May 2018 Update
The Tax Cuts and Jobs Act of 2017 (Pub L 115–97, 131 Stat 2054)
On December 22, 2017, Congress enacted Public Law 115-97, titled “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” In this book, this legislation is referred to as the “Tax Cuts and Jobs Act (Pub L 115-97, 131 Stat 2054)” or “the Act.” Sections throughout the book affected by the Act have been revised.
Most importantly, the Act doubles the basic exclusion amount for decedents dying, or gifts, made between January 1, 2018, through December 31, 2025. In 2018, the estate and gift tax exclusion amount and the GST exemption is $10 million per person and $20 million per married couple, indexed for inflation. IRC §2010(c)(3)(C). At the time of this writing, however, the IRS has not yet released inflation adjustments based on the Chained Consumer Price Index for all Urban Consumers (C-CPI-U), as required by the Act for many Internal Revenue Code sections. See Pub L 115-97, §1102, 131 Stat 2054. Commentators opine that the estate and gift tax exclusion amount will be $11.18 million and that the annual exclusion amount will remain at $15,000 as set forth in Rev Proc 2017–58, 2017–45 Int Rev Bull 489.
Chapter 2: Ethical Considerations
Probate Code §21380 has been amended to provide that the individual who transcribes or causes a donative instrument to be transcribed must have been in a fiduciary relationship with the transferor when the instrument was transcribed. In addition, the term “gift” has been replaced with the term “donative transfer” in the context of the presumption of fraud and undue influence under Prob C §§21360–21392. 2017 Stats, ch 56. See §2.22.
Chapter 4: Additional Property Transfer Obstacles for Married Persons and Registered Domestic Partners
In Irvin v Contra Costa County Employees’ Retirement Ass’n (2017) 13 CA5th 162, the court held that the plain meaning of the term “surviving spouse” included a legally separated spouse for purposes of county pension benefits under Govt C §31760.2 despite the definition of surviving spouse in Prob C §78(d), which expressly excludes legally separated spouses. See §4.4A.
In Yeh v Tai (2017) 18 CA5th 953, the court held that if a claim for violation of spousal fiduciary duty is brought on the death of a spouse, no limitations period applies except for laches under Fam C §1101(d)(2)–(3). See §4.7.
In In Brace v Speier (In re Brace) (BAP 9th Cir 2017) 566 BR 13, the court held that property acquired by spouses that, under applicable presumptions, appeared to be the separate property of both spouses (joint tenancy property) was community property as a result of failure to satisfy the “express declaration” requirement for a valid transmutation, to the detriment of both spouses. The court held that California’s community property presumption of Fam C §760 prevailed over Evid C §662 record title presumption. See §4.41. See also §26.48.
Chapter 5: Wills
In the will, the testator may allow (or prohibit) the disclosure of the testator’s digital assets, including electronic communications, to the testator’s personal representative or trustee, according to the Revised Uniform Fiduciary Access to Digital Assets Act (Prob C §§870–884) (RUFADAA) See §5.45A.
Chapter 6: Revocable Trusts
Fiduciary Trust Int’l v Klein (2017) 9 CA5th 1184 addresses the attorney-client privilege of a successor trustee. The court held that to claim the privilege personally, the predecessor trustee must have undergone some process, at the time of the communication, to distinguish between administrative and defensive communication. See §6.40A.
Probate Code §6300 has been amended to provide that a pourover will is valid if the trust is identified in the testator’s will and its terms are set forth within 60 days after execution of the testator’s will. 2017 Stats, chap 33. See §6.41.
In Carne v Worthington (2016) 246 CA4th 548, a California appellate court held that a trust which listed real property as an asset in the trust’s schedule of assets acted as an instrument of conveyance. See §6.49.
Probate Code §16502(d) has been amended to provide that an objection to the trustee’s proposed action must be made within 45 days of delivery or receipt of notice, or within a longer period specified in the notice (previously 45 days from the mailing of the notice). 2017 Stats, chap 319, §92. See §6.59.
Chapter 7: Nonprobate and Nontrust Transfers at Death
Estate of O’Connor (2017) 16 CA5th 159 confirmed that under Prob C §5302(a) a joint bank account belongs to surviving party at death as against the estate of the decedent unless there is clear and convincing evidence of a different intent. See §7.34.
Chapter 8: Noncharitable Inter Vivos (Lifetime) Gifts
For taxable years beginning after December 31, 2017, the unearned income of a child under age 19 (24 in the case of a dependent student) that is subject to the “kiddie tax,” is generally taxed at the rate applicable to trusts and estates (previously at the parent’s rate). See IRC §1(g), (j)(4). See §8.22.
Chapter 10: Estate and Gift Taxes
The basic exclusion amount, which was doubled by the Tax Cuts and Jobs Act (Pub L 115-97, 131 Stat 2054), is still indexed for cost of living changes but using a different index, the Chained Consumer Price Index for all Urban Consumers (C-CPI-U) that produces slower adjustments. While the basic exclusion amount increase sunsets after 2025, the use of the C-CPI-U does not sunset. Thus, starting January 1, 2026, the basic exclusion amount will be $5 million as adjusted by the C-CPI-U. See IRC §1(f)(3). See §§10.2, 10.3, 10.5A.
Estate of Minnie Lynn Sower (2017) 149 TC No. 11 illustrates a pitfall of electing portability. At the death of the surviving spouse, the IRS can examine the estate tax return and gifts made by the first deceased spouse to confirm or adjust the amount of the first decedent’s unused exemption that the surviving spouse may use. See §10.4A.
In Estate of Nancy H. Powell (2017) 148 TC No. 18, the Tax Court found the ability of a decedent who only held limited partnership interests to act with the other partners to dissolve the limited partnership was sufficient to cause inclusion of the transferred limited partnership property under IRC §2036(a)(2). See §10.20. See also §§10.15, 18.37A.
In Rev Proc 2017-34, 2017-26 Int Rev Bull 1282, the IRS provides a simplified method for making late portability election for estates not otherwise required to file return. See §10.66A.
A new section has been added to discuss the gift tax consequences of creating a joint tenancy in real property. See §10.90A.
In Estate of Sheldon C. Sommers (2017) 149 TC No. 8, the payment of estate tax from the marital share of the donor’s estate on gift tax paid on gifts made within 3 years of death resulted in a reduced marital deduction and the payment of additional estate tax. See §10.128.
Chapter 12: Income Tax Basis
In IRS Letter Ruling 201735015, the executors of a nonresident alien who died in 2010 were permitted to make a late election out of estate tax and apply the modified carryover basis. See §12.18. See also §16.16.
Chapter 13: Taxing Income of Estates and Trusts
The Tax Cuts and Jobs Act (Pub L 115–97, §11051, 131 Stat 2054) (the Act) made the following changes:
No deduction for casualty losses (losses suffered by reason of theft, fire, storm, shipwreck, or other casualty) is allowed for losses incurred in taxable years beginning after December 31, 2017, and ending before January 1, 2026, unless incurred in relation to a federally declared disaster. IRC§165(h)(5). See §13.16.
The Act eliminates miscellaneous itemized deductions subject to the 2 percent floor for taxable years after December 31, 2017, and before January 1, 2026. IRC §67(g). However, certain deductions that otherwise were not subject to the 2 percent floor because they were incurred in connection with the administration of the estate or trust which would not have been incurred if the property were not held in such trust or estate (e.g., executor fees or the cost of preparing an estate tax return) are still fully deductible. IRC §67(e). See §13.17. See also §1.55.
The Act introduces a new 20 percent deduction for qualified business income from pass-through entities. For tax years beginning after December 31, 2017, a trust or estate may deduct 20 percent of qualified business income shown on a K-1 from a partnership or S corporation owned by the trust or estate. IRC §199A. Such income is to be apportioned between the beneficiaries and the fiduciary (i.e., the trust or estate). See §13.20A.
The Act repeals IRC §682. Thus, if any alimony payments are made from a grantor trust according to a divorce or separation instrument entered into after December 31, 2018, or in effect before January 1, 2019, but modified after December 31, 2018, the trust should be treated as a grantor trust under IRC §677 and the income should be taxable to the grantor, to account for the repeal of §682. See §13.59.
Because net operating losses, capital losses, and excess deductions are miscellaneous itemized deductions subject to the 2-percent floor of IRC §67, beneficiaries of the trust or estate will not be able carry over such items for trusts and estates terminating after December 31, 2017. See . Thus, fiduciaries need to carefully plan the timing of income and deductions in a trust or estate that is preparing to terminate. Similarly, fiduciaries should be mindful of the fiscal year chosen by an estate or a qualified revocable trust that has elected under IRC §645 to be treated as an estate so as to minimize any net operating losses, capital losses, or excess deductions that will go unused on the termination of the trust or estate. See Practice Tip in §13.65.
In Green v U.S. (10th Cir 2018) 880 F3d 519, the 10th Circuit court held that the district court erred when it allowed a trust to deduct the fair market value of real property it donated to a charitable organization, instead of the trust’s adjusted basis in the donated property. See §§13.11, 13.14.
Chapter 16: Basic International and Noncitizen Transactions
Items of the Tax Cuts and Jobs Act that have an impact on international estate planning are discussed in new §16.1A.
In applying the “substantial presence test,” both the day of entry and the day of departure are included. Josi Angel Lujan, TC Memo 2000–365. See §16.9.
Chapter 17: Marital Deduction Planning
The uncertainty for estate planners has increased with the temporary $10 million exclusion amount (plus cost-of-living adjustments) in 2018 under the Tax Cuts and Jobs Act, which may revert to $5 million (plus cost-of-living adjustments) in 2026. The uncertainty is especially acute for spouses with a marital estate between $10 million and $20 million, which this chapter terms the “medium estate” (i.e., greater than deceased spouse’s applicable exclusion amount (AEA) and less than both spouses’ AEAs). Small estates (less than AEA) will never have an estate tax problem, and large estates (greater than both spouses’ AEAs) will always have an estate tax problem. Flexible planning strategies for medium estates are discussed in §§17.61–17.63.
Chapter 18: Business Entity Valuation Planning Strategies
Proposed 2016 regulations that virtually would have eliminated valuation discounts related to minority interests in family-owned business entities have been withdrawn in October 2017. See Withdrawal of Notice of Proposed Regulations, 82 Fed Reg 48779 (Oct. 20, 2017). See §18.1.
Increased estate and gift tax exemptions could make tax savings by means of valuation discounts illusory and, indeed, counterproductive if they result in a reduced income tax basis for business interests. See §§18.3, 18.18.
In Estate of Nancy H. Powell (2017) 148 TC No. 18, the Tax Court held that the ability of a limited partner to dissolve partnership, acting with other partners, was a right “to designate the persons who shall possess or enjoy” the cash and securities transferred to limited partnership “or the income therefrom,” within the meaning of IRC §2036(a)(2)). See §18.37A. See also §§10.15, 10.20.
In 926 North Ardmore Ave., LLC v County of Los Angeles (2017) 3 C5th 319, the court held that the documentary transfer tax may be assessed on a change in ownership of real property resulting from the transfer of entity interests. See §18.52.
Chapter 21A: IRC §529 College Savings Accounts and Coverdell Education Savings Accounts
The Tax Cuts and Jobs Act (Pub L 115-97, §11032, 131 Stat 2054) (the Act), allows amounts in College Savings Accounts to be used for qualified elementary and secondary school tuition and expenses of up to $10,000 per beneficiary per year. The Act states that “the term ‘qualified higher education expense’ shall include a reference to expenses for tuition in connection with enrollment or attendance at an elementary and secondary public, private, or religious school.” IRC §529(c)(7). Therefore, all references in chapter 21A to “qualified higher education expenses” and “College Savings Accounts” include certain qualified accounts and expenses for beneficiaries in grades K–12. New IRC §529(c)(7) and amended IRC §529(e)(3)(A) apply to distributions made after December 31, 2017. The $10,000 per student per year limitation does not apply to distributions for any postsecondary school expenses. See §§21A.1, 21A.17. See also §10.114.
The Act allows rolling over a College Savings Account to an ABLE account that exists for a special needs beneficiary, with no penalties. This opportunity may exist only until 2025. See IRC §529(c)(3)(C)(i)(III). See §21A.27.
Chapter 23: Charitable Giving
The Tax Cuts and Jobs Act of 2017 (Pub L 115–97, 131 Stat 2054) increased the limitation for cash charitable contributions to 60 percent of the individual’s contribution base. This special rule for cash contributions is effective for tax years after December 31, 2017, and will expire December 31, 2025. See §23.39A.
The Tax Act suspended the overall limitation on itemized deductions in IRC §68 for any taxable year beginning after December 31, 2017, and before January 1, 2026. IRC §68(f). See §23.45.
Chapter 29: Health Care Decision Planning
One court of appeals held that an attorney-in-fact under the statutory form power of attorney set forth in Prob C §4401 did not have authority under the Health Care Decisions Law (Prob C §§4600–4806) to admit a relative to a residential care facility for the elderly. Hutcheson v Eskaton FountainWood Lodge (2017) 17 CA5th 937. See §29.5. See also §29.6.
Chapter 31: Disposition of Human Remains
Alkaline hydrolisis (also called water cremation) will become available in 2020. See Health & S C §103055(a)(4) (effective January 1, 2017; operative July 1, 2020). Cremated remains and hydrolized human remains will be subject to the same Health and Safety Code requirements. See Stats 2017 ch 846. See §31.10.