     
Estate Planning Alert
Third Time is No Charm: Albany Fails
(Yet Again) to Enact Meaningful Estate
Tax Relief
President Obama and Democratic
Candidates Propose Reducing the
Federal Estate, Gift and GenerationSkipping Transfer (“GST”) Tax
Exemptions While Republicans
Continue the Push for Estate Tax Repeal
Federal Estate, Gift and GST Tax Exemptions Reach New
Threshold of $5,450,000 and Popular Wealth-Transfer
Techniques Remain Viable (For Now)
Coordination of Planning By New York
Couples Remains Crucial
April 21, 2016
      •   •   •  • , 
  ,  ,  -  ..  .. ..
  
Overview
amount increased from $3,125,000 to $4,187,500.
The New York estate tax exclusion amount is
scheduled to increase further as follows:
As
we
reported
in
April
2014
(http://www.stroock.com/siteFiles/Pub1474.pdf)
and
again
in
April
2015
(http://www.stroock.com/siteFiles/Publications/E
statePlanningAlert.pdf), two years ago, New York
State enacted legislation reforming its estate, gift,
and GST tax laws. Most of the benefits were
illusory for wealthier New Yorkers and fell
substantially short of Governor Andrew Cuomo’s
objective to provide major estate tax relief to
discourage wealthier New York State residents
from relocating to states like Florida that do not
impose an estate tax.
Date of Death
Exclusion Amount
April 1, 2016 to
March 31, 2017
$4,187,500
April 1, 2017 to
December 31, 2018
$5,250,000
January 1, 2019
and Later
Federal Exclusion
Amount
The Federal estate and gift tax exclusion amount
is currently $5,450,000 and continues to be
indexed for inflation.
State and City Bar Association Committees
continued to present proposals to legislative leaders
in Albany to fix the shortcomings of the new estate
tax law. Unfortunately, their efforts were once
again unsuccessful. The 2016 budget bill delivered
to Governor Cuomo on April 1, 2016, made
virtually no changes to the current estate tax
regime.
The only change the bill makes to the estate tax
law is the addition of a new provision (Tax Law
Section 951-a) providing that charitable
contributions and charitable activities may not be
considered in determining a taxpayer’s domicile.
While the provision mirrors Tax Law Section
605(c) (which is applicable in the income tax
context), it does nothing to address the serious
concerns that have been raised regarding New
York’s estate tax system.
The benefits of an increase in the New York
exclusion amount are effectively denied to wealthier
New Yorkers. There is still a cliff built into the tax
calculation, which quickly phases out the benefits
of the exclusion if the decedent’s New York
taxable estate (plus certain taxable gifts made within
three years of death) is between 100% and 105% of
the exclusion amount available on the date of
death. The cliff completely wipes out the benefits
of the exclusion if the decedent’s New York
taxable estate (and any such gifts added back)
exceeds 105% of the exclusion amount available on
the date of death. As a consequence, the increase
in the New York estate tax exclusion amount only
benefits individuals whose New York taxable
estates (including taxable gifts made within three
years of death) fall below the New York exclusion
amount in effect on the date of death.
New York Estate Tax Cliff Still Steep. One of the
major changes of the 2014 tax law was the gradual
increase of the New York State estate tax exclusion
from $1,000,000 to the Federal level. As of April
1, 2016, the New York estate tax exclusion
For example, 105% of the current exclusion
amount of $4,187,500 is $4,396,875. If a New
York resident were to die on June 1, 2016 with a
taxable estate of $4,400,000, which is 105.075% of
the current New York exclusion amount, the New
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  
York estate tax would be $324,400, and the benefit
of the New York exemption would be completely
eliminated. In contrast, the estate of a New York
decedent who dies in June 2016 with a taxable
estate equal to or below $4,187,500 would pay no
tax. In our example, the effective marginal tax rate
on the $212,500 by which the taxable estate
exceeds the exemption amount is over 150%!
that adds back gifts made within three years of
death to the gross estate of a New York resident
decedent. This change was enacted to close a
perceived “loophole” whereby New Yorkers could
avoid New York estate tax by making lifetime gifts
– even on their deathbed – because New York
does not impose a gift tax. Under current law,
gifts made within three years of death will be
added to the gross estate of New York resident
decedents dying before January 1, 2019. The add
back does not apply to individuals dying on or after
January 1, 2019 (but there is speculation that it
may be extended by further legislation).
The estate planning community strongly
advocated that the so-called cliff effect be
eliminated or ameliorated, given its confiscatory
nature. Unfortunately, the cliff remains as steep as
before.
Changes in Calculating a Decedent’s New York
Estate Provide Some Relief to Nonresidents. Ironically,
the 2014 legislation provided a significant benefit
to nonresidents by changing the methodology for
calculating New York estate tax on the estates of
nonresidents who died owning real and tangible
personal property located in New York. Under
the old law, a nonresident would pay New York
estate tax based on the value of his or her New
York property relative to the value of his or her
entire estate. In other words, nonresidents with
several million dollars of assets but less than $1
million of property located in New York would
often end up owing New York estate tax. Under
the new rules, nonresidents will not owe any estate
tax if the gross value of their New York property
(including taxable gifts made within three years of
death that are added back), less applicable
deductions, does not exceed the New York
exemption amount.
New York Continues to Decline to Adopt Portability.
Under current law the Federal estate tax
exemption is portable between spouses, meaning
any unused Federal estate tax exemption of the first
spouse to die may be used by the surviving spouse
for lifetime gifting or at death. This popular
provision greatly simplifies estate planning for
many individuals. Unfortunately, the New York
estate tax exemption is not portable, which
complicates New Yorkers’ estate planning.
Although estate planning practitioners lobbied for
portability of the New York exemption, Albany
failed to enact a state level version of this taxpayer
friendly measure.
New York’s Top Estate Tax Rate Remains at 16%.
Despite past proposals by Governor Cuomo to
reduce the top New York estate tax rate from 16%
to 10%, no change was even proposed in 2016.
For the time being, there will be no change in
New York estate tax rates. (Currently, the New
York estate tax is deductible against the Federal
estate tax.)
Planning Considerations For New
York Residents
Because New York has no gift tax, and only
adds back to the gross estate of New York resident
No Change to Three-Year Look-Back on Taxable
Gifts. The 2014 budget bill adopted a provision
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decedents gifts made within three years of death,
there still remain distinct advantages for New
Yorkers – particularly those who have not fully
used their Federal gift tax exemption (currently
$5,450,000 per individual; $10,900,000 per
married couple) – to make lifetime gifts. Such
gifts will insulate the gifted property from New
York estate tax (assuming they survive for three
years or until the three-year look-back on taxable
gifts expires) and may have the added benefit of
reducing their New York taxable estate below the
applicable exclusion amount on the date of their
death, thereby avoiding the confiscatory impact of
the cliff under the new estate tax calculation.
combined assets currently have a value of
$6,000,000, with one spouse owning assets worth
$1,000,000 and the other having assets worth
$5,000,000. If they have a simple estate plan
where they leave everything to each other outright
under their Wills, and the survivor of them dies on
December 15, 2018 when the New York
exclusion amount will be $5,250,000, the
inheritance that the survivor received from the first
spouse to die will throw the survivor’s estate over
the New York estate tax cliff. Because the
survivor’s New York taxable estate will be
$6,000,000, which is more than 105% of the New
York exclusion amount that will be available on
December 15, 2018, the New York estate tax
imposed upon the surviving spouse’s estate would
be $510,800 (based upon current rates).
For example, an unmarried New Yorker who
has assets with a current value of $6,000,000 and is
in relatively good health, may wish to consider
gifting $550,000 at this time to his or her children
or other intended beneficiaries. If such person dies
more than three years after making the gift (or
until the three-year look back expires), when the
New York exclusion amount will equal the
Federal estate tax exemption amount ($5,450,000,
assuming, for the sake of this example, no further
indexing for inflation), with a taxable estate of
$5,450,000, his or her estate will owe no New
York estate tax. In contrast, if the gift is not made
and the person dies on June 1, 2019 with a taxable
estate of $6,000,000, the estate will owe $510,800
in New York estate tax (based upon current rates)
due to the cliff effect.
Under this scenario, neither spouse’s estate
would have benefitted from the New York
exclusion amount. In contrast, if the couple’s
Wills are coordinated so that an amount equal to
the New York exclusion amount available on the
date of death of the first spouse is left in a credit
shelter trust for the surviving spouse (rather than
outright or in a trust that qualifies for the marital
deduction), there would be no New York estate
tax imposed upon either spouse’s estate, thereby
increasing the inheritances of the couple’s children
or other beneficiaries by $510,800.
One of the reasons why planning to maximize
the use of both spouses’ New York exemption
amounts continues to be tricky is that New York
does not recognize portability of a deceased
spouse’s unused estate tax exemption to the
surviving spouse as the Federal law does.
Portability at the state level would greatly simplify
estate planning for New York residents and allow
for better coordination of planning for Federal and
In the case of married couples, coordination of
their estate planning remains of the utmost
importance. Lack of planning could lead to the
inadvertent loss of the benefits of one or possibly
both of their New York estate tax exclusions. The
stakes are even greater as the New York exclusion
increases over time.
Take a couple whose
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New York estate tax purposes. Until such time as
New York may adopt portability, many New
Yorkers will continue to incorporate credit shelter
trusts or disclaimer trusts in their Wills to maximize
the benefits of both the New York and Federal
exclusion amounts.
lack the 60-member supermajority that would be
necessary to break a filibuster, and President
Obama has threatened to veto any attempt to
repeal the estate tax.
On the other side of the aisle, both President
Obama and the Democratic presidential candidates
would bring the Federal estate and gift tax
exemptions back down to 2009 levels, with a $3.5
million estate tax exemption ($7 million for
couples) and a $1 million lifetime gift tax
exemption.
Neither the President nor the
candidates support indexing the exemption
amounts for inflation. Hillary Clinton’s plan calls
for a top estate tax rate of 45%, which is consistent
with President Obama’s most recent proposal.
Bernie Sanders’ proposal would raise estate tax
rates on wealthy decedents as follows: 45% on
estate property between $3.5 million and $10
million, 50% on estate property between $10
million and $50 million, a 55% on estate property
in excess of $50 million, plus an additional 10%
surtax on estates valued in excess of $500 million,
raising the highest marginal estate tax rate to 65%.
Senator Sanders would also reduce the gift tax
annual exclusion (currently $14,000 per donee) to
$10,000 per donee.
As demonstrated by the foregoing examples,
lifetime gifts could enable a New York resident to
insulate the gifted property from New York estate
tax (if they survive for three years from the date of
the gift or until the three-year look-back expires)
and to possibly avoid the cliff effect built into the
New York estate tax calculation by bringing his or
her taxable estate below the New York exemption
amount applicable on the date of death. New
Yorkers who have not fully used their Federal gift
tax exemption (currently $5,450,000 per
individual; $10,900,000 per couple) may wish to
do so to achieve these potential New York estate
tax savings and the other advantages of lifetime
gifting described below.
As November Elections Near,
Republicans and Democrats Remain
Diametrically Opposed on Issue of
Estate Tax Reform
With the primaries in full swing, the presidential
candidates in both parties are once again talking
about the estate tax. On the Republican side, Ted
Cruz, John Kasich and Donald Trump have called
for a repeal of the Federal estate tax. The
candidates’ positions are consistent with
Congressional Republicans, who on April 16, 2015
passed the Death Tax Repeal Act of 2015 (H.R.
1105) in the House of Representatives by a vote of
240-179, largely along party lines. Despite pressure
from advocacy groups to hold a vote, the Senate is
unlikely to take up the measure, as Republicans
In addition to the candidates’ proposals,
President Obama once again released new budget
proposals, which added several new measures and
continued many others from prior years. Although
it seems unlikely that the President’s proposals will
be enacted before he leaves office, the current tax
laws are only “permanent” until Congress enacts
new legislation. Therefore, to the extent that you
have not made full use of your $5,450,000 Federal
gift and GST tax exemptions ($10,900,000 per
couple), you may wish to do so before election
day. For New Yorkers, there is the added benefit
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would drop the current estate and GST tax
exemptions to $3,500,000 and decrease the
gift tax exemption to $1,000,000.
The
exemptions would no longer be indexed for
inflation. The proposal also would increase
the rate for all transfer taxes to 45%. The
proposal would be effective for the estates of
decedents dying, and for transfers made, after
December 31, 2016.
that (assuming the law does not change), no gifts
will be added back into their estates if they survive
until January 1, 2019.
The key proposals in the President’s 2017
budget that may limit future estate planning
opportunities include the following:
• Recognition of Capital Gain on Appreciated
Property Transferred by Gift or as a Result of
Death and Higher Capital Gains Rates.
Under current law, when a donor makes a gift
of appreciated property during the donor’s
lifetime, the donee’s basis in the property is
the same as the basis in the hands of the
donor. When an individual dies owning
appreciated property, generally the basis in the
property becomes the fair market value of the
property at the time of the decedent’s death
(or the six month anniversary of death, if a
special election is made). The proposal would
change these two rules by imposing capital
gains tax when appreciated property is gifted
during lifetime or bequeathed upon death.
The gain would be reportable as taxable
income to the donor (in the case of the gift)
or to the decedent (either on a final income
tax return or a separate capital gains return).
This proposal also would increase the highest
capital gains tax rate from 20% to 24.2% and
retain the current 3.8% net investment
income tax (the “Obamacare tax”) as well.
The result would be an aggregate tax of 28%
on unrealized gains when appreciated
property passes by gift or bequest. If enacted,
the new rules would be effective for gains on
gifts made, and property bequeathed by
decedents dying, after December 31, 2016.
The proposal does include some small
exemptions ($100,000 per person applying at
death), but its impact would be enormous.
• Limit Portability of Estate and Gift Tax
Exemptions. Under current law the Federal
estate tax exemption is portable between
spouses, meaning any unused Federal estate
tax exemption of the first spouse to die may
be used by the surviving spouse for lifetime
gifting or at death. A new proposal would
limit the ability of a surviving spouse to use
the deceased spouse’s exemption for gifting
during the surviving spouse’s lifetime. For
decedents dying on or after the effective date
of the proposal, the unused estate tax
exemption of the deceased spouse would be
available to the surviving spouse in full on the
surviving spouse’s death, but, just as the
proposal would reduce taxpayers’ lifetime gift
tax exemption to $1 million, the surviving
spouse’s use of the decedent’s exemption for
lifetime gifts would be limited to the
remaining exemption the decedent could have
applied to his or her gifts made in the year of
his or her death.
• Eliminate Short-Term GRATs and Zeroed
Out GRATS. GRATS, which are discussed
below, have been a very popular, tax efficient
estate planning technique for years. The
President’s proposal would increase the
downside risk of using this technique by
requiring that a GRAT have a minimum term
of 10 years. In addition, the proposal would
require that the GRAT remainder interest
have a minimum value equal to the greater of
25% of the value of the assets contributed to
the GRAT or $500,000 (but not more than
the value of the assets contributed). This
proposal, if enacted, would likely spell the end
• Reduce Exemptions and Increase Tax Rates.
Currently, the Federal estate, gift and GST
exemptions are unified at $5,450,000 and the
tax rate is 40%. As noted above, the proposal
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of short-term GRATs and zeroed out
GRATs.
passthrough entities) would be limited to
$50,000 per year per donor (indexed for
inflation after 2017). Although this proposal
might alleviate certain administrative burdens
for trustees of certain trusts, it would severely
limit taxpayers’ ability to transfer large sums of
money to trusts without using gift tax
exemption.
This could have significant
consequences for taxpayers with insurance
trusts that hold policies with annual premiums
in excess of $50,000.
• Modify Grantor Trust Rules to Make Sales
and Exchanges Unfavorable. The planning
technique involving sales to intentionally
defective grantor trusts is described below.
Under the proposal, which is complicated and
far reaching, if a person who is the deemed
owner of a grantor trust engages in a sale,
exchange or comparable transaction with the
trust, then the portion of the trust attributable
to property received in the transaction
(including income earned and appreciation
thereon), less the consideration received by
the grantor, would continue to be included in
the grantor’s estate for estate and gift tax
purposes. This proposal, if enacted, likely
would put an end to sales to intentionally
defective grantor trusts.
• Limit Roth Conversions to Pre-Tax Dollars.
Currently, taxpayers can elect to convert
amounts held in a traditional IRA to a Roth
IRA. Although the converted amount must
be included in income, going forward the
taxpayer is able to enjoy all of the benefits of a
Roth IRA. The new proposal would permit
amounts held in a traditional IRA to be
converted to a Roth IRA only to the extent a
distribution of those amounts would be
includable in income if they were not rolled
over. Thus, after-tax amounts held in a
traditional IRA could not be converted to
Roth amounts.
• Limiting the Duration of GenerationSkipping Transfer (GST) Tax Exemption.
The proposal would limit the duration of
GST tax exemption allocated to trusts to 90
years. This limitation would apply to trusts
created after the enactment of the new rule,
but trusts already in existence would be
subject to “grandfathering rules” similar to
those in effect for trusts created before the
enactment of the GST tax.
• Changes to Laws Governing IRAs and
Retirement Plans. One proposal, which is
carried over from the 2016 budget proposals,
would limit your ability to make
contributions to, or earn accruals in respect of,
tax qualified plans and IRAs if your aggregate
balance in these accounts exceeds levels
necessary to finance a joint and 100% survivor
annuity for defined benefit plans. For a 62
year old individual, this annual limit would be
about $210,000 per year as calculated under
existing law, or a total of about $3,400,000. If
the account reaches this maximum, no further
contributions or accruals would be permitted,
but your existing account balance could
continue to grow with investment earnings
and gains. A second proposal would require
non-spouse beneficiaries of a deceased
individual’s retirement plan or IRA to take
distributions from an inherited account over
• Simplifying Annual Exclusion Gifts to Trusts.
Under current law, a gift cannot qualify for
the gift tax annual exclusion unless it
constitutes a present interest in property. In
order for transfers to trusts to qualify for the
annual exclusion, a beneficiary of the trust
must have a right to withdraw the annual
exclusion amount, and the trustee must give
the beneficiary timely notice of transfers to
the trust. The proposal would create a new
category of transfers that would qualify for the
annual exclusion. Transfers to irrevocable
trusts (as well as certain other transfers of
property that cannot be immediately
liquidated by the donee, such as interests in
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no more than five years. This proposal would
change the current law, which generally
allows a non-spouse beneficiary to take
minimum distributions over the beneficiary’s
life expectancy.
through sales to intentionally defective grantor
trusts.
The annual exclusion gifting amount remains at
$14,000 (or $28,000 if spouses elect to split gifts)
for gifts made in 2016. This amount is subject to
indexing in future years.
• Expansion of Consistent Basis Reporting to
Marital Deduction Property and Taxable
Gifts.
In their current form, the new
consistent basis reporting rules under 1014(f),
which are discussed below, are applicable only
to property that generates a Federal estate tax.
The proposal would make 1014(f) applicable
to property qualifying for the estate tax marital
deduction (in the case of estates that are
required to file estate tax returns) and to
property transferred by taxable gifts.
Current Tax Law Preserves Popular
Wealth-Transfer Techniques that Can Be
Used to Leverage Expanded Federal Gift
Tax Exemption
Individuals who wish to reduce future estate
taxes by maximizing the use of the increased gift
tax exemption should consider utilizing strategies
such as GRATs, sales to intentionally defective
grantor trusts, or intra-family loans. The interest
rates that the IRS uses to value many transfers for
estate and gift tax purposes continue to be near
historic lows for now, but this trend is not expected
to continue indefinitely, as most experts predict
that interest rates will rise in the near future. With
the Federal gift tax exemption having increased to
$5,450,000 on January 1st and interest rates
expected to rise, now may be the right time to
implement a gifting plan or enhance an existing
plan.
Multi-Generational Estate Planning
Opportunities
As of January 1, 2016, individuals are able to
transfer $5,450,000 free of Federal estate, gift and
GST tax during their lives or at death. A married
couple is able to transfer $10,900,000 during their
lives or at death. (There is no New York gift tax.)
Due to the portability of the Federal estate tax
exemption, any unused Federal estate tax (but not
GST tax) exemption of the first spouse to die may
be used by the surviving spouse for lifetime gifting
or at death.
The following are some estate planning
techniques that remain particularly attractive under
the current tax laws.
Through coordinated use of their Federal gift
and GST tax exemptions, individuals can create
trusts with an aggregate value of up to $5,450,000
($10,900,000 per couple), which may benefit
several generations of descendants, while insulating
the assets from Federal gift, estate and GST taxes.
Grantor Retained Annuity Trusts
Grantor Retained Annuity Trusts (“GRATs”)
are a popular technique used to transfer assets to
family members without the imposition of any gift
tax and with the added benefit of removing the
assets transferred into the GRAT from the
transferor’s estate (assuming the grantor survives
the initial term).
Individuals who have already implemented
gifting programs not only have all the advantages of
having consummated lifetime gifts, but they also
may have the opportunity to leverage their gifting
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In a GRAT, you transfer assets to a trust, while
retaining the right to receive a fixed annuity for a
specified term. The retained annuity is paid with
any cash on hand, or if there is no cash, with inkind distributions of assets held in the trust. At the
end of the term, the remaining trust assets pass to
the ultimate beneficiaries of the GRAT (for
example, your children and their issue or a trust for
their benefit), free of any estate or gift tax.
this rate is 1.8% for the months of April and May
2016.
Why is the interest rate important? Because if
the trust’s assets appreciate at a rate greater than the
interest rate, the excess appreciation will pass to the
ultimate beneficiaries of the GRAT free of any
transfer tax. Thus, any asset that you think will
grow more than 1.8% a year may be a good
candidate for funding a GRAT.
The GRAT can be funded with any type of
property, such as an interest in a closely held
business or venture, hedge fund, private equity
fund, or even marketable securities. The most
important consideration is whether the selected
assets are likely to appreciate during the GRAT
term at a rate that exceeds the IRS hurdle rate (an
interest rate published by the IRS every month).
The hurdle rate is 1.8% for transfers made in April
and May of 2016. Other factors to take into
account in selecting the assets to be gifted are
whether the assets currently have a low valuation
or represent a minority interest (which may qualify
the assets for valuation discounts for lack of control
and lack of marketability under current law).
Other benefits of a GRAT bear mentioning.
The transfer to a GRAT is virtually risk-free from
a valuation perspective. If an asset for which there
is no readily attainable market value is transferred
to a GRAT, and the IRS later challenges the value
that you report for gift tax purposes, the GRAT
annuity automatically increases in order to produce
a near zero gift. Accordingly, there is essentially
no gift tax exposure.
GRATs also enjoy an income tax advantage. A
GRAT is a “grantor trust,” meaning that you must
pick up all items of income, credit and deduction
attributable to the trust property on your personal
income tax return. Being saddled with the income
tax liability may seem like a burden, but it is
actually a great estate planning advantage, in that it
allows the trust property to grow income tax free
for the beneficiaries, while reducing your estate.
Generally, the GRAT is structured so as to
produce no taxable gift. This is known as a
“zeroed out” GRAT. Under this plan, the annuity
is set so that its present value is roughly equal to
the fair market value of the property transferred to
the GRAT, after taking into account any valuation
discounts. There is virtually no gift tax cost
associated with creating a zeroed out GRAT.
It is important to note that the existing rules that
make GRATs so attractive may change in the
future. Many bills requiring that the annuity term
of a GRAT have a minimum of ten years have
been introduced, and, as described above, President
Obama targeted this popular technique in his fiscal
2017 budget proposals. There may be no better
time than the present to consider GRATs while
the IRS hurdle rate remains low and valuation
discounts are available.
The value of the grantor’s retained annuity is
calculated based on the IRS hurdle rate – the
lower the IRS hurdle rate, the lower the annuity
that is required to zero out the GRAT. Currently,
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conditions, and in the case of a sale of a minority
interest, valuation discounts. You would create an
IDGT for the benefit of your children,
grandchildren and more remote descendants. If
there is an existing IDGT, all the better.
Intra-Family Loans
Another technique that works very well in a low
interest rate environment is an intra-family loan.
Each month the IRS publishes interest rate tables
that establish the lowest rate that, if properly
documented, can be safely used for loans between
family members without producing a taxable gift.
An IDGT provides two independent planning
opportunities. First, you will pay the income tax
on the income generated by the trust, including
capital gains tax, thereby allowing the trust to grow
for your children and their issue unencumbered by
the income tax, while reducing your estate. In
addition, you may engage in transactions with an
IDGT without any income tax consequences.
Currently, these interest rates are near historic
lows. The short-term rate for loans of up to three
years is 0.70% for April 2016 and 0.67% for May
2016. The mid-term rate for April 2016, for loans
of more than three years and up to nine years, is
1.45%, and the mid-term rate for May 2016 is
1.43%. The long-term rate for loans exceeding
nine years is 2.25% for April 2016 and 2.24% for
May 2016. Funds that are lent to children, or a
trust for the benefit of children, will grow in the
senior family member’s estate at this extraordinarily
low interest rate, essentially creating a partial estate
freeze plan. Those funds, in turn, can be put to
use by the junior family member to purchase a
residence or to be invested in a manner that
hopefully will beat the interest rate.
For example, you can sell low basis property to
an IDGT without recognizing a gain. President
Obama’s 2017 budget proposals would eliminate
virtually all of the estate and gift tax advantages if a
grantor engages in a sale, exchange or “comparable
transaction” with his or her grantor trust. The
proposal has yet to be passed and would be
effective with regard to all IDGTs that engage in
such transactions after the date of enactment. If you
are contemplating any non-gift transactions with a
grantor trust, such as a sale, exchange, lease or loan,
you may wish to consider advancing the
transaction before Congress may enact such
legislation.
Making a loan to a trust for your children may
be even more advantageous than making a loan
outright if the trust is intentionally structured as a
grantor trust for income tax purposes. Ordinarily,
the interest payments on the note must be included
in your taxable income, but if the payments are
made by a grantor trust, they will have no income
tax ramifications to you.
An ideal way to lock into valuation discounts,
which may be eliminated by future legislation or
regulations, would be to sell a minority interest in a
closely-held business or venture to an IDGT. That
minority interest can be sold at a price taking into
account discounts for lack of control and lack of
marketability.
Sales to Intentionally Defective Grantor
Trusts
A sale to an intentionally defective grantor trust
(“IDGT”) can be an extremely effective planning
strategy that takes advantage of the current market
The elimination of valuation discounts has been
the target of several bills previously introduced in
Congress, and the IRS has repeatedly warned
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practitioners that they may soon issue regulations
that would eliminate certain valuation discounts.
Currently, this important planning tool remains
intact, and the discounts obtained by taxpayers for
estate and gift tax purposes are robust. You can
still leverage your gift tax exemption by
transferring assets that may be subject to lack of
marketability and lack of control discounts.
the trust in the grantor’s gross estate for estate tax
purposes. Although most practitioners believe that
the IRS’s positions conflict with the Internal
Revenue Code, Treasury Regulations and prior
case law, these audit challenges, coupled with the
Treasury’s recent legislative proposals – which
target sales to grantor trusts – may be an indication
that the IRS intends to attack such sales more
vigorously.
Under this plan, you would sell property to the
trust and take back a note with fixed payments of
interest and principal. Any property can be sold to
an IDGT, but ideally the property would have a
low current valuation, good prospects for
appreciation and features that enable it to qualify
for valuation discounts. If the principal on the
note equals the fair market value of the property
sold, no taxable gift results. In addition, if the
assets earn more than the required interest rate, the
excess earnings may retire the principal of the debt,
leaving valuable property for your children.
The IRS recently brought a high profile
challenge to a sale to a grantor trust in two
companion Tax Court cases. In these cases, which
involved a husband and a wife, the grantor sold
assets to the trust in exchange for a promissory note
that contained a “defined value formula.” The
formula provided that if the value of the assets
were later determined by the IRS or a court to be
different than the appraised value, the number of
shares purchased would be adjusted to avoid the
imposition of a partial gift tax. Both cases settled
in March 2016, without the Tax Court having
ruled on the efficacy of the defined value formula.
There is a prior court case that supports the validity
of this technique, but the IRS has made clear that
it will continue to challenge defined value
transactions.
Therefore, it is possible that
“standard” sales to grantor trusts which do not
incorporate defined value formulas may be less
susceptible to attack by the IRS. If you are
considering a sale or exchange with an IDGT, you
should consult your tax advisor regarding the
potential risks and benefits of the various ways in
which the transaction can be structured.
As mentioned below, the interest rates that can
be used for this purpose are currently
extraordinarily low.
Unlike with GRATs,
however, such plans may have valuation risks that
need to be considered, particularly if the property
sold is an interest in a closely-held business or
venture.
Although sales to intentionally defective grantor
trusts have been used widely for decades, in some
recent audits, the IRS has attacked the technique
on two fronts: first, by taking the position that the
note given to the grantor by the trust in exchange
for the purchased property should be ignored,
resulting in a gift of the full value of the property
transferred; and second, by attempting to treat the
note as “equity” in the trust rather than “debt,”
resulting in the inclusion of the asset transferred to
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New Consistent Income Tax Basis
Reporting Requirements for
Executors and Individuals Making
Gifts of Inherited Property
estate tax marital or charitable deductions and
property received from estates that are not required
to file estate tax returns.
Under Section 6035(a), Executors that file an
estate tax return (Form 706) are required to file the
new IRS Form 8971 (Information Regarding
Beneficiaries Acquiring Property From a
Decedent) within 30 days of filing the return and
to provide each beneficiary with a schedule of
assets (Schedule A) showing the estate tax value of
all property to be received by the beneficiary. The
IRS has so far extended the deadline for filing
Form 8971 three times, first until February 29,
2016, then until March 31, 2016, and most
recently until June 30, 2016.
On July 31, 2015, the Surface Transportation
and Veterans Health Care Choice Improvement
Act of 2015 (commonly known as the “Highway
Bill”) became effective. The Highway Bill added
two new provisions to the Internal Revenue Code,
which were meant to ensure that recipients of
property from estates use the estate tax value of the
property received as their income tax basis in the
property. Section 6035(a) applies to executors
who file estate tax returns after July 31, 2015, and
Section 1014(f) applies to individuals who receive
property from such estates. In early March, the
IRS issued proposed Regulations, which would
impose reporting requirements on individuals who
makes gifts with property they received from
relatives’ estates.
Currently, executors of estates that are not
required to file estate tax returns because they are
below the filing threshold ($5,430,000 in 2015 and
$5,450,000 in 2016) are not required to file Form
8971. This means that executors who file a return
solely for the purpose of making a portability
election or making an allocation or election with
respect to GST exemption are not required to file
Form 8971. In addition, four specific types of
assets need not be reported on Form 8971: (1)
cash (other than coins or bills that are part of a
collection); (2) items of income in respect of a
decedent (or “IRD”); (3) items of tangible personal
property for which an appraisal is not required to
be filed (i.e., items worth less than $3,000); and (4)
assets that are sold, exchanged or otherwise
disposed of by the estate in a transaction in which
gain or loss is recognized.
Section 1014(f) provides that a beneficiary’s
income tax basis in property received from a
decedent must not be greater than the “final value”
of the property for estate tax purposes. The “final
value” means: (1) the value reported on the estate
tax return; (2) the value as finally determined on
audit (or by a court); or (3) if there has not been a
final determination, the value shown on a
statement provided to the beneficiary pursuant to
Section 6035(a). Any taxpayer who incorrectly
reports his or her basis on an income tax return as
being higher than the final value may be subject to
a 20% penalty on any resulting underpayment.
The good news for taxpayers is that Section
1014(f) (and any resulting penalties) only applies to
property that increased the estate tax liability in a
decedent’s estate. Therefore, the penalties will not
apply with respect to property that qualifies for the
Executors filing an estate tax return must
provide each beneficiary who receives property
required to be reported on From 8971 with a
Schedule A listing all property distributable to the
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  
beneficiary. If, as is often the case, the executor
does not know which property will be used to
satisfy a bequest to a particular beneficiary, the
executor must list all property that could be used to
satisfy the bequest on the Schedule A provided to
the beneficiary. It easy to imagine a scenario in
which multiple residuary beneficiaries of an estate
will receive a Schedule A that lists almost all of the
assets of the estate.
to provide your child with a “supplemental
statement” containing the information from
Schedule A and file a copy with the IRS within 30
days of the gift. If you made the gift before the
“final value” of the painting was determined for
estate tax purposes (which could be any time
before the end of the 3-year period during which
the IRS could audit the estate tax return), you also
would be required to provide a copy of the
supplemental statement to your parent’s executor.
If you gift the painting before the executor
provides you with a Schedule A, you still would be
required to provide a statement showing the
change in ownership (but not the value) to your
child and to your parent’s executor and to file a
copy with the IRS. Once you inform the
executor of the change in ownership, the executor
must provide any further information concerning
the value of the painting directly to your child.
The proposed Regulations do not make clear
whether your child will have reporting obligations
if he or she gifts the painting to another related
party (such as his or her spouse or one of your
grandchildren).
The proposed Regulations extend the
requirements imposed by these new rules to
individuals who make further transfers of inherited
property to relatives. Specifically, recipients of
property listed on Form 8971 who distribute or
retransfer property to a “related transferee” whose
basis will be determined with reference to the
recipient’s basis, must provide the transferee with a
supplemental Schedule A and file a copy with the
IRS. Related transferees include family members
and entities controlled by the transferor and his/or
her family, as well as grantor trusts of which the
transferor is deemed the owner for income tax
purposes. Non-grantor trusts, however, are not
considered “related transferees” even if they are
solely for the benefit of the transferor’s family.
There is no time limit on these retransfer rules, and
it is unclear whether they apply to subsequent
retransfers among related parties.
Given the scope and complexity of the new
consistent basis reporting rules, anyone acting as an
executor or receiving property from an estate
should consult a tax professional regarding his or
her obligations under the new rules.
For example, if you inherit a valuable painting
from a parent who had a taxable estate, your
parent’s executor would be required to provide
you with a Schedule A within 30 days of filing the
estate tax return, showing the value of the painting.
If there is an estate tax audit and the value of the
painting changes, the executor will have to provide
you with a supplemental Schedule A showing the
new value of the painting. If you were to gift that
painting to your child, then you would be required
Taking Advantage of Extraordinary
Planning Opportunities
In 2016, when the Federal gift, estate and GST
exemptions all have increased to $5,450,000,
individuals have extraordinary multi-generational
estate planning opportunities to use these
exemptions through lifetime gifting. Selecting the
optimal wealth-transfer technique and the right
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assets to gift are of paramount importance. The
timing of your gifts also should be considered.
Federal legislation and regulations may be passed
limiting the effectiveness of intentionally defective
grantor trusts, setting ten-year minimum terms or
25%/$500,000 minimum remainders on GRATs,
modifying the grantor trust rules and/or
eliminating certain valuation discounts that make
these techniques so powerful.
members of our Personal Client Services Practice
Group listed below.
For More Information
Anita S. Rosenbloom
Seth D. Slotkin
..
..
[email protected] [email protected]
Etta Brandman
..
[email protected]
By Anita S. Rosenbloom and Seth D. Slotkin,
Partners in the Personal Client Services Practice
Group of Stroock & Stroock & Lavan LLP. If you
would like to discuss any questions you may have
regarding the estate tax laws or estate planning
opportunities, please be in touch with any of the
Ronald J. Stein
..
[email protected]

Jerome A. Manning
..
[email protected]
  
New York
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New York, NY -
Tel: ..
Fax: ..
Los Angeles
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Miami
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Fax: ..
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