Tuesday April 23, 2024

1.3.6 Estate Tax Calculation and Form 706

Estate Tax Calculation and Form 706

Calculation Procedures:   The general structure of the gift calculation process follows.

Form 706 Due Date:   Form 706 is due nine months after the date of death.

Incomplete Gifts Due to Sec. 2036(a) Retained Control:   A common strategy for making optimum use of the gift exemption is to create a family limited partnership and then make gifts of limited partnership interests to children.

The calculation of estate tax is a cumulative process. That is, all prior gifts and prior taxes payable under current schedules are considered when calculating the current estate tax liability.

Calculation Procedures

The general structure of the gift calculation process is as follows:

TOTAL ESTATE	____________________
PRIOR NONCHARITABLE GIFTS	____________________
SUBTOTAL	____________________
MARITAL DEDUCTION	____________________
CHARITABLE DEDUCTION	____________________
NET ESTATE	____________________
TENTATIVE TAX	____________________
PRIOR CREDIT	____________________
NET ESTATE TAX	____________________

Example 1.3.6A Estate Tax Payable in 2024

Harold Wilson made gifts to his daughter Susan last year in excess of his annual exclusion. The excess gifts were $360,000. He passed away in the current year, leaving $3,000,000 to charity and the remainder of his estate to Susan

The Form 706 Estate Tax Return would be as follows:

Gross Estate	$15,560,000
Prior Noncharitable Gifts	$360,000
Total Estate:	$15,920,000
Marital Deduction	0
Charitable Deduction	$3,000,000
Taxable Estate	$12,920,000
Tentative Tax	$5,113,800
Credit	0
Estate Credit in Current Year	$5,389,800
Total Tax Due	$0

Form 706 Due Date

Form 706 is due nine months after the death of the decedent. Sec. 6651(a)(2). The filing of Form 706 will start the three-year statute of limitations, provided that there is "adequate disclosure." Reg. 25.2504-2.

Incomplete Gifts Due to Sec. 2036(a) Retained Control

A common strategy for making optimum use of the gift exemption is to create a family limited partnership and then make gifts of limited partnership interests to children. Typically, the gifted interests are discounted for both lack of marketability and minority interest. In addition to the discounts, future appreciation of the value of FLP assets will benefit the children.

With the very large discounts claimed, Treasury has a clear incentive to contest the gift values. The contests may be during life, but also can be after the demise of the FLP interest donor. In several cases, Treasury has successfully claimed that the gift was incomplete.

In Estate of Concetta H. Rector et al. v. Commissioner; T.C. Memo. 2007-367; No. 20860-05 (13 Dec. 2007), decedent created a 1991 irrevocable trust and transferred all of the marital trust assets to that trust. In 1998, when she was age 92, the decedent became a resident of a convalescent hospital and she and her son John Rector created the Rector Limited Partnership (RLP). RLP was funded with virtually all of her assets and held over $8.8 million in liquid investments. RLP had no business plan, no investment strategy, no investment management, no balance sheets, no income statements, no other financial statements and no formal meetings. Distributions from RLP for its first three years were over 90% to the decedent.

The court noted that Mrs. Rector depended on RLP for support. The court stated that this also was not "a bona fide sale for an adequate and full consideration in money or money's worth." In view of the court there was no significant nontax business purpose for the trust, the gift was incomplete and the assets were included in her estate.

Austin and Edna Korby created a living trust and the Korby Properties Limited Partnership (KPLP) in 1994. They both passed away four years later in 1998. KPLP received contributions of assets valued at $1,888,704. The Korby's gifted a 98% limited partnership interest in 1995 to four irrevocable trusts for their sons. A discount of 43.61% of value was claimed based on the minority discount and lack of marketability of the limited partnership interests.

The tax court determined that there was "an implied agreement" between the Korby's and their sons that all the income and assets of KPLP would be available to them for their lifetime. In Estate of Edna Korby et al. v. Commissioner; Nos. 06-1201, 06-1203 (8 Dec 2006), the Eighth Circuit affirmed the tax court. It noted that the tax court "did not clearly err in finding a retained right of control." The appellate court cited Strangi v. Comm'r, 417 F.3d 468 (5th Cir. 2005), Abraham v. Comm'r, 408 F.3d 26(1st Cir. 2005) and Thompson v. Comm'r, 382 F.3d 367 (3d Cir. 2004). The rationale of these cases is that a gift of family limited partnership interests is not effective if there is an implied agreement for access to the income and assets by the parents. Therefore, the majority of KPLP assets were included in the Korby estates under Sec. 2036(a).

In Mark W. Senda et ux. v. Commr.; No. 05-1118 (6 Jan 2006), the 8th Circuit affirmed a Tax Court decision denying any FLP discounts. The transfers of $2 million of WorldCom stock in 1998 and $1.5 million dollars of WorldCom stock in 1999 were treated as indirect gifts to the Senda minor children. Gift taxes were assessed using the full value of the WorldCom stock on the date of transfer.

The Sendas created Senda I FLP in the spring of 1998. On December 28, 1998 they transferred $2 million in WorldCom stock to the partnership. The three minor children had previously owned 0.01% of the trusts and the Sendas gifted their approximately 90% limited partnership interests to these children. On December 17, 1999, Senda II FLP was created. The children initially also owned 0.01% interest. On that date, Mark and Michele Senda transferred $1.5 million in WorldCom stock to Senda II FLP and gave approximately 98% limited interests to the three minor children. The Sendas filed gift tax returns and claimed FLP gift discounts for lack-of-marketability and minority-status.

The Tax Court found that the Sendas "presented no reliable evidence they contributed the stock to the partnerships before they transferred the partnership interests to the children." Since the transfers were either simultaneous or the stock was given after the partnership gifts, the court determined that the full stock value was a taxable gift.

The 8th Circuit determined that the factual records showed the transactions "were integrated and simultaneous." In response to the claim by the Sendas that the Tax Court had disregarded the FLP, the 8th Circuit noted the FLP was not ignored. Rather, the Tax Court recognized the existence of the FLP and then applied the federal law on indirect gifts and step transactions to decide the case. As a result of the simultaneous nature of the transactions and the unreliable record, the discounts were denied and the WorldCom stock transfers were taxed at full fair market value.

Private Letter Rulings

PLR 200206024 Estate Tax Apportionment Statute Applies to Beneficiaries of Taxpayer's Will and Trust: Pursuant to Taxpayer's estate plan, Taxpayer created a revocable trust and a will. Taxpayer's will provides that Taxpayer's residuary estate pass to Taxpayer's revocable trust. The term "residuary estate" means all of Taxpayer's estate of whatever nature and wherever situated that is not otherwise effectively transferred.

PLR 200626021 Extension to File an Election to Deduct Charitable Contributions in Previous Tax Years is Approved: B created Trust and subsequently died. Trust was to make certain bequests to charities upon B's demise. In year 1, after B's death, the trustee of Trust claimed a charitable income tax deduction based on amounts set aside for charitable gifts.

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