Estate and Trust Administration — Tax Planning (Portfolio 855)

Tax Management Portfolio, Estate and Trust Administration — Tax Planning, No. 855-3rd, discusses aspects of tax planning in connection with the administration of an estate or trust.

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Tax Management Portfolio, Estate and Trust Administration — Tax Planning, No. 855-3rd, discusses aspects of tax planning in connection with the administration of an estate or trust. This Portfolio includes, but is not limited to, the subject of after-death tax planning.
In administering an estate or trust, the fiduciary has numerous options affecting taxes. These options are analyzed from the standpoint of the income, estate, gift, and generation-skipping transfer tax laws. Options that must be considered by a fiduciary include: (1) splitting gifts, (2) claiming administration expenses as income expenses, (3) using the entity as a separate taxpayer, (4) disclaimers, and (5) options relating to interests in partnerships and corporations. Various elections available in the administration of an estate also are discussed.
The timing and type of distributions from an estate or trust can affect the income tax consequences of both the estate or trust and its beneficiaries. The fiduciary can distribute income currently or retain it, thereby using the estate or trust as a separate taxpayer. The fiduciary can also time distributions to make use of deductions. In distributing property in kind, the estate or trust can elect to recognize the gain or loss.
Many of the post-mortem estate planning options discussed in this Portfolio cannot be used by unilateral action of the executor; the cooperation (or at least the consent) of others is required. In addition, the executor must often take timely action to take advantage of a given option. On the other hand, many elections, once made, are irrevocable or difficult to revoke. Thus, the task of post-mortem tax planning is one of the most challenging areas of tax practice.
This Portfolio may be cited as Acker, 855-3rd T.M., Estate and Trust Administration — Tax Planning.
This Bloomberg BNA Portfolio is not intended to provide legal, accounting, or tax advice for any purpose and does not apply to any particular person or factual situation. Neither the author nor the publisher assumes responsibility for the reader's reliance on information or opinions expressed in it, and the reader is encouraged to verify all items by reviewing the original sources.


Alan S. Acker, Esq.

Alan S. Acker, University of Illinois (B.S. 1974), Illinois Institute of Technology, Chicago-Kent College of Law (J.D. 1977); member, Ohio, Illinois, and Virginia (Inactive status) Bars; member, American Institute of Certified Public Accountants and Ohio CPA Society; Fellow, American College of Trusts and Estates Counsel; adjunct professor of law, Capital University Law and Graduate Center, Columbus, Ohio; contributor, Tax Management Estates, Gifts and Trusts Journal, Estate Planning, and other legal publications; lecturer, various tax seminars.

Table of Contents

Detailed Analysis

I. Introduction

A. Scope of This Portfolio

1. General

2. Administration of Estates

3. Administration of Trusts

B. Importance of Local Law

1. General

2. Morgan vs. Comr.

3. Fiduciary Duties

II. Options Affecting the Decedent's Income Taxes

A. Filing Joint Returns

B. Using Medical Expenses as Income Tax Deductions

1. General

2. Marginal Tax Rates and Other Tax Considerations

3. Effect of Marital Deduction

C. Accruing Series E Bond Interest

D. Requesting Prompt Assessment and Discharge from Personal Liability

1. Requesting Prompt Assessment

2. Requesting Discharge from Personal Liability

III. Options Affecting the Decedent's Gift Taxes

A. Splitting Gifts with the Surviving Spouse

B. Requesting Valuation Information

C. Requesting Prompt Assessment and Discharge from Personal Liability

IV. Option to Treat Revocable Trust as Part of Estate

A. General

B. Potential Benefits

C. Making the § 645 Election

V. Options Affecting the Decedent's Gross Estate

A. Alternate Valuation Date Election - § 2032

1. Availability of the Election

2. Effect of Election on Dates When Property Is Valued Under § 2032

a. Valuation Date for Property Disposed Of

b. Valuation Date for Property Not Disposed Of

c. Interest-Bearing Obligations

d. Property Affected by Lapse of Time

3. Time and Manner of Making the Alternate Valuation Election

4. Special Rules

5. Effect on Other Elections

6. Planning Considerations

B. Special Use Valuation - § 2032A

1. General

2. Valuation Adjustment

3. Planning Considerations

a. Satisfying Threshold Tests

b. Cash Rents

c. Marital Deduction Planning

d. Qualified Property Passing to Non-Qualified Heirs

e. Effect of Special Use Valuation on § § 303 and 6166

C. Qualified Conservation Easement - § 2031(c)

VI. Options Affecting the Decedent's Taxable Estate

A. QTIP Election - § 2056(b)(7)

1. Availability of the Election

a. Property Must Pass from the Decedent

b. Qualifying Income Interest

c. Time When Qualifications Must Be Satisfied

2. Time and Manner of Making the Election

a. General Rule

b. Special Rule for Survivor Annuities

3. Partial Election Is Permitted

4. Protective Elections

5. Planning Considerations

a. Reducing Estate Tax

b. Unnecessary QTIP Election/Reasons Not to Make the Election

c. Coordination with the GST Exemption

d. Creating a Contingent QTIP Trust

e. Purchase of Remainder Interest

f. Unintended Consequences

B. Income Tax or Estate Tax Deduction for Administration Expenses and Losses

1. Availability and Effect of Election

2. Planning Considerations

a. File Waiver Only When Benefit Is Known

b. Consider Marginal Tax Brackets of Relevant Taxpayers

c. Expenses Allocable to Tax-Exempt Income

d. Cash Flow Needs of the Estate

e. Use of Flower Bonds

f. Equitable Apportionment

C. Waivers of Commissions by the Fiduciary

D. Using Medical Expenses as Estate Tax Deductions

VII. Options Affecting the Decedent's Estate Tax Payments

A. Extending the Time for Payment of Estate Tax Under § 6166

1. Availability of the Election

2. Determining the Value of the Closely Held Business Interest

3. Interest Must Be in a Closely Held Business

4. Effect of the § 6166 Election

a. Maximum Amount That Can Be Deferred

b. Number of Installments

c. Time Installments Are Due

d. Payment of Interest

e. Section 6166 and Tax Deficiencies

f. Executor Is Liable for the Estate Tax

5. Time and Manner of Making the Election

a. Election Is Made on a Timely Filed Return

b. Information Required with Election

c. Protective Election Permitted

6. Acceleration of Tax Payments

a. Disposition of Interest or Withdrawal of Funds

b. Undistributed Net Income of the Estate

c. Late Payments

7. Special Rules for Holding Companies

8. Planning Considerations

a. Gifts of Non-Business Assets

b. Liquidating Holding Companies

c. Keeping the Estate Open

d. Limitation on Refund Suits

B. Other Extensions of Time to Pay Estate Tax

1. General

2. Twelve-Month Extension

3. Ten-Year Extension

4. Reversionary or Remainder Interests

C. Redemptions of Stock to Pay Death Taxes - § 303

1. Availability of § 303

2. Effect of § 303

3. Redemptions Covered by § 303

a. Stock That May Be Redeemed

b. Amount That May Be Redeemed

c. Time in Which Such Redemptions Must Be Made

4. Coordination with § 6166

5. Section 303 Redemptions and Generation-Skipping Transfers

6. Planning Considerations to Qualify for § 303

a. Gifts of Non-Business Assets

b. Recapitalization

c. Reorganization to Combine Stock Interests

VIII. Options Affecting the Decedent's GST Exemption

A. Requesting Valuation Information

B. Gift Splitting

C. Reverse QTIP Election

D. Allocation of the GST Exemption

IX. Options Available to Beneficiaries Affecting the Disposition of the Decedent's Estate

A. Disclaimers

1. Effect of Disclaimer

2. Rules for Making a Qualified Disclaimer

3. Disclaimers of Joint Property

a. Joint Bank, Brokerage, and Other Investment Accounts

b. Interests in Joint Tenancy with Right of Survivorship or Tenancies by the Entirety

4. Planning with Disclaimers

a. Disclaimer in Favor of the Surviving Spouse

b. Disclaimer in Favor of a Charity

c. Disclaimer to Take Advantage of the Unified Credit

B. Election Against the Will by the Surviving Spouse

X. Options Affecting Fiduciary Income Taxes

A. Selection of Fiscal Year

1. Time and Manner of Electing Fiscal Year

2. Planning Considerations

a. Deferring Income Tax Payments

b. Selecting a Short Year to Minimize Income Taxable to Distributees

c. Selecting a Fiscal Year to Spread Income Evenly over Two or More Years

B. Distributions of Property in Kind

1. When a § 643(e) Election Is Available

2. Effect of § 643(e) Election

3. Planning Considerations

C. Sixty-Five Day Election - § 663(b)

D. Trapping Distributions

1. No Tracing

2. Simple Trusts, Outside Income, and the Throwback Rule

XI. Options Involving Business Interests

A. Elections Affecting Subchapter S Corporations

1. Ownership of S Corporation Stock

a. General

b. Qualified Subchapter S Trust

c. Electing Small Business Trusts

d. Planning Considerations

2. Terminating the Tax Year

B. Optional Basis Adjustments for Partnership Interests - § 754

1. Availability of Election

2. Effect of the § 754 Election

3. Time and Manner of Making the § 754 Election

4. Revoking the § 754 Election

5. Special Rule for IRD Items

6. Planning Considerations

a. General Considerations

b. Section 732(d) Option

XII. Options Involving Interests in Employee Benefits

Introductory Material

A. Distribution Options

1. General Options

2. Special Tax Treatment of Lump Sum Distributions

B. Rollovers by Employee

C. Rollovers by Surviving Spouse

Working Papers

Working Papers

Table of Worksheets

Relevant Working Papers Appearing in Other Portfolios:

Worksheet 1 Checklist of Tax Planning Options Available in the Administration of Estates and Trusts

Worksheet 2 IRS Forms Commonly Used in the Administration of Estates and Trusts

Worksheet 3 Excerpts Concerning § 2518 (Disclaimers), from General Explanation of the Tax Reform Act of 1976, Prepared by the Staff of the Joint Committee on Taxation

Worksheet 4 Explanation Concerning Holding Company Stock Qualification for § 6166 Deferral of Estate Tax, from General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, Prepared by the Staff of the Joint Committee on Taxation

Worksheet 5 Explanation Concerning Entity's Waiver of Family Attribution Rules, from General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982, Prepared by the Staff of the Joint Committee on Taxation

Worksheet 6 Explanation of 1986 Act 2% Floor on Miscellaneous Itemized Deductions, from Conference Report, H.R. Rep. No. 99-841, at II-32-34 (1986)

Worksheet 7 Explanation of 1986 Act Provisions on Recognition of Gain or Loss on Distributions of Property in Liquidation, from Conference Report, H.R. Rep. No. 99-841, at II-198-207 (1986)

Worksheet 8 Explanations of 1986 Act Provisions Relating to Taxable Years of Trusts, Estimated Tax Payments by Trusts and Certain Estates, and Multiple Trusts, from House, Senate and Conference Committee Reports

Worksheet 9 Explanation of 1986 Act Revisions to Grantor Trust Rules from Senate Committee Report, S. Rep. No. 99-313, at 868–871 (1986)

Worksheet 10 Explanation of 1986 Act Provisions Relating to the Tax on Generation-Skipping Transfers, from House and Conference Committee Reports and Congressional Record

Worksheet 11 Examples of Credit Shelter and Marital Deduction Will Provisions

Worksheet 12 Examples of Will Provisions Relating to Use of Tax Options by Executors

Worksheet 13 New York Statutes Relating to Use of Tax Options By Executors





Committee Reports:

Treasury Rulings and Procedures:




Tax Management Portfolios: