ARTICLE ABSTRACT: Minimize Capital Gains Tax of Estates, Trusts, and Beneficiaries

TITLE	Minimize Capital Gains Tax of Estates, Trusts, and Beneficiaries
AUTHOR(S)	Nicholas E. Christin, William A. Snyder
PUBLICATION	Estate Planning Journal, April 2014
PUBLISHER	WG&L
ABSTRACT	Trusts are taxed at the highest rate on capital gains at a very low income threshold ($12,150 in2014), as well as being subject to the 3.8% Medicare tax on capital gains at the same low threshold. Lower overall taxes will often be available if capital gains are included in DNI and distributed to beneficiaries. General review of Treas. Regs. §1.643(a)-3 rules on inclusion of capital gains in DNI. Regular practice of trustee characterizing discretionary principal distributions as capital gain distributions (should commence from first tax year) as a method of including capital gains in DNI. Use of power to adjust to include capital gains in DNI. Total return unitrusts as a method to include capital gains in DNI- providing an ordering rule in the trust itself, using a state ordering statute. Need to address these issues in the first tax year of the trust, and to consistently apply allocation rules thereafter.
RESEARCH TAGS	Capital gains; DNI; income taxation of trusts; Code §§643, 661, 662; Treas. Regs. §1.643(a)-3

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LLC PREFERRED INTEREST QUALIFIES FOR MARITAL DEDUCTION

In a recent private letter ruling, the question was raised whether an LLC interest that received a preferred return with additional LLC cash flow going to other common interests could qualify for the marital deduction if funded into a QTIP trust.

The IRS ruled that the property did qualify for the marital deduction. However, this was based on certain elements being present – absent their presence the ruling may not have been issued. These key elements were:

1. The QTIP trust itself had all the Section 2056(b)(7) requisite elements, including required income distributions and limits on distributions to persons other than the surviving spouse.

2. The preferred units provided for an eight percent return on the aggregate face value, payable no less often than annually.

3. The preferred units cannot be redeemed for less than the greater of their face value or fair market value.

4. The rights of the preferred units cannot be altered by the holders of the common units.

5. The sale of preferred units is not unreasonably restricted.

PLR 201410011 (3/7/2014)

KNOWLEDGE OF EXECUTOR’S ATTORNEY IMPUTED TO EXECUTOR FOR CLAIMS ACT LIABILITY

Two individuals were appointed as co-executors of an estate. The decedent had not filed income taxes for a number of years. The attorneys prepared tax returns for the missing years, and the IRS assessed taxes against the estate. Without knowledge of the tax liabilities (at least according to the executors), the executors distributed funds out of the estate (coincidentally to the executors). The estate was left with insufficient assets to pay the income tax liabilities of the estate.

Under 31 USC 3713, a fiduciary of an estate is liable for the tax obligations of the estate to the extent it distributes estate funds to lower priority creditors and beneficiaries. In the above case, one of the co-executors sought summary judgment that he was not responsible for the taxes since he did not have knowledge of the tax obligations when the distributions were made out of the estate.

Motion denied, said the District Court – the law firm’s knowledge is imputed to their clients, the co-executors. Further, the court rejected the defense of reliance on erroneous advice of counsel, citing Renda, 709 F.3d 472,484 (5th Cir. 2013) – “We follow the majority of other courts in holding that a representative's actual knowledge of a federal claim is sufficient, notwithstanding that representative's reliance on the erroneous advice of counsel as to how to address the claim.”

U.S. v. SHRINER, ET AL., 113 AFTR 2d 2014-1360, (DC MD), 03/12/2014