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George F. Bearup, J.D. Senior Legal Trust Advisor

9-Nov-21

Treasury Priority Guidance

Take-Away: In early September the Treasury and the IRS published its priority guidance for the next six months. One of those guidance topics have already become effective. Of some surprise are a handful of other estate planning topics that were not on the most current Priority Guidance that have appeared in early IRS Priority Guidances that have been released.

Topics Included in the September 2021 Priority Guidance:

  1. User Fees for Estate Tax Closing Letters: On September 27, 2021, effective October 28, 2021, the IRS will charge a user fee of $67.00 to issue a Closing Letter for an estate tax return.
  2. Consistent Basis Rules: The IRS is reviewing, presumably in response to the high volume of complaints,  the basis consistency rules imposed under IRC 1014(f) and IRC 6035. Of particular interest will be to see if some relief is given to the current rules that: (i)  a fiduciary must provide to all trust beneficiaries within 30 days of a closing letter the list of all assets that the beneficiary might receive with the assets’ initial income tax bases, i.e. fair market value as of the date of the decedent’s death; (ii) the $0.00 basis assigned to an omitted asset; and (iii) if the recipient of an inherited asset later gives that inherited asset to another individual, the recipient-inheritor must furnish to the donee the list of assets with their initial income tax basis (even if improvements were made to the asset by the recipient-inheritor prior to the gift being made.)
  3. Anti-Abuse to Claw-back Regulations: The way the Regulations are currently written with regard to the ‘use-it-or-lose-it’ bonus applicable exemption amount [from 2017 through 2025] that is set to sunset in 2026, it is possible that a ‘bonus’ estate tax exemption might be available to a decedent’s estate who had used their bonus exemption amount for gifts prior to 2026. [Regulation 20.2010-1(c).] The potential change would be to assure that the penalty taxpayers worry about with claw-back will not be imposed, but also assure that there would not be a computational bonus tax exemption available to a post-2025 donor’s death.
  4. Estate Alternate Valuation Date: There have been several Regulations published in response to a handful of federal Tax Court decisions with regard to intervening events that occur, post-death,  that could affect asset values if an estate  considers claiming an alternate valuation for the estate’s assets within six months of the decedent’s death. [IRC 2032A.] The concept of intervening events may be better defined as to what would permissibly reduce the value of assets in the six month period after a decedent’s death.
  5. Deductible Debts of a Decedent: There exists some ambiguity with regard to the effect of the decedent’s guaranty of another individual’s debt and whether such guaranty is a contingent obligation that can be used to reduce the size of the decedent’s taxable estate. [IRC 2053.] The focus will be on how to calculate the present value of a personal guaranty of the decedent (along with applying present value principles to other contingent (unliquidated) debts of the decedent used to reduce the size of the decedent’s taxable estate.)
  6. GST: Hopefully we can expect more informative Regulations on the allocation of GST exemptions and late GST exemptions to prior transfers made by a donor. [IRC 2642(g).]
  7. Taxation of Expatriates: Recall that we now have IRC 2801 which imposes an income tax on a US citizen who intends to renounce US citizenship and move abroad as expatriates. Apparently there are lots of questions that still exist how that mark-to-market tax is calculated and on whom the tax will be assessed.
  8. Actuarial Tables: The ‘new’ tables based on the 2010 Census were supposed to be effective beginning in 2020. The effective date was pushed back to start in 2022. The new Tables will reflect longer life expectancies. The impact of the new actuarial tables will include: (i) lower values in general for remainder interests; (ii) large charitable income tax deductions for charitable lead annuity trusts (CLATs); (iii) smaller charitable income tax deductions for charitable remainder annuity trusts; (iv) harder to satisfy the ‘at-least’ 10% remainder ‘test’ for CRATs (IRC 644(d); and (v) harder to satisfy the ‘not more than 55 possibility of exhaustion’ ‘test’ for CRATs.

Topics Omitted from the September 2021 Priority Guidance Plan:

  1. Grantor Trusts: The income tax basis for assets held in a grantor trust. [IRC 1014.]
  2. Promissory Notes: The present value of promissory notes that are either gifted or included in a decedent’s taxable estate.
  3. Defined Value Clauses: The gift tax effect of using a defined value clause for lifetime gifts, i.e. addressing the Wandry
  4. Trust Material Participation: If a trust or an estate materially participate in a business held in the trust or estate, the income earned from that business interest avoids the net investment income tax (3.8%.) [IRC 1411.]
  5. Family Owned Trust Companies: Private or family owned trust companies acting as fiduciaries.
  6. Decanting: The IRS has refused, and apparently it will continue to refuse, providing guidance on the tax consequences of a trustee’s decanting of trust assets to a new trust.