Tax News & Comment

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© 1999 Law Offices of David L. Silverman, J.D., LL.M.

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IRS MATTERS

FROM THE COURTS

FROM WASHINGTON

1998 Decisions of Note

1998 Tax Legislation

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TRA 1997 now prohibits the IRS from revaluing prior adjusted taxable gifts after the expiration of the statute of limitations (see January Comment). The exemption equivalent, now the “applicable exclusion amount” will rise to $650,000 in 1999. New § 2033A excludes from the gross estate all or part of the value of a qualified family owned business (QFOB). The QFOB exclusion equals $1.3 million less the applicable exclusion amount. Qualification for the exclusion may require advance tax planning, as limitations and restrictions are significant.

The IRS has issued final regulations which permit “contingent” QTIP elections. The regs provide that an interest in property is eligible for treatment as QTIP if the spouse’s income interest is contingent on the QTIP election, and if no election is made the property will pass to beneficiaries other than the surviving spouse. In planning for the contingent election, it may be prudent for the Will to provide for the funding of several QTIP trusts, to avoid making the election an all-or-nothing proposition.

The 5th Circuit, in Estate of McLendon, 98-1 USTC ¶60,303, reversing the Tax Court, held that (i) the decedent, who was terminally ill and died six months later, was entitled to rely on Rev. Rul. 80-80, which permits the use of actuarial tables to value an annuity unless death is “clearly imminent,” and that (ii) the IRS must follow its own pronouncements. In Estate of McClatchy v. CIR, __F3d__ the 9th Circuit reversed the Tax Court and held that the estate tax value of stock

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Recent years have seen the proliferation of Family Limited Partnerships and Family LLCs as estate planning and asset protection vehicles. Extremely effective in reducing transfer taxes, these entities are attractive because of the discounts available for lack of control and lack of marketability. The IRS blessed valuation discounts in Rev. Rul. 93-12 after the courts, in cases such as Estate of Bright, 658 F2d 999 (5th Cir. 1981) and Estate of Andrews,

Property passing by bequest outright to a surviving spouse qualifies for the unlimited marital deduction. Property placed in trust for the surviving spouse may, depending upon the trust language, also qualify for the marital deduction. However, Code Sec. 2056(b) provides that a bequest to a surviving spouse will not qualify for the deduction where the interest passing to the surviving spouse will “terminate or fail.” Terminable interests are generally those which enable a person other than the surviving

spouse to possess or enjoy any part of the property after a lapse of time or the occurrence of an event, such as the surviving spouse's remarriage. Two important exceptions to the terminable interest rule exist, and both require the use of a trust. The first is the “power of appointment” exception, found in Code Sec. 2056(b)(5). To qualify for this exception, the trust must provide that the surviving spouse