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Tax Apportionment /2036

Turner Cases
In the first case of Turner (Tax Court Memorandum 2011-209), the Court found that the transfer of assets to the limited partnership was includable in the decedent’s estate under section 2036; “the possession or enjoyment of, or the right to the income from the property…” The Court based its decision on a number of facts: the transferor did the following: receiving disproportionate distributions from the partnership; using personal funds to invest on behalf of the partnership; comingling personal partnership assets; using partnership assets to pay legal fees for his own estate planning; using partnership assets to pay insurance premiums on policies held in a different trust. As a result, the Court held that proper procedures were not followed; that there was lack of respect for legal boundaries of a separate entity; and the partnership entity was used as a personal account. Further, there was no significant nontax purpose for the formation of the limited partnership, and the assets were not properly titled. Additionally, Section 2036 also applied because there was no bona fide sale.
In the second case of Turner (138 T. C. 306 (2012), the decedent’s Executor argued that the decedent’s trust provided a formula clause so that his spouse was to receive sufficient assets to reduce the estate tax to zero, and therefore, the marital deduction should be increased to reduce the estate tax liability as increased in Turner case of 2011 under section 2036. The IRS argued that under section 2056 the marital deduction only applies to assets that actually pass to the spouse. The Court found that section 2036 is a phantom inclusion statue that includes the assets in the decedent’s estate and often occurs with a family partnership when the interests are already given away and under state property law no longer included in the decedent’s probate estate, and such asset cannot pass to the spouse and therefore not allowed as a the marital deduction.
In the third case of Turner (151 T. C. 10 (2018), which was decided November, 2018, the estate argued that although the Last Will did not contain an apportionment clause under section 2007B of the Internal Revenue Code (regarding property included under section 2036), the estate had a right to reimbursement for estate taxes paid on property included in the gross estate under section 2036, because unless that apportionment section is waived, it is preserved. And, if transfer taxes are paid from any property which was to transfer to the surviving spouse , it would reduce the marital deduction and reduce assets to the spouse. The Court found that it’s reasonable to assume that the decedent was to do what was necessary to ensure that whichever property is passing to his surviving spouse and qualifying for the marital deduction not be impaired by estate taxes, and therefore the Court found that the executor must exercise a right of recovery under section 2207 B of the Internal Revenue Code regarding tax apportionment. Thus, the estate should attempt to retrieve the estate tax amount from the transferee of the partnership assets.
Obviously, rather than a court determining such provisions of tax apportionment, it should be specifically included when preparing testamentary documents.

Power of Attorney

The Philadelphia Orphans Court in the Estate of Gloria Capobianco , 8 Fiduc. 3rd pages 201-206 (O.C. Philadelphia Co.July 2018) cited numerous sections under Chapter 56 under Title 20 of the Pennsylvania Statutes, and held that the trust as created by the agent under a power of attorney is invalid.

Gloria Capobianco died intestate on June 3, 2016. On November 1, 2005, she named her son as agent under her power of attorney. On April 24, 2016, she had to be placed in a medically-induced coma. On May 27, 2016, the agent, her son, under the power of attorney, created a trust and named himself and only two of his six siblings as beneficiaries of the trust, and transferred the decedent’s home and tangible personal property to the trust. The agent stated in court filings that he transferred the assets to the trust to protect such assets from being counted for the purposes of Medicaid.
One of the siblings that was not named as an heir of the trust objected to the accounting.

The Court stated that as a result of the decedent dying intestate all of her children were heirs equally of the estate in accordance with the Pennsylvania intestate law. The Court cited 5601.3 which provides that an agent is required to act according to the principal’s reasonable expectations, the agent must act in good faith, and only within the scope of the authority granted by the power of attorney. Furthermore, the agent must act loyally for the principal’s benefit.

The Court stated that an agent has a fiduciary duty to attempt to preserve the principal’s estate plan under 5601.3(b)(6), and the agent, in the case before the Court, did not have the authority to deviate from the principal’s estate plan.

The Court decided that there was no purpose in creating the trust except to eliminate four heirs as beneficiaries, and therefore the Court sustained the objections to the accounting and held that the trust is invalid.

Estate and Gift Tax Changes

For 2018 the gift tax exclusion is now at $15,000 per donee increased from $14,000 in 2017.

The Tax Cuts and Jobs Act was enacted on December 22, 2017, and basically doubles the estate, gift and generation skipping transfer tax exemptions to approximately $11,200,000 per person and approximately $22,400,000 per married couple. These increased exemptions only last until December 31, 2025, and without future legislation the amounts will return to the 2017 levels. Also, it is possible that before 2026, a new congress and administration may change the law and lower the exemptions. These increased exemptions provide many opportunities for planning, such as changing bypass or credit shelter trusts, and/or utilizing the additional gift tax exemptions before the law reverts. Those with significant assets should have their estate plans reviewed in conjunction with these changes.

Deceased Spouse Unused Exclusion

In case an election to transfer decedent’s federal estate tax exclusion to surviving spouse (DSUE; portability) was not filed after 2010, recent IRS Revenue Procedure 2017-34 allows an executor to file and elect portability until the later of January 2, 2018, or 2 years after the decedent’s date of death.

Estate and Gift Tax Limits Increase

The IRS has announced that the annual gift tax exclusion for 2018 will be $15,000 per donee, up from $14,000 per donee. Also, the estate and gift tax exemption will be $5.6 million per person for 2018, and that amount is up from $5,490,000 per person. Therefore a married couple will have a total of $11,200,000 exempt from federal estate tax or gift tax.

Creditor Claiming Trust Assets

In the trust creditor case of the Clegg Trust, 6 Fiduc. 3rd pages 69-79 (O.C. Philadelphia Co. Dec. 2015) the Trust held a life insurance policy and allowed the Trustee to pay the premiums. The trust contain provisions to limit creditors from claiming trust assets of beneficiary debtors under a spendthrift clause. To avoid loss of the federal gift tax exclusion under 2503 of the Internal Revenue Code the beneficiary had a limited right of withdrawal over certain assets and the power over certain assets after the lapse of the withdrawal period under “hanging powers”. The issue was whether a creditor of a trust beneficiary could claim trust assets. The Court cited section 7741 of Title 20 of the Pennsylvania Consolidate Statutes which limits a creditor from reaching trust assets where there is a spendthrift clause. The Court stated that spendthrift trusts are not sustained for the interest of the donee, but because the donor possessed an individual right of property in the execution of the trust; it is the intent of the donor which is important. Therefore, the creditor was not entitled to claim an interest in the trust assets under the spendthrift clause. The creditor then claimed that it had a right to make a claim of the trust assets which the beneficiary had a power to withdraw which did not lapse under section 20 Pa.C.S.A.7748. However, the Court denied the claim as the Court cited the “Power of withdrawal” definition under section 7703, which provides:

“Power of withdrawal. The unrestricted power of a beneficiary acting as a beneficiary not as a trustee, to transfer to himself or herself the entire legal and beneficial interest in all or a portion of the trust property. However, a power to withdraw the greater of the amount specified in section 2041 (b)(2), 2503(b) or 2514(e) of the Internal Revenue Code of 1986, or any lesser amount determined by reference to one or more of these provisions, may not be treated as a power of withdrawal.”

The claim of the creditor was denied.

Recent Powell Case

On May 18, 2017, the Tax Court (148 T.C. No.18) decided against the taxpayer with facts that involved a deathbed transfer. Assets were transferred from decedent’s revocable trust to a family limited partnership by her son under decedent’s power of attorney. Decedent’s son became the general partner and the decedent received all of the limited shares. Decedent’s son, under the power of attorney of decedent, then transferred all the limited shares to a Charitable Lead Annuity Trust. The decedent died 7 days thereafter. Understandably the deathbed facts were terrible for the taxpayer. The Court decided to tax the assets under section 2036 (a) (1) (decedent with her son as both general partner and the agent of her power of attorney could retain enjoyment of income), and surprisingly, under 2036 (a) (2) (decedent with her son could dissolve the partnership and also with her son, the general partner and power of attorney agent, could control distributions). The Tax Court in Powell agreed with the reasoning in the Strangi case decision that Byum fiduciary requirements did not apply in Powell.

Petition for Accounting and Surcharge

In the case of Guardo vs. Buzzuro, 7 Fiduc. Rep. 3rd page 14-19 (O.C. Monroe Co.2016), the Court was presented with a Petition to Compel an Accounting and Declaratory Relief by the Petitioner against Respondent/guardian. Respondent lived with her Aunt for 4 years from September 2010 through March 2014, and handled many of her finances. Her Aunt died in July 2014. Petitioner provided an accounting provided by the estate showing unaccounted funds and missing documents. Petitioner alleged that Respondent mismanaged decedent’s money while living with decedent for approximately 4 years. Respondent responded that she did not mismanage or convert funds and she did not know she was to keep extensive records.

The Court stated that the statute provides that the agent shall file an account whenever directed to do so by the court. 20 PS 5610. The Court stated that when money is unaccounted for in an estate the court could order the funds be repaid by the fiduciary in the form of a surcharge, and the burden to prove the wrongdoing is on the party who seeks the wrongdoing, and when sufficient discrepancy appears in the record then the burden shifts to the guardian or executor. The Court stated that a fiduciary acting under a power of attorney or as a guardian or caregiver is no different than an executor in such circumstances.

During a hearing the Responded was resolute in her position that written records were unnecessary because she handled many matters in cash and did her best to care for decedent. Even though the Respondent testified that records were not kept because she had no formal training or accounting skills, “the records are so bare that they do not meet the minimum of common skill or prudence.”

The Court stated that a surcharge against a fiduciary can only be initiated by an accounting by the fiduciary in question (which is the normal pattern), and the opposing party can file objections, and the court can then determine the amount of the surcharge, if any. And of course a party can appeal. In re Smith, 2006 Pa. Super.5; In re Estate of Bechtel, 92 A. 833 (2014); In re Novosielski, 605, Pa. 508, 992 A.2d 89 (2010).

The Court concluded that evidence was produced that warrants the filing of a formal accounting while the respondent was acting as the fiduciary, and that although the respondent may not be able to do so, the respondent should be given the opportunity to make a full accounting. Therefore, the Court granted the Petition to Compel the Accounting and deferred the request for Declaratory Relief until the accounting issue is resolved.

Forfeiture of Inheritance

The Orphan’s Court Division of the Court of Common Pleas of Monroe County, Pennsylvania was presented with a Petition for Forfeiture in Jansen Estate, 6 Fiduc. Rep., 3rd, page 375-381 (O.C. Monroe Co. 2016) .

The facts were as follows: The decedent was born on November 6, 1991, and suffered complications at birth which resulted in developmental delays and cerebral palsy. Subsequently, the decedent was declared to be an incapacitated person and the Petitioner (the mother) was appointed as the sole legal Guardian of the person and the estate. As result of complications, the Petitioner instituted a medical malpractice action which resulted in monetary settlement on behalf of the decedent. Petitioner and the father of the child separated soon after the child’s birth, and subsequently the father was incarcerated in 1993 until 1997 during which time, the father provided no care for the child from the time of his incarceration until the death of the child in 2014. The Petitioner and father were the sole heirs.

Title 20 of the Pennsylvania statutes 2106 (B) provides for forfeiture as follows .

(b) Parent’s share.–Any parent who, for one year or upwards previous to the death of the parent’s minor or dependent child, has:

(1) failed to perform the duty to support the minor or dependent child or who, for one year, has deserted the minor or dependent child; or

(2) been convicted of one of the following offenses under Title 18:

section 4303 (relating to concealing death of child);

section 4304 (relating to endangering welfare of children);

section 6312 (relating to sexual abuse of children);

or an equivalent crime under Federal law or the law of another state involving his or her child; shall have no right or interest under this chapter in the real or personal estate of the minor or dependent child. The determination under paragraph (1) shall be made by the court after considering the quality, nature and extent of the parent’s contact with the child and the physical, emotional and financial support provided to the child.

The Court concluded, after reviewing credible testimony and evidence, that the father deserted child, and/or failed to perform the duty to support the child in accordance with the above statute and therefore, the Petition for Forfeiture was granted.

Estate Tax Proposals

The estate tax proposal by Hillary Clinton, the Democratic Nominee for President, is to lower the exemption from $5,450,000 (which is subject to increases with inflation) to $3,500,000, and to increase the rate of tax from 40% to 45%.

The estate tax proposal by Donald Trump, the Republican Nominee for President, is to eliminate the estate tax.

The estate tax proposal by the Obama Administration is under proposed regulations issued on August 2, 2016, which would greatly eliminate valuation discounts regarding transfers of business entities between family members. A public hearing on these regulations is scheduled for December 1, 2016.