tax
return for the year ending 11/30/19, resulting in an almost
full year of deferral in reporting the income.
Choice of Fiscal Year
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▪ Final year considerations
• Excess deductions on termination not allowed through 12/31/2025
• Capital losses of the estate pass out to the beneficiaries
• If the estate has an interest in a passive activity that is being distributed to a
beneficiary (other than in satisfaction of a pecuniary bequest), any suspended
PALs associated with the activity at the time of distribution increase the basis of
the interest to the beneficiary.
• An NOL of the estate passes out to the beneficiaries to be utilized on their
individual income tax returns
− In tracking the number of years remaining for the NOL carryover, the final year
of the estate and the first year in which the beneficiary reports the NOL count
as two separate years.
Choice of Fiscal Year
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Estate Tax Elections
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Portability (IRC 2010(c)(5)(A))
▪ Introduced in 2011 (DSUE – deceased spouse’s unused exclusion)
▪ Available only to surviving spouse
▪ Impact of remarriage of surviving spouse
• DSUE of most recently deceased spouse
▪ DSUE used first when gifting
▪ Not applicable for GST exemption
▪ Form 706, United States Estate Tax Return, must be filed to elect
portability
▪ If filing Form 706 and portability is not wanted, executor must
affirmatively opt out in Part 6, Section A of Form 706
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Portability
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Portability
▪ Simplified Relief Method for Late Portability Election
− Rev. Proc. 2017-34 (eff. 6/9/17) – Provides a simplified method of obtaining relief under Treas. Reg. 301.9100-3 for the late filing of an estate tax return that is under the filing threshold and being filed to make a portability election. (Since the end of the last relief period, December 31, 2014, and prior to this Rev. Proc., estates under the filing threshold that were filing for portability had to request a private letter ruling and pay a substantial fee to obtain relief for a late portability election.)
− If the estate is over the filing threshold (whether taxable or not) and the return is filed late, then no portability is allowed and no relief available.
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Portability
▪ Simplified Relief Method for Late Portability Election
(cont.)
• The following criteria must be met:
− Decedent must be survived by a spouse.
− Decedent died after 12/31/10.
− Decedent was a U.S. citizen or resident at time of death.
− Gross estate must be under the filing threshold and an
estate tax return was not filed timely.
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Portability
▪ Simplified Relief Method for Late Portability Election
(cont.)
• Steps to take:
− Executor of the estate must file Form 706 on or
before the second anniversary of the decedent’s
date of death
− “Filed Pursuant To Rev. Proc. 2017-34 To Elect
Portability Under IRC 2010(c)(5)(A)” must be written
at the top of Form 706
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Portability
▪ NOTE: IRC 2010(c)(5)(B) – IRS can examine the
estate tax return of the predeceased spouse when a
portability election was made to review the DSUE
amount even after the statute of limitations for
assessing estate or gift tax of that spouse has expired.
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Portability
▪ Portability Planning - Direct assets of the pre-deceased spouse to the surviving spouse free of trust
− Pros:– If surviving spouse is in a lower income tax bracket than trust would be
then less income taxes
– Get basis step-up at surviving spouse’s death
– Avoid costs of trust administration
− Cons: – No trust protection (creditor, divorce, fiduciary management of assets)
– Deceased spouse had no control over direction of assets
– Asset appreciation after first spouse’s death is not sheltered
– GST exemption is not portable
– Consider state estate tax exemptions that can be lost if assets left entirely to surviving spouse
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QTIP Election
▪ Qualified Terminal Interest Property (QTIP) is property that passes from the decedent in which the surviving spouse has a qualifying income interest for life.
▪ Executor can make an election to claim a marital deduction for all or a portion of an interest in the qualified terminal interest property by listing the property on Schedule M of Form 706.
▪ If a return was not filed timely, the election can be made on the first return filed after the due date.
▪ The election can also be made on an amended Form 706 filed before the extended due date for filing the original estate tax return
▪ Once made, the election is irrevocable.
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QTIP Election
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QTIP Election
▪ Requirements for a QTIP trust (IRC 2056(b)(7)):
• All trust accounting income must be payable to the surviving spouse (SS) at least annually for life
• No one (including the SS) has a power to distribute or appoint assets to any person other than the SS during the SS’s lifetime
• Trust may hold unproductive assets only if the trust document requires, or permits the SS to require, the trustee to either make the property productive or convert it to productive property within a reasonable time (some exceptions for residential property and tangible assets held for use by the SS)
• Executor of the decedent’s estate must elect on the estate tax return to have some or all of the trust property qualify for the marital deduction.
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QTIP Election with Portability
▪ Utilizing the QTIP election with the portability election to obtain a
double step-up for the assets
▪ Prior to portability, typical planning to avoid estate tax for a
married couple was the combination of a credit shelter trust and a
marital trust.
▪ The QTIP election to fund the marital trust does not reduce the
deceased spouse’s exemption/amount available for portability
▪ When the value of the marital trust is included in the surviving
spouse’s estate, the remaining amount of the “ported” exemption
from the deceased spouse will be available to defray the estate
tax implications.
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QTIP Election with Portability
▪ The inclusion of the trust assets in the surviving spouse’s estate allows for the basis of those assets to be stepped-up again (initially were stepped-up on the predeceased spouse’s death) hopefully without any estate tax impact due to the SS having her exemption and the ported exemption.
▪ If the decedent resided in a state that has an estate tax, that estate’s exemption amount needs to be factored into the planning to avoid wasting that exemption or unintentionally incurring state estate tax on the first spouse’s death. NOTE: Most of the states that have an estate tax do not recognize portability at the state level. Consider hybrid plan of portability election/QTIP trust/credit shelter trust.
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QTIP Election with Portability
▪ Rev. Proc. 2001-38 states that the IRS would disregard
a QTIP election made in situations where it was not
needed to reduce the estate tax liability to zero.
▪ Rev. Proc. 2016-49 excludes from the scope of Rev.
Proc. 2001-38 estates in which the executor made a
portability election.
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QTIP Election with Portability
▪ Reverse QTIP Election
• Decedent spouse is treated as the transferor of the trust property for GST purposes instead of the surviving spouse
• Avoid wasting the decedent spouse’s GST exemption (portability does not apply to this exemption)
• Irrevocable election
• Election made by listing the qualifying property on Schedule R, Part 1, line 9 of the Form 706
• QTIP trust can be split into two trusts with the reverse QTIP election being made to obtain an inclusion ratio of zero for one of the trusts
• Rev. Proc. 2004-47 outlines the process for requesting a late reverse QTIP election
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QTIP Election with Portability
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Deducting Expenses
• Comparison of estate tax savings vs income tax savings• Consider limitations on the 1041 (disallowed 2% floor deductions
and allocations to tax-exempt income)
• Consider timing of payment vs income recognition on the 1041
• Consider impact on marital deduction (and amount of exemption available for portability) and charitable deductions on the 706
• Estate transmission expenses
• Estate management expenses
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Deducting Expenses
• Examples of expenses that can be taken on either Form 706 or Form 1041 but not both:– Executor commissions; legal and accounting fees; appraisal fees and probate
fees
• Examples of expenses that can be taken on both returns (DRD - deductions in respect of decedent):– Expenses related to the decedent’s business allowable under IRC 162; interest
expense allowable under IRC 163; taxes allowable under IRC 164; investment expenses under IRC 212 and percentage depletion allowable under IRC 611.
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Deducting Expenses
• Election statement outlined in Treas. Reg. 1.642(g)-1 may be handled in either of two ways:
• Attached to each Form 1041 on which the deductions, which would otherwise have been allowable on the Form 706, are being taken.
• Filed within the statutory period of limitation for the respective Form 1041 with the appropriate IRS Center for the return.
– Must be filed in duplicate with both statements signed by the executor.
– Consideration should be given to not filing the election statement for the deductions until the earlier of the final estate tax assessment or the statute of limitations for the 1041.
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Deducting ExpensesSummary of Estate or Income Tax Deduction Alternatives