Post Mortem Estate Planning – Executors’ Elections



Estate’s Control Sheet

               Date other state(s) fiduciary income tax return(s) due:                       
               Alternate valuation date:            


                        Email:  



















All section references are to the Internal Revenue Code (“IRC”) unless otherwise indicated. “DNI” refers to distributable net income; “IRS” to the Internal Revenue Service; “QTIP” to qualified terminable interest property; “ERTA” to the Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, 95 Stat. 172; “TRA 1997” to the Taxpayer Relief Act of 1997, Pub. L. No. 105-34, 111 Stat. 788, “EGTRRA” to the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, “JGTRRA” to the Jobs and Growth Tax Relief Reconciliation Act of 2003, Pub. L. No. 108-27, the “2010 Tax Relief Act” to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No. 111-312, and “ATRA” to the American Taxpayer Relief Act of 2012, Pub. L. No.112-240.



I.    Introduction

A.                     Overview



1.                       During the course of the estate’s administration, an executor performs four basic functions. The executor:

a.                       Marshals assets;

b.                       Determines and raises cash needs;

b.                       Pays reasonable funeral expenses, debts, administration expenses, and taxes; and

c.                        Distributes assets in accordance with the decedent’s will.




2.                       In the performance of these tasks, the executor is faced with various alternatives, time limitations, and elections. Depending on the uniqueness of the estate, the executor may be faced with a multitude of elections and should be cautious in the exercise or non-exercise of each of them. The executor must consider the estate tax, gift tax, income tax, and generation- skipping transfer tax consequences of each election. An equitable adjustment may be required because of an executor’s election or the executor’s failure to make an election. The compression and reduction of the income tax rates for individuals, trusts, and estates caused by the Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085, has greatly influenced an executor when he or she makes an election. Non-tax factors, such as the beneficiaries’ needs or a beneficiary’s age may also have to be considered.






1.     An executor is required to provide written notice to the Internal Revenue Service of the creation or termination of the fiduciary relationship. §6903; Treas. Reg. §301.6903-1.

                        2.     Written notice is generally provided by Form 56, Notice Concerning Fiduciary Relationship.

3.     Treas. Reg. §301.6903-1(b)(2) provides the requirements for notices filed after April 24, 2002. The notice must be signed by the fiduciary and filed with the service center where the return of the person for whom the fiduciary is acting is required to be filed. The notice must state the name and address of the person for whom the fiduciary is acting, and the nature of such person’s liability; that is, whether it is a liability for tax, and if so, the type of tax and the year or years involved.

4.     If notice of fiduciary capacity is not provided to the Internal Revenue Service, notice of deficiency sent by the IRS to the deceased taxpayer’s last know address will be sufficient compliance with the requirements of the Internal Revenue Code, even though the taxpayer is deceased. Treas. Reg. §301.6903-1(c).














II.    Decedent’s Final Income Tax Return

A.                     Overview

1.                       The final return is due on the regular date for filing had the decedent lived for the entire taxable year, generally April 15. Treas. Reg. §1.6072-1(b).

2.                       It includes income and deductions of the decedent for a period beginning with the first day of the taxable year (generally January 1) and ending with the date of death.

3.                       The executor should consider securing an automatic six month extension of time to file the decedent’s final federal (using IRS Form 4868) and state personal income tax returns, if additional time is required.

4.                       The executor of an individual’s estate is not required to make installment payments of a taxpayer’s estimated income tax in respect of income earned in the period prior to death, where the installments are not due until after death. IRS Letter Ruling 9102010.

5.                       The executor should prepare and submit IRS Form 4506 to the appropriate IRS Center, if necessary, to secure the decedent’s prior years’ income tax returns. §6103(e).

6.                       The executor should make certain that decedent’s final Form W-2 does not include salary, commissions, and bonuses paid after death that are reportable as income in respect of a decedent on the estate’s fiduciary income tax returns.

7.                       Note that a decedent’s final income tax return must report all income actually distributed to that individual before death from a simple trust regardless of the date on which the trust’s fiscal year ends. §652. Income required to be distributed, but is in fact distributed to that individual’s estate, is included in the estate’s gross income as income in respect of a decedent under section 691. Treas. Reg. §1.652(c)-2.

8.                       Similar rule applies with respect to distributions made from an estate or a complex trust. §662; Treas. Reg. §1.662(c)-2.

9.                       For partnership tax years beginning after December 31, 1997, the death of a partner will result in the closing of the partnership’s tax year with respect to that partner. §706(c)(2)(A). The partnership’s tax year continues for the remaining partners. Consequently, partnership income or loss received by the partner through date of death will be reportable on that individual’s final personal income tax return. Is there any possibility of deferring or accelerating this income or loss prior to death?

10.                  The executor or administrator must sign the return, if an executor or administrator has been appointed.

a.                                                        a.   The surviving spouse and the fiduciary must sign the return if it is a joint return.

b.               If no fiduciary has been appointed, on a joint return, the surviving spouse should sign the return and write “Filing as surviving spouse” in the signature area.

11.                  The executor should prepare and file IRS Form 1310 (Statement of Person Claiming Refund Due a Deceased Taxpayer), with evidence of the fiduciary’s appointment to the appropriate Service Center, if income tax refund is due.

a.                Form 1310 will normally be filed by a fiduciary claiming a refund for the decedent on Form 1040X or Form 843.

b.                                                         b.           The executor need not file Form 1310 if:

i.          A surviving spouse is filing an original or amended joint return with the decedent.

ii.        A personal representative is filing an original Form 1040, Form 1040A, or Form 1040EZ for the decedent and is attaching a court certificate showing his or her appointment.











1.     The executor and surviving spouse can file a joint return on behalf of the decedent and surviving spouse, if the decedent was married at the time of death and the surviving spouse has not remarried before the end of the surviving spouse’s taxable year. §6013(a)(2). However, a joint return is not available if either spouse is a nonresident alien at any time during the taxable year. §6013(a)(1).

a.                           A joint return includes income and deductions of the decedent for the period ending at the date of death and includes a surviving spouse’s income and deductions for the entire year. Treas. Reg. §1.6013-1(d)(1).

b.                          Liability for the entire tax shown on the return is joint and several. §6013(d)(3). The executor should consider whether he or she is assuming a risk for the surviving spouse’s unknown tax liabilities.

c.                           Liability for joint tax must be allocated. The estate tax deduction for income taxes due is limited to that amount for which the decedent’s estate would be liable under local law. Absent contrary evidence, that deductible amount is determined as follows: the decedent’s separate tax liability divided by the combined separate tax liability of the decedent and the surviving spouse, multiplied by the total joint tax liability. Treas. Reg. §20.2053-6(f).

d.                          Consider filing a joint return if the decedent’s deductions exceed income, to avoid the loss of excess deductions in the final tax year. Excess capital losses and excess charitable deductions may be otherwise wasted, unless the surviving spouse has or can generate capital gains or other income in the final tax year.

e.                                  Review decedent’s previously filed income tax returns for carryovers (charitable contributions, capital losses, and net operating expenses) that may otherwise be lost if not taken on a joint return with the surviving spouse. Consider accelerating income to offset these losses (for example, making §454(a) election re Series E Savings Bonds or accelerating payouts under a deferred compensation plan).

f.                                    The primary advantage of filing a joint return is that the income is subject to more favorable tax rates; otherwise, the less favorable tax rate schedules for married persons filing separately must be used by each of the parties. For example, in 2014 with
$100,000 of taxable income, the federal income tax saving can amount to $4,921.

g.                                 The disadvantage of filing a joint return is the potential exposure to the estate by becoming jointly and severally liable with the surviving spouse for the entire tax and penalties.




2.     The surviving spouse may make a joint return with the deceased spouse if:

a.                                                                                                           a.                       The decedent has made no return for the taxable year;

b.                                                                                                           b.                   No executor has been appointed at or before the time of making the joint return;      and

c.                                  No executor is appointed before the last day prescribed by law for filing the surviving spouse’s return. Treas. Reg. §1.6013-1(d)(3).





3.     The executor may disaffirm a joint return filed by a surviving spouse.

a.                                  The joint return must be made in the form of a separate return for the taxable year of the decedent concerning which the joint return was made. Treas. Reg. §1.6013-1(d)(5).

b.                                 It must be made within one year after the last day prescribed by law for filing the surviving spouse’s return (including extensions). Id.

c.                                  The separate return made by the executor shall constitute the return of the deceased spouse for the taxable year.

d.                                                                                                          d.                      The penalty and interest for delinquent returns, as provided in                                                sections 6651 and 6601, are applicable to the return made by the                                         executor in disaffirmance of the joint return.




4.     The executor should consider making an election to file a joint return for the prior taxable years in which the decedent filed separate returns, for which a joint return could have been made by the decedent and the decedent’s spouse under section 6013(a). §6013(b)(1); Treas. Reg. §1.6013-2(a).









1.                       Under section 6501(d), a request for prompt assessment must be in writing, filed after the return in question has been filed, and filed with the district director for the internal revenue district in which the return was filed.

a.                The request must:

i.       Be transmitted separately from any other document;

ii.     Set forth classes of tax and taxable periods; and

iii.   Clearly indicate that it is a request for prompt assessment.



2.                       Its effect is to limit the time in which an assessment of tax may be made, or to start court proceedings in court without an assessment, to a period of 18 months from the date the request is filed with the proper district director. Treas. Reg. §301.6501(d)-1(b).




3.                       The special 18-month period of limitations does not apply to any return filed after the request has been filed unless an additional request is filed. Id.




4.                       Requests for prompt assessment can be made on IRS Form 4810, to insure that the requirements of Treas. Reg. §301.6501(d)-1 are satisfied. However, such a request may precipitate an audit.










1.                                                A request for discharge from personal liability must be in writing, filed after the return in question has been filed, and filed with the internal revenue office where the estate tax return is required to be filed. If no estate tax return is required to be filed, the application should be filed where the decedent’s final income tax return is required to be filed. §6905(a); Treas. Reg.
§301.6905-1(a).

a.                      Within nine months after receipt of the application, the executor shall be notified of the amount of taxes due and, upon payment thereof, shall be discharged from personal liability for any deficiency thereafter found to be due.

b.                                 If not notified, the executor will be discharged at the end of the nine-month period from personal liability for any deficiency thereafter found to be due.

c.                                  A discharge under this section from personal liability applies only to the executor in her personal capacity and applies only to the executor’s own assets; it does not apply to the executor’s liability in her fiduciary capacity to the extent of the estate’s assets in her possession or control.





2.                                                An executor should request a discharge from personal liability on IRS Form 5495.





3.                                                A request for discharge from personal liability may precipitate an audit.














1.                                               Cash-basis owners of Series E savings bonds and similar obligations normally do not elect to report each year the increase in their redemption price as taxable income.


2.                                               If a decedent failed to make this election, the executor may do so and the bonds previously unreported interest will be included in the gross income on the decedent’s final income tax return. §454(a); Rev. Rul. 68-145, 1968-1 C.B. 203.


3.                                               The executor may make this election on the decedent’s final income tax return if the bonds are held in a revocable trust and the decedent did not make the election. Rev. Rul. 79-409, 1979-2
C.B. 208.


              4.                                               If a section 454(a) election is made:

a.                                                                     a.                  The executor must make the election for all bonds - Series E, EE, and Series H                                          and HH U.S. savings bonds (bonds acquired by the decedent in exchange for                                       Series E or EE savings bonds).

b.                                                         
                                                            b.                  The income tax liability attributable to the accrued interest                                          constitutes        a deduction for federal estate tax purposes.

c.                                                                    c.          The section 691(c) deduction is lost.

d.                                                  d.   The election presents a good opportunity for accelerating income on the                                            decedent’s final return; the estate may need additional income to avoid a loss                             of excess deductions in the final year.

e.                                The election may be advantageous if the decedent is in the 10 percent or 15 percent bracket and the beneficiaries of the bonds are in the 35 percent or 39.6 percent bracket.

f.                                  Neither the estate nor any subsequent beneficiary is bound to report interest annually in subsequent years unless they elect to do so. Treas. Reg. §1.454-1(a)(1). Consequently, the beneficiary who receives the bonds may defer tax on the interest accrued on them until redemption.






5.                                               If a section 454(a) election is not made:

a.                                                       a.     Unreported interest is income in respect of a decedent, taxable under                                       section 691(a) to the estate or beneficiary, and subject to                                                                the income tax deduction allowed                under section 691(c).

b.                               The executor may make the election on a subsequent fiduciary income tax return. This practice may be desirable if there is a short first taxable year for an estate with little other income.

c.                                                c.   The executor can redeem bonds to allow the estate to report a portion of                                        accrued income over a number of taxable years; however, the executor                               should plan the redemptions to avoid any loss of interest.

d.                                                 d.     The executor should consider distributing the bonds to residuary                               beneficiaries of the estate who would report all accrued interest on their own                          personal income tax returns in the earlier of the tax year in which they make a                       section 454(a) election, or in which they redeem the bonds. Rev. Rul. 64-104,                    1964-1 C.B. 223.

e.                                          e.  Bonds are includable in the gross estate at a value equal to the sum of the                         principal and accrued interest, regardless of whether the executor made the                           section 454(a) election.







F.                      Medical Expenses

1.     The executor may deduct unpaid medical expenses either as a medical expense on the decedent’s income tax return or on the estate tax return, at the election of the executor.
§§213(c), 2053(a)(3).

2.     If the executor pays the expense during the one-year period after death, medical expenses may be deducted on the return for the year when the expenses were incurred, but the executor must waive the right to deduct those expenses for federal estate tax purposes. Treas. Reg. §1.213- 1(d)(2).

                   3.                                         A 7.5 per cent threshold applies for income tax purposes.

a.   If the decedent has not satisfied the 7.5 per cent threshold before death, the portion of the medical expenses paid after death required to meet the threshold amount may not produce any tax benefit.

b.   The portion of medical expenses below the 7.5 per cent threshold may not be claimed for estate tax purposes, if medical expenses above the 7.5 per cent threshold are deducted on the income tax return. Rev. Rul. 77-357, 1977-2 C.B. 328.

c.   This provision does not apply to medical expenses that the decedent incurs on a dependent’s behalf.

4.                            If the executor takes the deduction for medical expenses for income tax purposes:

a.                                                                                                                                         a.   If the expenses were incurred in the year before the final year, the executor will have to deduct those expenses on that year’s return, possibly requiring an amended return.

b.   The deduction may reduce the final income tax liability, thus reducing the deduction of that liability on the estate tax return, thereby increasing the estate tax.

c.   If no estate tax is due, this may cause the credit shelter bequest to be decreased and the marital deduction bequest to be increased - the executor must take the potential future estate tax into consideration.

d.   This deduction is normally more valuable for estate tax purposes. If this deduction is taken on the estate tax return, the section 2053 deduction for the decedent’s income tax liability will increase.

e.   A determination of where to deduct medical expenses will give the executor the power to change dispositive consequences and may require some sort of equitable adjustment, as in the case of administration expenses and casualty losses.








1.                       Fees and commissions paid to the executor for services rendered are deductible by the estate either on the estate tax return or the estate’s income tax return (or partially on each), as the executor chooses. §§642(g), 2053(a)(2); Treas. Reg. §1.642(g)-2.



2.                       The compensation is also taxable income. §61.




3.                       The executor must consider these factors:

a.                                                           a..      Whether the executor is also a beneficiary of any portion of the estate.

b.                The personal liability assumed by the executor. For example, see 31 U.S.C.A. §3713, which imposes personal liability on fiduciaries for paying debts or distributing assets, which result in insufficient funds available to satisfy a decedent’s tax obligations.

c.                                                   c.          The estate’s net incremental estate tax bracket and income tax bracket versus the executor’s marginal income tax bracket.

d.                If beneficiaries are of a younger generation than the executor, the executor’s waiver passes the fees down without incurring estate or gift tax.




4.                       Taking commissions brings income tax advantages to the estate and beneficiaries.

a.                The commissions reduce the estate’s taxable income during the tax year; however, check local law to determine whether a court order is required for the advance payment of commissions.

b.                                                             b.      Excess deductions are passed through to the beneficiaries in the final year. §642(h).

i.                      Section 67 makes this planning technique less valuable to individuals since those excess deductions are no longer deductible except to the extent that they exceed two per cent of the individual’s adjusted gross income.

ii.                  However, it is still a viable planning technique for individuals whose miscellaneous itemized deductions already exceed two per cent of adjusted gross income.

iii.             They may be able to keep the estate open for a longer period of time by using the deduction for commissions to offset additional estate income.






5.                       If a fiduciary is taking commissions, determine whether local law authorizes the payment of compensation in excess of the commissions prescribed by statute, if he or she renders extraordinary services.



6.                       The IRS issued guidelines on when the executor may waive the right to receive commissions without incurring income tax or gift tax liability. Rev. Rul. 66-167, 1966-1 C.B. 20. The executor may do so:

a.                                                           a.       If the executor formally waives the right to compensation for services within six months after the initial appointment.

                                   b.                If the executor fails to claim fees or commissions at the time of filing usual accountings, and all other attendant facts and circumstances are consistent with a continuing intention to serve gratuitously.

                                     c.                “If the timing, purpose, and effect of the waiver make it serve any other important objective, it may then be proper to conclude that the fiduciary has thereby enjoyed a realization of income by means of controlling the disposition thereof, and at the same time, has also effected a taxable gift by means of any resulting transfer to a third party of his contingent beneficial interest in a part of the assets under his fiduciary control.” Rev. Rul. 66-167, 1966-1 C.B. 20; see also Breidert v. Commissioner, 50 T.C. 844 (1968), acq., 1969-2 C.B. xxiv.














A.                     Selection of the Tax Year

1.                       Section 644, which requires all trusts to adopt a calendar year as their taxable year, does not apply to estates.

a.                                                        a.     This provision eliminates the ability of trusts to defer taxes on amounts distributed to trust beneficiaries.

b.               The rule does not apply to tax-exempt trusts (described in section 501(a)) and wholly charitable trusts (described in section 4947(a)(1)). §644(b).





2.                       Under the current law, the selection of an estate’s tax year is still one of the most important elections that the executor must make.




3.                       The election is made on the first fiduciary income tax return, which is due three and one half months after the close of the taxable year. Treas. Reg. §1.6072-1(a).

a.                                                         a.      It allows the executor to use hindsight in making the election.

                                   b.               The primary objectives of the election are to:

i.       Equalize the income tax brackets of the estate and beneficiaries.

ii.     Defer payment of income taxes.

iii.   Use the estate’s $600 exemption and separate taxpayer status.

iv.    Satisfy the immediate financial needs of the beneficiaries.

                                     c.                Before the election is made, the executor should project the anticipated income and estimate allowable deductions for a succeeding 12-month period.





4.                       Make the election by the statutory due date of the first return. An estate’s taxable year is adopted by filing its first Federal income tax return using that taxable year. Treas. Reg.
§1.441-1(c)(1). Any change to another accounting period requires the prior approval of the Commissioner. Treas. Reg. §1.441-1(e).




5.                       For tax years ending after May 16, 2002, the filing of an application for an extension of time to file the estate’s first income tax return with the payment of the tax due will no longer establish the estate’s taxable period for tax reporting purposes. Rev. Rul. 69-563, 1969-2 C.B. 104, obsoleted by T.D. 8996, 67 Fed. Reg. 35009 (5/16/02), which published Treas. Reg. §1.441- 1(c)(1).




6.                       The estate’s first tax year need not run a full 12-month period. Depending on the anticipated flow of income and actual deductible expenses, a shorter period should sometimes be used for the first tax year.

a.                A situation may exist wherein during the early months of administration, the estate receives substantial sums of non-recurring items of income, such as salaries, bonuses, commissions, deferred compensation, and other forms of income in respect of a decedent.

i.       If the first year is terminated before the receipt of substantial sums of income, the tax on this income can be deferred more than one year.

ii.     The executor may want to split the income into two separate tax years, to avoid the bunching of income in any one year.

b.               The beneficiaries may require substantial distributions shortly after the decedent’s death. If a distribution is made in an initial short tax year, the estate should have little distributable net income that would be tracked out to the beneficiary when the distribution is made.

c.                The executor may select a short fiscal year to reduce income receivable in the current year, if income tax rates are expected to decrease.





7.                       The selection of the proper fiscal year may defer the beneficiary’s realization of taxable income. Beneficiaries report distributions for their taxable year with which or within which the estate’s year ends. §662(c).

a.                Example - The decedent dies August 1, 2014 and the estate selects the first fiscal year ending January 31, 2015. Any distribution to a beneficiary during this period will be deductible for the fiscal year ending January 31, 2015 and taxable to the beneficiary for the year ending December 31, 2015. Consequently, the beneficiary will not have to pay taxes on the income until April 15, 2016.

b.               Section 644 has substantially reduced the use of tax deferral, when the testamentary trust is involved.

c.                The executor should consider an initial long year if the beneficiaries have no immediate need for a distribution and an estate has not received substantial sums of non-recurring items of income.

d.               An initial long year may be attractive if the estate incurs substantial deductible expenses early in the period of administration.






8.                       The executor may select a long fiscal year to receive as much income as possible in current tax year, if increase in income tax rates is expected.





9.                       The executor may also select a calendar year.



10.                  The election of the tax year requires careful analysis.

a.                                           a.               The executor must analyze the income earned and the deductible expenses incurred.

                            b.               The executor must make the election early enough so as not to lose the opportunity to select a short fiscal year.




11.                  During first nine months of the estate’s administration, the maximum of earning assets are usually present. If the executor fails to adopt a fiscal year, the estate must file its income tax return on a calendar-year basis. Treas. Reg. §1.441-1(b)(4).
















B.                     Treating Qualified Revocable Trust as Part of Decedent’s Estate for Federal Income Tax Purposes – Section 645

1.                                               For estates of decedents dying after August 5, 1997, the TRA 1997 added new section 646, later redesignated section 645, which grants an election to treat a qualified revocable trust as part of the decedent’s estate for federal income tax purposes. To be treated as a “qualified revocable trust”, the trust must be one that was treated as owned by the decedent as a result of a power held by her or him. §645(b)(1).

                                        a.                                 The election must be made by both the trustee of the revocable trust and the executor of the estate, if any. §645(a).

b.                                The election must be made no later than the due date for filing the estate’s income tax return for its first year, including extensions. §645(c).

                                         c.                                 Once made, the election is irrevocable. Id.




2.                                               The election is effective for two years from the date of decedent’s death, if no federal estate tax return is required, or six months after the final determination of estate tax liability, if a federal estate tax return is required. §645(b)(2).

3.                                               The procedure for making the election to treat the revocable trust as part of the estate was initially found in Revenue Procedure 98-13, 1998-1 C.B. 370.

4.                                               To make the election, a required statement must be attached to a U.S. Income Tax Return for Estates and Trusts (Form 1041). The statement must provide the following:

                                            a.                                 Identify the election as a section 645 election;

                                           b.                                Contain the decedent’s name, address, date of death, and taxpayer identification number (TIN);

c.                                 Contain the trust’s name, address and TIN; however, if the trust does not have a TIN because the trust was reporting under the alternate grantor trust reporting requirements of Treas. Reg. §1.671-4(b)(2)(i)(A), the trustee must obtain a TIN, unless a Form 1041 does not have to be filed (see Rev. Proc. 98-13, 1998-1 C.B. 370, Sec. 3.01(3));

                                          d.                                Contain the estate’s name, address and TIN;

e.                                 Represent that the trust for which the election is being made was treated under section 676 as a grantor trust owned by the decedent due to the decedent’s power to revoke the trust; and

f.                                   Be signed by both the estate’s executor or administrator and a trustee of the qualified revocable trust. Rev. Proc. 98-13, Sec. 3.01(6).



5.                                               The original required statement must be attached to the estate’s Form 1041 for its first taxable year. A copy of the required statement must be attached to the trust’s Form 1041 for the taxable year ending after the date of decedent’s death. The election is considered made upon the earlier of such filings. Once made, the election is effective from the date of decedent’s death. Rev. Proc. 98-13, Sec.3.02.

6.                                               If the section 645 election is made, the income, deductions and credits attributable to the qualified revocable trust for the period subsequent to decedent’s death, must be excluded from the trust’s Form 1041 for the taxable year ending after the date of decedent’s death and must be reported on the estate’s Form 1041. Id.

7.                                               If there is no probate estate, and neither an executor nor an administrator will be appointed, a trustee of the qualified revocable trust must sign every Form 1041 for the estate. Id.

8.                                               Qualified revocable trust secures similar income tax treatment as an estate when the section 645 election is made.

a.                                 Trust will now be allowed a charitable deduction for amounts permanently set aside for charitable purposes, without requirement that such amount be paid in order to secure a charitable deduction (see §642(c)).

b.                                Trust will now be able to report its income on a fiscal year basis rather than on a calendar year basis.

c.                                 The active participation requirement under the passive loss rules will now be waived for qualified revocable trusts for two years after the settlor’s death (see §469(i)(4)).

9.                                               On December 18, 2000, the IRS issued proposed regulations under section 645 which contained different procedures for making the election and for filing the short year return for a Qualified Revocable Trust (QRT).

a.                                 In most situations, Rev. Proc. 98-13 required a trust that made a section 645 election to secure a taxpayer identification number (TIN) and to file a Form 1041 for the trust’s short taxable year beginning at decedent’s date of death and ending on December 31 of that year.

                                         b  .                                Under the proposed regulations, if a section 645 election was made for the trust, the trustee and the personal representative, if any, may choose not to secure a TIN for the trust or file a Form 1041 for the trust’s short tax year – the section 645 was considered made only after a Form 1041 was filed, with the requisite election statement attached, for the first taxable year of the related estate, or, if there was no personal representative, the first taxable year of the trust filing as an estate. Prop. Reg. §1.645-1(c). Here, the trust’s income, deductions and credits were included on the combined Form 1041 for the electing trust and the related estate under the related estate’s TIN. Prop. Reg. §§1.645- 1(d)(1)(i) and (ii)(A).

                                        c.                                 In response to numerous requests that taxpayers be permitted to use the procedures set forth in the proposed regulations prior to the date final regulations were issued, the IRS had indicated that it would allow estates and qualifying revocable trusts of decedents who died after December 31, 1999 and before the effective date of the final regulations to choose either the election and reporting procedures set forth in Rev. Proc. 98-13, or those enumerated in Prop. Reg. §1.645-1(c) and Prop. Reg. §§ 1.645-1(d)(1)(i) and (ii)(A). (Notice 2001-26, 2001-13 I.R.B. 942).






10.                                      The IRS has now issued final regulations under Section 645, effective for estates and trusts of decedents dying on or after December 24, 2002. Rev. Proc. 98-13 and Notice 201-26 are obsolete as of December 24, 2002.


11.                                      The section 645 election may be made whether or not an executor is appointed for the estate. Treas. Reg. §1.645-1(c).
a.                                 If an executor is appointed, the executor and the trustee of the QRT make the 645 election by filing a form provided by the IRS for making the election (election form). Treas. Reg. §1.645-1(c)(1)(i).

                                        b.                                If an executor is not appointed, the trustee of the QRT makes the 645 election by filing the election form. Treas. Reg. §1.645-1(c)(2)(i).

c.                                 The election form, IRS Form 8855, “Election to Treat a Qualified Revocable Trust as a Part of an Estate,” was issued in March 2004.




12.                                      Regardless of whether there is an executor for the estate and regardless of whether a section 645 election will be made for the QRT, a taxpayer identification number (TIN) must be obtained for the QRT following the decedent’s death. The trustee must furnish the TIN to the payors of the QRT. Treas. Reg. §1.645-1(d).

13.                                      If the trustee of the QRT elects to make a section 645 election, the trustee is not required to file a Form 1041 for the QRT for the short taxable year beginning with the decedent’s death and ending on December 31 of that year. Treas. Reg. §1.645-1(d)(2)(i).

14.                                      Regardless of whether or not there is an executor, the trustee of the QRT must file a Form 1041 for the short taxable year beginning with the decedent’s death and ending on December 31 of that year, if a section 645 will not be made for the trust, or if the trustee and executor, if any, are uncertain whether a section 645 election will be made for the QRT. Treas. Reg.
§1.645-1(d)(2)(ii).

15.                                      Election period terminates on earlier of the day on which both the electing trust and related estate, if any, have distributed all of their assets or the day before the applicable date. Treas. Reg. §1.645-1(f)(1).

a.                  If no Form 706 is required to be filed, applicable date is the day which is 2 years after decedent’s date of death. Treas. Reg. §1.645-1(f)(2)(i).

b.                 If Form 706 is required to be filed, applicable date is later of the day which is 2 years after decedent’s date of death, or the day that is 6 months after final determination of liability for estate tax. Treas. Reg. §1.645-1(f)(2)(ii).







C.                     Payment of Estate Income Tax

1.                                               Estates and trusts are required to make estimated payments of income tax in the same manner as individuals. §6654(1).

a.                  Estates in the first two years following decedent’s death are exempted from this requirement.

b.                 Any grantor trust to which the decedent’s residuary estate is payable is exempted from this requirement in the first two years following decedent’s death. §6654(1)(2).

c.                  Private foundations and charitable trusts that are taxed on unrelated business income under
§511 are also exempted from this requirement. §6654(l)(3).

d.                 Trusts are required to make estimated payments commencing with the first taxable year, except as provided in (b) and (c) above.

e.                  Although trusts compute their taxable income as of a date that is one month earlier than the cutoff date used by individual for making estimated payments, the due date for the estimated payments is the same for both.







1.                                               A trustee can elect to treat any portion of excess estimated payments for any tax year as a payment made by the beneficiary or beneficiaries. That sum or amount will be treated as a distribution paid or credited to a beneficiary on the last day of the applicable tax year. §643(g).

a.                                 The election must be made on Form 1041-T, Allocation of Estimated Tax Payments to Beneficiaries, and the election must be filed within 65 days following the close of the trust’s tax year. §643(g)(2).

b.                                The sum or amount so treated shall be treated as a payment of estimated tax made by the beneficiary on January 15 following the close of the trust’s tax year. §643(g)(1)(C).

2.                                               In the case of a taxable year reasonably expected to be the last taxable year of an estate, a fiduciary may elect to treat any amount of an estimated tax payment made by an estate as a payment made by the beneficiaries. §642(g)(3).







1.                                                Section 643(e) governs all non-cash distributions. The distribution of appreciated (or depreciated) property results in a gain (or loss) to the trust or estate, only if an election is made to recognize the gain (or loss). §643(e)(3).

2.                                                If a section 643(e) election is made:

a.                                 The gain or loss will be recognized by the estate or trust as if the property had been sold to the beneficiary at the property’s fair market value. §643(e)(3)(A)(ii).

b.                                The estate or trust will be allowed a distribution deduction equal to the fair market value of the property distributed. §643(e)(3)(A)(iii).

c.                                 The beneficiary will receive ordinary income equal to the fair market value of the property distributed (to the extent of the beneficiary’s share of DNI from the trust or estate). Id.

d.                                The beneficiary’s basis in the distributed property will be the property’s fair market value on the date of distribution. §643(e)(1).

3.                                                If a section 643(e) election is not made:

                                     a.                                 The distribution is treated as carrying out DNI only to the extent of the lesser of the property’s adjusted basis or its fair market value at the time of distribution. §643(e)(2).

b.                                The beneficiary will receive ordinary income equal to the lesser of the property’s adjusted basis or its fair market value (to the extent of the beneficiary’s share of DNI from the trust or estate). Id.

                                         c.                                 The beneficiary’s basis in the distributed property will be the same as the trust’s or estate’s basis.

                                    d.                                The recognition of any gain or loss will be deferred until the beneficiary sells the property.


4.                                                The executor must make the election on the income tax return for the taxable year in which the distribution was made.

a.                                 The election shall apply to all distributions made by the executor or trustee during the taxable year.

b.                                Once made, the election is irrevocable, except with the Secretary’s consent.
§643(e)(3)(B).

5.                                                This provision does not apply to distributions described in section 663(a) - distributions of property to satisfy a specific bequest or certain charitable distributions. §643(e)(4).

6.                                                A primary benefit of making a section 643(e) election is to offset the trust’s or estate’s capital losses in current tax year.

7.                                                Advise a trustee against making the section 643(e) election for assets worth less than their cost basis, to avoid creating loss that would be non-deductible under section 267(a)(1).

8.                                                An interesting planning opportunity arises if a trustee of a discretionary trust distributes appreciated property in kind to a charitable - minded trust beneficiary and the trustee does not make a section 643(e) election. If the beneficiary transfers the property to a charity, the gift will qualify for a charitable income tax deduction at its fair market value on the date of transfer
– without recognition of any capital gains by the trust or the beneficiary.

9.                                                Regardless of whether the section 643(e) election is made, inform each beneficiary of the cost basis of all assets distributed in kind.






1.                                               A trustee of a complex trust has for many years been able to elect to treat certain distributions made within 65 days after the close of the trust’s tax year as having been made earlier, on the last day of that previous tax year. §663(b).

2.                                               For taxable years beginning after August 5, 1997, the TRA 1997, which amended section 663 (b), has made this election available to an executor of an estate.

a.   The election will provide greater flexibility in timing distributions for tax purposes, since an executor can now make a decision based on known information rather than estimated projections.

b.   Due to the great disparity between the federal income tax rates applicable to individuals and estates, this election will allow an executor to better coordinate the income tax planning for an estate and the beneficiaries. The following Tables can be used to determine the federal income tax liability for an estate or trust for tax years beginning in 2014 and 2015.

3.                                               The election is made by checking the box on line 6, page 2, of the Form 1041 under “Other Information.”

a.   The election must be made no later than the due date for filing the fiduciary income tax return, including extensions. Treas. Reg. §1.663(b)-2(a)(1).

                                              b.   The election is irrevocable after the last day prescribed for making it. Id.

                                              c.   The election is effective only for the taxable year for which it is made. Treas. Reg.
§1.663(b)-1(a)(2).

4.                                               Does the 65 day rule apply to an estate in final tax year?






A.                     Final Tax Year

1.                       Since the estate is a separate entity for income tax purposes, there are tax advantages in maintaining the existence of an estate as long as possible.
  
                                          a.                                  The estate will be considered terminated when all assets have been distributed except for a reasonable amount set aside for unascertainable or contingent liabilities (not including claims by a beneficiary in that capacity). Treas. Reg. §1.641(b)-3(a).

b.                                 If the estate’s administration is unreasonably prolonged, the estate will be considered terminated for income tax purposes after the expiration of a reasonable period for the performance by the executor of all duties of administration. Id.

                                         c.                                  The estate can be kept open if reasonable grounds or a bona fide purpose exist for holding the estate open:

i.                      The payment of estate tax in installments under section 6166. Rev. Rul. 76-23, 1976- 1 C.B. 264.

ii.                  The prosecution of a tax refund claim. McCauley v. U.S., 193 F. Supp. 938 (E.D. Ark. 1961).

iii.              The payment of claims from estate income to avoid the sale of valuable assets at a sacrifice. Carson v. U.S., 317 F.2d 370 (Ct. Cl. 1963).

                                                d.                                 The IRS will not issue advance rulings or determination letters on whether the period of administration or settlement of an estate is reasonable or unduly prolonged. Rev. Proc. 98-3, 1998-1 C.B. 100, superseded by Rev. Proc. 99-3, 1999-1 C.B. 103, superseded by Rev. Proc. 2000-4, 2000-1 C.B. 115.



2.                       The executor can achieve income tax savings by the wise selection of an estate’s final year.
  
                                           a.                                  Excess deductions are lost in any other year.

                                        b.                                 Only in the year of termination can beneficiaries take advantage of excess deductions (deductions in excess of estate’s or trust’s gross income). §642(h). However, section 67 makes this election less valuable to the extent that a portion of those excess deductions may not be deductible to an individual beneficiary, except to the extent that those deductions exceed two per cent of that individual’s adjusted gross income.

                                    c.                                  In the year of termination, excess deductions pass to “beneficiaries succeeding to the property of the estate or trust.” §642(h). Generally, these beneficiaries are the residuary beneficiaries of an estate or the remaindermen of a trust. Treas. Reg. §1.642(h)-3(c),(d).

i.                      The excess deductions are passed through to beneficiaries on Schedule K-1 of Form 1041.

ii.                  They are useful only to beneficiaries who itemize since they are not allowable in determining the beneficiary’s adjusted gross income. Treas. Reg. §1.642(h)-2(a).

                                        d.                                 Since the two per cent floor imposed by section 67(a) does not apply to trusts and estates, the executor may consider terminating the estate in favor of trusts or other estates, where otherwise appropriate and authorized. §67(c).

                                         e.                                  The estate’s $600 personal exemption is lost in its final year.






3.                       Avoid the “bunching of income” and excess income build-up in the final year.

                                       a.                                  Upon the termination of an estate that is on a fiscal year, it is possible for a residuary beneficiary to receive more than 12 months income in one taxable year. For example, if an estate with a fiscal year ending March 31, 2015 terminates on November 30, 2015, the residuary beneficiary will be taxed on a full year’s income, to the extent of distributions and distributable net income, plus income for the final eight-month period. Selection of a January 31, 2016 termination date would avoid this “bunching of income.”

                                         b.                                 In the final year, all of the estate’s net income is distributed to the beneficiaries, and is therefore taxable to them. Consider terminating the estate shortly after the close of the prior taxable period to reduce the total income earned during the final year.




4.                       The executor should coordinate the timing of the estate’s termination with the beneficiaries’ income tax planning.

                                             a.                                  The executor should advise residuary beneficiaries of their right to claim deductions for losses and excess deductions of the estate or revocable trust pursuant to section 642(h), and of their potential income tax liability for income received in the final year.

                                           b.                                 Advise beneficiaries of need to accelerate receipt of other income, to offset excess deductions and losses passed through in the estate’s final year.









1.                 Generally, the U.S. Estate Tax Return (Form 706), must be filed within nine months after the date of death. §6075(a).

2.                 Unless an extension of time for filing the estate tax return has been granted, if there is no numerically corresponding date in the ninth month, the due date is the last date of the ninth month. For example, if the decedent dies on July 31, 2015, the estate tax return is due on April 30, 2016. If the due date falls on a Saturday, Sunday, or a legal holiday, the return is due on the next succeeding day which is not a Saturday, Sunday, or legal holiday. Treas. Reg. §20.6075-1.

3.                 Effective for estate tax returns due after July 25, 2001, an executor will be allowed an automatic six-month extension of time to file the Form 706. An automatic extension will be allowed if the application:

a.        Is filed on or before the date prescribed in §6075(a) for filing the return;

b.        Is filed with the appropriate IRS office designated in the application’s instructions (except as provided in Treas. Reg. §301.6091-(b) for hand-carried documents); and

c.        Includes an estimate of the full amount of estate and generation skipping transfer tax due. Treas. Reg. §20.6081-1(b).

4.                 The application should be made on IRS Form 4768 (Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes). It should be made before the expiration of time within which the return must otherwise be filed and failure to do so may indicate negligence and constitute sufficient cause for denial. Treas. Reg. §20.6081-1(c).

5.                 The Internal Revenue Service may, upon a showing of good and sufficient cause, extend the time for filing the estate tax return for a period not to exceed six months from the usual date the return is due in certain situations. Treas. Reg. §20.6081-1(c). Such an extension may be granted to an estate that did not request an automatic extension of time to file the Form 706. In that case, the Form 4768 must also contain an explanation showing good cause for not requesting the automatic extension. Id.

6.                 An extension of time to file the return will not operate as an extension of time to pay the estate tax. Treas. Reg. §20.6081-1(e).

7.                 Note the penalty for filing a late return - 5 percent (of the amount of tax) for the first month and an additional 5 percent for each additional month or part thereof, up to a maximum of 25 percent. §6651(a)(1).

8.                 The executor should give serious consideration to securing an automatic six-month extension of time to file the estate tax return when assets pass to a QTIP trust. If the surviving spouse dies or becomes seriously ill within the six-month extension period, the executor may wish to make a partial QTIP election (or elect not to make a QTIP election) to reduce the combined estate taxes. The executor may wish to pay some estate tax in first estate, causing a reduction of surviving spouse’s estate, to equalize brackets and to secure a section 2013 credit for transfers previously taxed for estate taxes attributable to the spouse’s income interest on taxable portion.

B.                     Deferral of Payment of Estate Tax - Section 6161

1.                                               Generally, the U.S. Estate Tax Return (Form 706) is due nine months after the date of death, and the tax must be paid in full with the return. §§6075(a); 6151(a).

2.                                               A district director or a director of a regional service center may extend the time for payment of the estate tax for 12 months from the usual date payment is due.
§6161(a)(1). If an extension is granted, the time for payment of the estate tax is postponed until 21 months after the date of death.

3.                                               If reasonable cause exists, a district director is authorized to grant an extension for a reasonable period not to exceed 10 years from the due date for payment of any part of the estate tax owed by the estate. If the estate tax has been deferred under section 6166, the extension of time for reasonable cause cannot be extended beyond 12 months after the due date for the last installment. §6161(a)(2). An extension may be granted if:

a.        The estate includes sufficient liquid assets to pay the estate tax when otherwise due; however, the assets are located in several jurisdictions, not immediately subject to the executor’s control.

b.        A substantial part of the assets of the estate consists of the rights to receive payments in the future (annuities, copyright royalties, contingent fees, or accounts receivable).

c.        The estate includes a claim to substantial assets that cannot be collected without litigation.

d.        The estate does not have sufficient funds to pay estate tax and also provide funds to pay a reasonable family allowance and to satisfy claims against the estate. Treas. Reg. §20.6161-1(a).

4.                                               An application for an extension of time for payment of the estate tax must:

a.        Be in writing;

b.        Identify the period of time for which the extension is requested;

c.        Include a statement of the reasonable cause, if the application is based upon reasonable cause; and include a declaration that the statement is made under penalties of perjury. Treas. Reg. §20.6161-1(b).

5.                                               The application should be made on IRS Form 4768 (Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes).

a.        The General Instructions accompanying the Form 4768 indicate that the request must be filed with the Department of the Treasury, Internal Revenue Service Center, Cincinnati, Ohio 45999.

b.        The application will not be considered unless it is filed on or before the date fixed for payment of the tax. Id.

6.                                               The executor should consider including in the section 6166 election a request under Treas. Reg. §20.6161-1(b), that the election be treated alternatively as a request for extension under section 6161, if the estate does not qualify for section 6166.

7.                                               An extension for the payment of the tax:

a.        Will not relieve the executor from the duty of filing a timely return. Treas. Reg.
§20.6161-1(c)(3).

b.        Will not relieve the estate from liability for payment of interest on tax deferred during the period of the extension. Treas. Reg. §20.6161-1(c)(2).

i                          The amount deferred bears interest from the due date of payment at a rate of interest adjusted quarterly according to section 6621. §6601.

ii                      The interest rate on an underpayment is equal to the short-term federal rate plus three percentage points. §6621(a)(2).

iii                  For the calendar quarter beginning April 1, 2015, the section 6621 interest rate is three percent. Rev. Rul. 2015-5, 2015-13 I.R.B. 788.

c.        The district director may require a bond in an amount up to twice the deferred amount. §6165.

8.                                               The IRS will not grant an extension if the deficiency is on account of negligence, intentional disregard of rules and regulations, or fraud with intent to evade tax.
§6161(b)(3). If the request for extension is denied, a written appeal may be made by registered or certified mail or hand delivery to the appropriate regional commissioner within 10 days after the denial is mailed to the executor. Treas. Reg. §20.6161-1(b).


1.     Administration expenses and casualty losses, herein “administration expenses,” can be used as deductions in computing the decedent’s taxable estate and the estate’s taxable income in whatever proportion the executor wishes to allow for either purpose. §§642(g); 2053(a)(2); Treas. Reg. §1.642(g)-2. For a comprehensive article on this topic, see Mariani, “Form 1041 vs. Form 706: Where to Deduct Administration Expenses,” Trust & Estates, June 1984, p. 37.

2.        Types of administration expenses are:

                           a.                Executors’ commissions;

                             b.               Attorneys’ fees;

                             c.                Court fees;

                               d.               Accountants’ fees;

                                e.                Appraisers’ fees;

f.                 Brokerage fees for selling estate property;

                                 g.               Auctioneers’ fees for selling estate property;

                                  h.               Costs incurred to store, insure, or maintain estate property;

i.                  Expenses incurred to collect assets, pay debts, and distribute assets to persons entitled to them; and

                                     j.                  Interest on federal and state income tax deficiencies that accrue after death.



3.     Generally, administration expenses can be deducted against only one tax. §642(g). This rule does not apply to deductions for taxes, interest, business expenses and other items accrued at decedent’s death; these “deductions in respect of a decedent” are deductible for estate tax purposes under section 2053(a)(3) and for income tax purposes under section 691(b). Treas. Reg. §1.642(g)-2. The rule also applies to selling expenses incurred in disposing of an estate’s property. Expenses can be used either as an offset against recognized gain or an administrative expense deduction for estate tax purposes, not both. §642(g).

a.                Will administration expenses be deducted on the Form 1041 or Form 706? The logical starting point for this analysis is a comparison of the estate’s estate tax bracket with its income tax bracket, and the effect that election will have upon the beneficiaries.

i.                     An income tax deduction will be less valuable, because of a reduction and compression of income tax rates for trusts and estates, as reflected in section 1.

ii.                Before comparing brackets, determine the estate’s net incremental tax rate (the federal estate tax bracket minus a credit for state death taxes) for a more accurate comparison.

                           b.               What about the pre-ERTA maximum marital deduction formula? Claiming administration expenses on an estate tax return will reduce the value of the adjusted gross estate, thereby reducing the value of the maximum marital deduction bequest by one half of the dollar amount of expenses. This will be troublesome if the surviving spouse is the decedent’s second spouse and also executor.

                            c.                Conflicts of interest can be a problem. The executor may benefit personally by taking all of the deductions on the estate’s income tax return. Consider seeking the advice and direction of the probate court having jurisdiction over the estate. Matter of Fales,, 106 Misc. 2d 419, 431 N.Y.S. 2d 763 (N.Y. County Surr. Ct., 1980); Matter of Rappaport, 121 Misc. 2d 447, 467 N.Y.S. 2d 814 (Nassau County Surr. Ct., 1983).

                              d.               Unless the will provides otherwise, statutory law, case law, and in some states equitable principles sensibly require income interests to reimburse principal interests for the increase in estate taxes caused by section 642(g) election. New York Estates, Powers and Trusts Law §11-1.2 codifying the results in In re Estate of Warms, 140 N.Y.S. 2d 169 (N.Y. County Surr. Ct., 1955); Matter of Estate of Bixby’s, 140 Cal. App. 2d 326, 295 P. 2d 68 (Dist. Ct. App.1956); Maryland Estates and Trusts §11-106(a).

                                 e.                The election decision must take account of the reduction of the estate’s DNI.

                               f.                 Administration expenses allocable to tax-exempt income are not deductible for income tax purposes; the executor should claim the unused portion on the estate tax return if the executor deducts them.

                               g.               The executor should pass through excess deductions in the final year to beneficiaries, who can deduct these expenses on their individual returns, to the extent that the deductions exceed two per cent of the beneficiaries’ adjusted gross income. Treas. Reg.§1.642(h)-2.

                           h.               Claiming inordinately high administration expenses on the federal estate tax return may precipitate an audit of the Form 706.

i.                  The administration expenses are deductible on the estate’s income tax return only in the year in which paid; if the expenses exceed income in any year other than the final year, those “excess deductions” are lost. The deductions can be claimed on the estate tax return when it is filed, long before expenses are paid.

j.                  The executor must consider the effect of the election on the section 691(c) deduction.

                             k.               For section 2044 property, the executor must determine whether claiming administration expenses on the Form 1041 rather than on the Form 706 will increase the estate tax payable on a QTIP trust created by the decedent’s pre-deceased spouse, requiring an adjustment with that trust.

                          l.                  The executor must consider whether claiming expenses on the Form 1041 rather than on the Form 706 will permit more estate tax to be deferred under section 6166.

                             m.             The executor must consider the effect on the apportionment of estate taxes.

                          n.               The executor must consider the effect on the state death tax credit allowable under section 2011.

                      o.               The executor must consider the effect on the credit for tax on prior transfers allowable under section 2013.

                            p.               The executor must consider the effect on the credit for foreign death taxes allowable under section 2014.



4.     If administration expenses are claimed as deductions on the estate’s income tax return, a statement must be filed in duplicate to the effect that the items have not been allowed as deductions on the estate tax return and that all rights to have the items subsequently allowed as deductions are waived. §642(g); Treas. Reg. §1.642(g)-1. The waiver is irrevocable and must be filed before the expiration of the statutory period for the income tax return.

                                 a.                Claiming deductions for estate tax purposes on the initial estate tax return does not preclude a subsequent allowance and waiver for income tax purposes, if the estate tax deduction is not finally allowed and a statement is filed.

                               b.               If doubt exists, the executor should claim the deduction on both the estate tax and income tax returns.

i.                     The technique is permitted, if the estate tax deduction is not finally allowed and the statutory period for filing the waiver statement has not run.

ii.                This technique will preserve maximum flexibility.








D.                     Alternate Valuation Election – Section 2032

1.     The alternate valuation date is the date six months after the date of death for property not disposed of before that time. If the property is disposed of within that six-month period, the alternate valuation date is that date on which the property was distributed, sold, exchanged, or otherwise disposed of. §2032(a). The actual sales price of the stock sold in an arm’s length transaction during the six month period following the date of death, not the median between the high and low on the date of the sale, fixes the value for alternate valuation purposes. Rev. Rul. 70-512, 1970-2 C.B. 192.

2.     Before the enactment of the Tax Reform Act of 1984:

                      a.           The election had to be made on a timely filed return, including the additional period of extension of time granted by the district director.

                      b.           The election could not be made on a late return, even if there was reasonable cause for a late filing. Estate of Calkins v. U.S., 79-2 U.S. Tax Cas. (CCH) 13,306 (E.D.N.Y. 1979).

                        c.           Because of the substantially increased unified gift and estate tax credit and unlimited marital deduction, the availability of this election granted the executor a new technique to obtain a free step-up in basis of the property.

                       d.           If the estate was not subject to estate tax and assets appreciated within six-month period, alternate valuation date election would increase the income tax cost basis of the property without any estate tax cost.




3.     The Tax Reform Act of 1984, Pub. L. No. 98-369, 98 Stat. 494, applies to the estates of decedents dying after July 18, 1984.

                                      a.           The election is available only when both the value of the gross estate and the estate tax (after allowable credits) are reduced. §2032(c).

i.  This provision was added to discourage the executor’s election of an alternate valuation date merely to reduce a beneficiary’s income tax liability upon a later sale of the property. In such instances, the election was an abuse of the underlying purposes of section 2032 - to reduce the overall estate tax liability when assets had declined in value after the decedent’s death.

ii.  The election is not available if a federal estate tax return is not required to be filed. If no federal estate tax return is required, determine whether an alternate valuation election is allowable under local law.

iii.  The election is not available if the “optimum” marital deduction formula clause is used, since there would be no tax to be reduced.

b.           The election may be made on an estate tax return filed any time within one year after the time prescribed by law (including extensions) for filing such returns. §2032(d)(2). Thus, the election can be made up to 27 months after death. However, note the potential consequences of filing a Form 706 late:

i.  A late filing may cause the loss of section 6166 relief since the section 6166 election must be made on a timely filed return. §6166(d).

ii.  Interest and penalty charges will be imposed for a late filing.

                                    c.           The election is irrevocable. §2032(d)(1).

4.     The election must also decrease any generation-skipping tax due. §2032(c)(2).

5.     If there is no day in the sixth month following the decedent’s death that corresponds numerically to the date of death, the correct alternate valuation date under section 2032(a)(2) is the last day of the sixth month. Rev. Rul. 74-260, 1974-1 C.B. 275.

6.     The election is made by checking “Yes” to the box on line 1, page 2 of the Form 706 under the “Elections by the Executor.”

7.     The executor must examine the following considerations:

                           a.           How will the election affect the income tax basis-gain or loss on subsequent sales or other disposition and the basis for depreciation purposes?

                                 b.           What will be the effect on the election to pay federal estate taxes under section 6166 in installments-will it reduce the value of the interest in a closely held business below 35 per cent of the adjusted gross estate?

                                     c.           What will be the effect on marital or charitable deductions?

                                d.           Will the election assist the estate in meeting the requirements of the section 2032A special use election?

e.           Should any adjustment be made among any interests under the will, revocable trust agreement, or otherwise because of the section 2032 election?

                                 f.            Should the executor make election if the decedent owned, or gave away within three years before death, a policy insuring someone else who died within six months after decedent’s death? Advise the executor against doing this.


8.    What about conflicts between beneficiaries? The beneficiary of a parcel of real property or other asset that has declined in value will desire the date of death value to secure a higher basis for income tax purposes; the residuary beneficiary of a decedent’s estate who has the obligation to pay estate taxes under the decedent’s will would want the section 2032 election to be made to reduce his or her tax burden.










1.                                                If certain conditions are met, real property used for farming or for a closely held business may be valued on the basis of its actual use, rather than on the traditional basis of highest and best use. §2032A.

2.                                                The amount by which qualifying real property can be reduced under section 2032A is $750,000.  §2032A(a)(2).  The  potential  maximum  federal  estate  tax  saving  amounts to $346,500. For estates of decedents dying after 1998, the $750,000 limitation has been increased  to  an  amount  equal  to  $750,000  multiplied  by  a  cost-of-living  adjustment.
§2032A(a)(3). For estates of decedents dying in 1999, the value of the property may be reduced by up to $760,000. Rev. Proc. 98-61, 1998-2 C.B. 811. The value of the property may be reduced by up to $770,000 for estates of decedents dying in 2000. Rev. Proc. 99-42, 1999-2
C.B. 568. For estates of decedents dying in 2001, the value of the property may be reduced by up to $800,000. Rev. Proc. 2001-13, 2001-1 C.B. 337. The value of the property may be reduced by up to $820,000 for estates of decedents dying in 2002. Rev. Proc. 2001-59, 2001-2
C.B. 623. For estates of decedents dying in 2003, the value of the property may be reduced by up to $840,000. Rev. Proc. 2002-70, 2002-46 I.R.B. 845. The value of the property may be reduced by up to $850,000 for estates of decedents dying in 2004. Rev. Proc. 2003-85, 2003- 49 I.R.B. 1184. It may be reduced by up to $870,000 for estates of decedents dying in 2005. Rev. Proc. 2004-71, 2004-50 I.R.B. 970. For estates of decedents dying in 2006, the value of the property may be reduced by up to $900,000. Rev. Proc. 2005-70, 2005-47 I.R.B. 979. It may be reduced by up to $940,000 for estates of decedents dying in 2007. Rev. Proc. 2006-53, 2006-48 I.R.B. 996. It may be reduced by up to $960,000 for estates of decedents dying in 2008. Rev. Proc. 2007-66, 2007-45 I.R.B. 970; it may be reduced by up to $1,000,000 for estates of decedents dying in 2009. Rev. Proc. 2008-66, 2008-45 I.R.B. 1107. For estates of decedents dying in 2010, the sum remains at $1,000,000. Rev. Proc. 2009-50, 2009-45 I.R.B. 617; it may be reduced by up to $1,020,000 for estates of decedents dying in 2011. Rev. Proc. 2010-40, 2010-46 I.R.B. 663. For estates of decedents dying in 2012, it may be reduced by up to $1,040,000. Rev. Proc. 2011-52, 2011-45 I.R.B. 701; it may be reduced by $1,070,000 for estates of decedents dying in 2013. Rev. Proc. 2012-41, 2012-45 I.R.B. 539. It may be reduced by $1,090,000 for estates of decedents dying in 2014. Rev. Proc. 2013-35, 2013-47
I.R.B. 537. For estates of decedents dying in 2015, the value of qualified property may be reduced by up to $1,100,000. Rev. Proc. 2014-61, 2014-47 I.R.B. 860.

3.                                                The purpose of this provision is to assist estates of farmers and owners of closely held businesses by providing an alternate means for valuing real property that is used in farming or other small business purposes for federal estate tax purposes, thereby reducing the overall estate tax liability and encouraging the heirs to continue the operation of the farm or closely held business.


4.                                                The qualifications for the special use valuation are:

                                a.                The decedent must have been a resident or citizen of the United States. §2032A(a)(1).

b.               The property – “qualified real property” – must meet the conditions in section 2032A(b)(1):

i.          The property must be located in the United States.

ii.        The property must be devoted to a qualified use on the date of decedent’s death.

iii.     The property must pass to a qualified heir and a requisite agreement must be filed.

                                    c.                The decedent’s equity in the real and personal property used in the farm or closely held business must be at least 50 per cent of the adjusted value of the decedent’s gross estate. §2032A(b)(1),(3).

                                   d.               The decedent’s equity in the qualified real property must be at least 25 per cent of the adjusted value of the decedent’s gross estate. Id.

                       e.                The decedent or a member of his family must have materially participated in the operation of the farm or closely held business for five of the eight years preceding death, decedent’s disability, or the commencement of receipt of social security. §2032A(b)(1),(4).


5.                                                The election to use a special use valuation must be made on the first federal estate tax return filed. The election once made is irrevocable. §2032A(d)(1).

a.                The requirement that the election be made on a timely filed return (including extensions) was repealed by Economic Recovery Tax Act of 1981. The election may now be made on a return filed late, so long as it is the first return. However, note the potential consequences of filing a Form 706 late.

i.          Since many estates that qualify for section 2032A election also qualify for section 6166 relief, a late filed return may cause the loss of the section 6166 election since the section 6166 election must be made on a timely filed return. §6166(d).

ii.        Interest and penalty charges may be imposed for a late filing.

                                  b.               The election is made by checking “Yes” to line 2 of Part 3 of the Form 706 and attaching to the Return a completed Schedule A-1 with the required statements and appraisals.

                                   c.                Each person in being who has a present or contingent interest in the qualified real property for which the election is made must sign an agreement consenting to the application of a recapture tax for that property. §2032A(d)(2); Treas. Reg. §20.2032A- 8(c)(1).

i.          A sample form of an agreement satisfying this provision is set forth in Rev. Proc. 81- 14, 1981-1 C.B. 669. This form has been updated by the IRS to include a reference to the recapture of the generation-skipping transfer tax and is designated as “Part 3. - Agreement to Special Valuation Under Section 2032A” of Schedule A-1 of the Form 706.
ii.                       The tax benefits realized by the estate where special use valuation has been elected may be fully or partially recovered if the qualified real property subsequently passes out of the family or ceases to be used as a farm or closely held business within 10 years of decedent’s death, or if there is insufficient material participation by members of decedent’s family following death. §2032A(c).

                    d.               Attached to the return must also be a statement containing detailed information required by the Treasury Regulations, including the fair market value of the property, its special use valuation, and the method used in computing the special use valuation. Treas. Reg.
§20.2032A8(a)(3).

e.                If a timely special use valuation election is made and the election substantially complies with the requirements of the Treasury Regulations relating to a special use valuation, the executor has a reasonable period of time (not exceeding 90 days) in which to cure any technical defects in the form of the election or agreement that would otherwise invalidate the election or agreement. §2032A(d)(3).




6.                                                The executor should consider making a protective election to value real property under section 2032A, if there is any uncertainty whether the estate qualifies for this relief.

                                 a.                This election is made by a notice of election filed with a timely estate tax return stating that a protective election under section 2032A is being made pending the final determination of values. Treas. Reg. §20.2032A-8(b).

                                    b.               The executor may make the notice by checking the appropriate box on Part 1 of Schedule A-1 of Form 706 and providing requisite information.

                                     c.                The notice must include the following information:

i.          The decedent’s name and taxpayer identification number;

ii.        The relevant qualified use; and

iii.     The items of real and personal property shown on the estate tax return that are used in a qualified use, and that pass to qualified heirs (identified by schedule and number). Treas. Reg. §20.2032A-8(b).

                                d.               If the estate does qualify for special use valuation based on values finally determined, an additional notice of election must be filed within 60 days after the date of such determination. The election is made on an amended Form 706 and must set forth the information required by Treas. Reg. §20.2032A-8(a)(3), together with the agreement required under section 2032A(d)(2). Id.



7.                                                When making the section 2032A election, the executor must:

                                   a.                Consider its effect on estate tax generally and on the marital and charitable deductions.

b.               Determine whether making the election justifies claiming administration expenses on the income tax return rather than on the estate tax return.

                              c.                Ascertain whether it would be more advantageous to make the section 2032A election than to make the qualified terminable interest election.

                                  d.               Consider whether making the section 2032A election will have any effect on the section 6166 election.

e.                Advise a non-qualified heir to consider disclaiming an interest in property that will qualify for the section 2032A election, if that property would pass to a qualified heir and allow the election to be made.

                      f.                 Determine whether an alternate valuation date election will assist the estate in meeting the requirements of the section 2032A election.

                             g.               Advise the fiduciary that making the section 2032A election will result in a lower income tax cost basis for purposes of depreciation and later sale.

                                h.               Consider the commencement of a court proceeding, as required by Treas. Reg.
§20.2032A-8(c)(3), to secure appointment of a representative for a minor, incompetent, or decedent, who is required to sign a special valuation recapture agreement.

                             i.                  Determine whether any adjustment should be made among any interests under the will, revocable trust agreement or otherwise because of the section 2032A election.

                                   j.                  Determine whether a special use valuation election is available under local law.









F.                      Postponing Payment of Estate Tax Attributable to Reversionary or Remainder Interests
– Section 6163

1.                                               If a reversionary or remainder interest in property is included in the gross estate, the executor may elect to postpone the payment of that part of the tax attributable to that interest until six months after termination of the precedent property interest. §6163(a).

2.                                               The Commissioner may extend the time for payment for an additional period not exceeding three years, if after the expiration of the six-month period the executor establishes reasonable cause for further extension. §6163(b).

3.                                               The district director may require a bond in an amount up to twice the deferred amount. §6165.

4.                                               The section 6163 election must conform to the following requirements:

                                      a.                 The notice of the exercise of the election should be filed with the district director before the date prescribed for payment of the tax.

                                            b.                The notice may be made in letter form, addressed to the district director.

i.                      A certified copy of the will or other instrument under which the interest was created must be filed with a notice of election, along with the names and birth dates of any individuals who are intervening lives. Treas. Reg. §20.6163-1(b).

ii.                 The election is also made by checking “Yes” to the box on line 4, page 2 of the Form 706 under the “Elections by the Executor.”

c.                 Prudence would dictate using both procedures since the Instructions for Form 706 refer the preparer to section 6163 and the related regulations; therefore the executor should attach a duplicate copy of the notice to the district director to the Form 706.












1.                                               The election is available to executors of estates of decedents dying after December 31, 1981.
§2056(b)(7)(B)(v).

2.                                               For QTIP trusts, there are certain similarities to prior law.

                         a.                The property must “pass” from the decedent to the surviving spouse.

b.               The surviving spouse must receive all income from the property, payable at least annually.

c.                A specific portion or fractional portion of the property is treated as a separate property interest.

d.               The value of property is includable in the surviving spouse’s estate at the spouse’s later death.


3.                                               For QTIP trusts, there are changes from prior law.

a.                No person, including the spouse, has the power to appoint any of the property to anyone other than the surviving spouse during the spouse’s lifetime.

                                 b.               Note that if a surviving spouse is granted a general lifetime power of appointment, there is no violation of section 2056(b)(7); however, section 2056(b)(5) would apply and there would be no reason for exercising the election.

c.                The surviving spouse may, but need not, be granted a special testamentary power of appointment. If the surviving spouse is granted a general power of appointment, section 2056(b)(5) would apply, and there would be no reason for exercising the election.

                                d.               The decedent may designate the recipients of the remainder interest at the spouse’s death.




4.                                               The executor must make the election on the estate tax return.

a.                The election must be made on the last estate tax return filed by the executor on or before the due date of the return, including extensions, or, if a timely return is not filed, on the first estate tax return filed by the executor after the due date. Treas. Reg. §20.2056(b)- 7(b)(4)(i).

b.               Once made, the election is irrevocable. §2056(b)(7)(B)(v). However, an election may be revoked or modified on a subsequent return filed on or before the due date of the return, including extensions actually granted. Treas. Reg. §20.2056(b)-7(b)(4)(ii).

5.                                               The election procedure is to list the qualified terminable interest property on Schedule M and deduct its value.

6.                                               Partial election is permitted; partial election must relate to a fractional or percentage share of the property so that the elective portion will reflect its proportionate share of increases or decreases of the total property for purposes of section 2044; the fraction or percentage may be defined by means of a formula. Treas. Reg. §20.2056(b)-7(b)(2).

7.                                               A trust may be divided into separate trusts to reflect a partial election, if authorized under the governing instrument or under local law. See, e.g., New York Estates, Powers and Trusts Law
§7-1.13. The division must be accomplished before the end of the estate’s administration. If the trust has not been divided when the estate tax return is filed, the intent to divide the trust must be unequivocally signified on the estate tax return. Treas. Reg. §20.2056(b)- 7(b)(2)(ii)(A). The division must be done on a fractional or percentage basis to reflect the partial election. Treas. Reg. §20.2056(b)-7(b)(2)(ii)(B).

8.                                               A protective election can be made only if there is a bona fide issue concerning whether an asset is includable in the gross estate, or the amount or nature of the property the surviving spouse is entitled to receive, i.e., whether the property that is includable is eligible for the election. Treas. Reg. §20.2056(b)-7(c)(1). The protective election, once made, is irrevocable. Treas. Reg. §20.2056(b)-7(c)(2).

9.                                               A surviving spouse’s qualified disclaimer can override the election. Rev. Rul. 83-26, 1983-1 C.B. 234.

10.                                      It may be desirable to give the executor guidance in the governing instrument regarding what factors the executor should consider and how the executor should exercise that discretion. A direction to make full election may prove costly since the main advantage of a QTIP trust is the flexibility permitted for the most advantageous post-death tax planning.



11.                                      The factors the executor should consider when making a QTIP election are:

a.                Other qualifying assets (DO NOT OVER QUALIFY) - the more other assets that qualify for the marital deduction, the greater the reason for not making the full election, so at least the credit equivalent amount is sheltered from double taxation.

                               b.               The spouse’s anticipated life expectancy - the longer the spouse is expected to survive, the better the reason for making the election. The election will achieve a maximum deferral of tax payment and the assets will increase in value. If the surviving spouse’s life expectancy is relatively short, the executor may wish to pay some tax in the first estate, causing reduction of surviving spouse’s estate, to equalize brackets and to secure section 2013 credit for transfers previously taxed for estate tax attributable to the spouse’s income interest on taxable portion.

                                c.                The lower the spouse’s estate taxes are expected to be, the greater the reason for making the election and deferring payment of taxes.

                                  d.               If the spouse has other substantial income and resources, the reason for not making the election is even greater.

                                 e.                The more tax that is avoided by making the election, the less tax that can be deferred under section 6166.

                               f.                 The more estate taxes that are deferred by making the QTIP election, the more assets remain to provide additional income to the surviving spouse.

                                 g.               Since the section 2032 election is available only when both the value of the gross estate and the estate tax are reduced, the alternate valuation date cannot be elected if no estate tax is payable on the decedent’s estate because of the QTIP election.

                                 h.               State death taxes - if the state has another rate and tax structure, there may be additional costs or savings by making the election.




12.                                      Consider applying to the court for advice and direction if a potential conflict of interest exists. See Matter of Estate of Gordon, 134 Misc. 2d 247, 510 N.Y.S. 2d 815 (N.Y. County Surr. Ct., 1986).

13.                                      Petition the court to appoint a guardian for any minor, incompetent, or incapacitated beneficiary, to make a qualified disclaimer of an interest in the trust, to leave the surviving spouse as the trust’s sole beneficiary, so the trust can constitute a qualified terminable interest.

14.                                      Consider whether the executor should exercise the election granted by section 2056(b)(7)(C)(ii) not to treat as qualified terminable interest property any joint and survivor annuities that are included in the gross estate and that would otherwise be treated as qualified terminable interest property under section 2056(b)(7)(C).

15.                                      Should a professional fiduciary be entitled to additional compensation for exercising or not exercising the QTIP election?

16.                                      Under what circumstances should a fiduciary be surcharged for exercising or not exercising the QTIP election?

17.                                      What remedies, if any, does a remainderperson have, if an executor’s accounting has been judicially settled, the surviving spouse dies, and a determination is made that a partial election or no election would have generated substantially less combined estate taxes?







SPECIAL NOTICE – On March 16, 2010, the Taxpayer Guidance Division of the Office of Tax Policy Analysis of the New York State Department of Taxation and Finance issued Memorandum TSB-M-10(1)M which authorizes a QTIP election to be made for New York State estate tax purposes when no federal estate tax return is required.

Applicability:

          If there is no federal estate tax in effect on the decedent’s date of death.
          If the decedent dies while federal estate tax was in effect but the value of the gross estate was below the threshold for fling a federal estate tax return.

H.                    Qualified Domestic Trust (QDOT) Election – Planning for the Non-Citizen Spouse – Section 2056A

1.                                               Generally, the estate tax marital deduction is disallowed, if the decedent’s surviving spouse is not a U.S. citizen. §2056(d)(1).

2.                                               Transfers to a non-citizen spouse are generally not eligible for the gift tax marital deduction. §2523(i)(1). However, the gift tax annual exclusion under Section 2503(b) is increased from $10,000 to $100,000 (indexed for inflation) for gifts to non-citizen spouses, so long as the transfers would otherwise qualify for the marital deduction, if the donee spouse was a U.S. citizen. §2523(i)(2). In 1999, the gift tax annual exclusion for these transfers is increased from $10,000 to $101,000. Rev. Proc. 98-61, 1998-2 C.B. 811. In 2000, it is increased to $103,000. Rev. Proc. 99-42, 1999-2 C.B. 568. It is increased to $106,000 in 2001. Rev. Proc. 2001-13, 2001-1 C.B. 337. In 2002, it is increased to $110,000. Rev. Proc. 2001-59, 2001-2 C.B. 623. It is increased to $112,000 in 2003. Rev. Proc. 2002-70, 2002-46 I.R.B. 845. In 2004, it is increased to $114,000. Rev. Proc. 2003-85, 2003-49 I.R.B. 1184. It is increased to $117,000 in 2005. Rev. Proc. 2004-71, 2004-50 I.R.B. 970. It is increased to $120,000 in 2006. Rev. Proc. 2005-70, 2005-47 I.R.B. 979. In 2007, it is increased to $125,000. Rev. Proc. 2006-53, 2006-48 I.R.B. 996. In 2008, it is increased to $128,000. Rev. Proc. 2007-66, 2007-45 I.R.B. 970. It is increased to $133,000 in 2009. Rev. Proc. 2008-66, 2008-45 I.R.B. 1107. In 2010, it is increased to $134,000. Rev. Proc. 2009-50, 2009-45 I.R.B. 617. It increased to $136,000 in 2011. Rev. Proc. 2010-40, 2010-46 I.R.B. 663. In 2012, it is increased to $139,000. Rev Proc. 2011-52, 2011-45 I.R.B. 701. It increased to $143,000 in 2013. Rev. Proc. 2012-41, 2012-45 I.R.B. 539. In 2014, it is increased to $145,000. Rev. Proc. 2013-35, 2013-47 I.R.B. 537. It is increased to
$147,000 in 2015. Rev. Proc. 2014-61, 2014-47 I.R.B. 860.

a.                       To qualify for the gift tax annual exclusion, the gift must qualify for the gift tax marital deduction and satisfy the present interest requirement for an annual exclusion gift.

b.                       Regardless of whether the donor is a citizen or resident of the United States at the time of the gift, the gift tax marital deduction is allowed under Section 2523(a), if the donor’s spouse is a U.S. citizen, subject to the otherwise applicable rules of Section 2523. Treas. Reg. §25.2523(i)-1.

3.                                               The marital deduction is allowed for property passing to a surviving spouse who is not a U.S. citizen, if the property passes to the spouse in a “qualified domestic trust” (QDOT). §2056(d)(2)(A).

4.                                               To qualify as a QDOT, the trust must meet the following requirements, as set forth in Section 2056A(a):

a.                       The trust instrument must require that at least one trustee (the “U.S. trustee”) of the trust be an individual citizen of the United States or a domestic corporation.
§2056A(a)(1)(A). A domestic corporation is a corporation that is created or organized under the laws of the United States or the District of Columbia. Treas. Reg. §20.2056A-2(c).

b.                       The trust instrument must provide that no distribution (other than a distribution of income) be made unless a U.S. trustee has the right to withhold from such distribution the tax imposed by Section 2056A. §2056A(a)(1)(B).

c.                       The trust must meet the requirements of any regulations prescribed to ensure the collection of any estate tax imposed on the trust. §2056A(a)(1)(C).

d.                       The executor must make an election to treat the trust as a QDOT.
§2056A(a)(1)(D).

5.                                               The executor must make the election to treat a trust as a QDOT on the estate tax return.
§2056A(d).

a.                       The election must be made on the last estate tax return filed by the executor on or before the due date, including extensions, or, if a timely return is not filed, on the first estate tax return filed after the due date. Treas. Reg. §20.2056A- 3(a). However, please note that section 2056A(d) provides that “No Election may be made under this section on any return if such return is filed more than one year after the time prescribed by law (including extensions) for filing such return.”

b.                       Once made, the election is irrevocable. §2056A(d); Treas. Reg. §20.2056A- 3(a).

c.                       The election is made in the form and manner set forth in the decedent’s estate tax return, including applicable instructions. Treas. Reg. §20.2056A-3(d).

i.     The election procedure is to list the qualified domestic trust or the entire value of the trust property on Schedule M of Form 706 and deducting its value.

ii.     The estate is presumed to have made the QDOT election if the trust or trust property is listed and its value deducted on Schedule M.

iii.     If the election is made, the following information should be provided for each QDOT on an attachment to the Schedule:

(a)                   The name and address of every trustee;

(b)                   A description of each transfer passing from the decedent that is the source of the property to be placed in trust; and

(c)                   The trust’s employer identification number (EIN). Instructions for Form 706, Schedule M (9-2007) Page 30.

6.                                               A partial QDOT election is not allowed with respect to a specific portion of an entire trust that would otherwise qualify for the marital deduction but for the rule disallowing the marital deduction when the surviving spouse is not a U.S. citizen. However, if the trust is severed in accordance with the applicable requirements of Treas. Reg.
§20.2056(b)-7(b)(2)(ii) prior to the due date for the actual election, a QDOT election may be made for one or more of the severed trusts. Treas. Reg. §20.2056A-3(b).

7.                                               A protective election may be made to treat a trust as a QDOT only if there is a bona fide issue that concerns: (i) the decedent’s residency or citizenship; (ii) the surviving spouse’s citizenship; (iii) whether an asset is includible in the decedent’s gross estate; or (iv) the amount or nature of the property the surviving spouse is entitled to receive. Once made, the protective election is irrevocable. Treas. Reg. §20.2056A-3(c).

8.                                               Consider the special security requirements applicable to QDOTs with assets valued in an amount greater than $2 million as of the date of decedent’s death:

a.                       The trust instrument must provide that at least one trustee be a bank as defined in Section 581; or

b.                       The U.S. trustee must provide a bond in an amount equal to 65% of the fair market value of the trust’s assets (determined without regard to any indebtedness with respect to the assets), as finally determined for federal estate tax purposes; or

c.                       The U.S. trustee must furnish an irrevocable letter of credit equal to 65% of the fair market value of the trust’s assets (determined without regard to any indebtedness with respect to the assets), as finally determined for federal estate tax purposes. Treas. Reg. §20.2056A-2(d)(1).

d.                       Sample language that may be used in a QDOT to satisfy the additional security requirements contained in Treas. Reg. §20.2056A-2(d)(1) is found in Revenue Procedure 96-54, 1996-2 C.B. 386.

9.                                               Another exception to the general rule which denies an estate tax marital deduction to assets passing to a non-citizen spouse can be found in Section 2056(d)(4). Under this provision, the estate tax marital deduction will be allowed where:

a.        The non-citizen surviving spouse becomes a U.S. citizen before the day on which the estate tax return is made. §2056(d)(4)(A); and

b.        The surviving spouse was a U.S. resident at all times after the date of death and before becoming a U.S. citizen. §2056(d)(4)(B).

10.                                      If assets pass to a non-citizen spouse in a marital trust that does not meet the QDOT requirements, the trust may be reformed to qualify as a QDOT, either in accordance with the terms of the will or trust agreement or pursuant to a judicial proceeding.
§2056(d)(5); Treas. Reg. §20.2056A-4(a)(1).

a.        The reformation pursuant to the will or trust agreement must be completed by the estate tax return due date, including extensions. Treas. Reg. §20.2056A-4(a)(1).

b.        The judicial reformation must be commenced by the estate tax return due date, including extensions. Prior to the time the judicial reformation is completed, the trust must be treated as a QDOT; therefore, the trustee is responsible for filing the Form 706-QDT, paying any Section 2056A estate tax that is due, and filing an annual statement, if required. Treas. Reg. §20.2056A-4(a)(2).

11.                                      A marital deduction is also allowed on property passing directly to a non-citizen spouse, if the spouse transfers or irrevocably assigns the property interest to a QDOT. The transfer or irrevocable written assignment must be made: (i) before the estate tax return is filed; and (ii) before the last date prescribed by law that the QDOT election may be made. Section 2056(d)(2)(B); Treas. Reg. §20.2056A-4(b).

I.                        Reverse QTIP Election – Section 2652(a)(3)

1.    Allows the decedent to be treated as the “transferor” of all of the assets in a QTIP Trust for GST purposes, as if the QTIP election has not been made. IRC §2652(a)(3).

2.    Without the reverse QTIP election, the surviving spouse would be treated as the “transferor” of the assets in the QTIP Trust at his or her later death, (IRC
§2652(a)(1)(A)), thereby wasting or not utilizing the decedent’s unused GST exemption at his or her death.

3.    A reverse QTIP election is made on the return on which the QTIP election is made. Reg. Sec. 26.2652-2(b).

4.    The election is irrevocable; it is not effective unless it is made with respect to all of the assets in the trust to which the QTIP applies. Reg. Sec. 26.2652-2(a).

5.    The election is made by listing the QTIP Trust to which the election relates on Line 9 of Part 1 of Schedule R of the Form 706.

6.    In planning stages, consider creating two or more QTIP Trusts, one of which would be funded with the decedent’s unused GST exemption to take full advantage of the reverse QTIP election.

7.    In the absence of appropriate language authorizing the creation of two or more QTIP Trusts, determine whether the personal representative has the authority under local law to sever a trust with or without a judicial proceeding for GST planning purposes. Reg. Sec. 26.2654-1(b)(1).

8.    Consider not making the reverse QTIP election, if the decedent has other assets that can be sheltered by his or her unused GST exemption and the surviving spouse does not have sufficient assts to use his or her unused GST exemption.


1.                       If certain conditions are met, an executor may elect to defer the payment of the portion of estate tax attributable to the value of a closely held business interest for up to five years (paying interest only) and pay the tax in up to ten equal annual installments.
§6166.

a.         The maximum payment period is 14 years because the due date of the last interest payment coincides with the due date for the first installment of tax. §6166(a)(3).

b.        If the election is made, the estate must pay interest at a special rate of two percent per year on the portion of the deferred estate tax, herein the “two percent portion”, attributable to the first $1,000,000 (as adjusted annually for inflation; in 2003, this amount is $1,120,000; in 2004, this amount is $1,140,000; in 2005, this amount is
$1,170,000; in 2006, this amount is $1,200,000; in 2007, this amount is $1,250,000; in 2008, this amount is $1,280,000; this amount is $1,330,000 in 2009; this amount is $1,340,000 in 2010; in 2011, this amount is $1,360,000; this amount is
$1,390,000 in 2012; in 2013, this amount is $1,430,000; this amount is $1,450,000 in 2014; this amount is $1,470,000 in 2015) in taxable value of the closely held business interest in excess of the applicable exclusion amount (currently
$5,430,000) and any other exclusions. §6601(j).

(i)      The interest rate imposed on the amount of the deferred estate tax attributable to the taxable value of the closely held business exceeding the two-percent portion is imposed at a rate equal to 45% of the rate generally applicable to underpayments of estate tax. §6601(j)(1)(B). Consequently, since the normal estate tax underpayment rate is 3% for the quarter beginning April 1, 2015, the interest rate charged on the estate tax deferred under Section 6166 that does not qualify for the 2% rate is 1.35% (.45 X 3%) during this quarter.

(ii)   The interest paid on the deferred estate tax is not deductible for income or estate tax purposes. §§163(k); 2053(c) (1)(D).

2.                       In order for an estate to qualify for the benefits of IRC Section 6166, the decedent must have been a citizen or resident of the United States at the date of death. In addition, the value of the interest in a closely held business must exceed 35 percent of the adjusted gross estate. §6166 (a). The term “interest in a closely held business” is defined in the Code as follows:

a.         An interest as a proprietor in a trade or business carried on as a proprietorship;

b.        An interest as a partner in a partnership carrying on a trade or business, if (1) 20% or more of the capital interest in the partnership is included in the decedent’s gross estate, or (2) the partnership had 45 or fewer partners; or

c.         Stock in a corporation carrying on a trade or business, if (1) 20% or more of the value of the corporation’s voting stock is included in the decedent’s gross estate, or
(2) the corporation had 45 or fewer shareholders. §6166(b)(1).

3.                       The maximum amount of estate tax which is eligible for the five year deferral and the ten year installment provisions of Section 6166 is computed under §6166(a)(2) as follows:


Value of closely held business interest Adjusted gross estate
(Gross estate minus allowable deductions under §§ 2053 and 2054)



X                Net federal estate tax due


The remaining estate tax is due nine months after the decedent’s death.

4.                       The election provided under Section 6166 must be made on a timely filed estate tax return, including extensions. §6166(d). It is made by checking the “Yes” box on line 3, page 2, Part 3 of the Form 706. The executor must also attach to the Form 706 a Notice of Election containing the following information:

a.         The decedent’s name and taxpayer identification number as they appear on the estate tax return;

b.        The amount of tax to be paid in installments;

c.         The date selected for payment of the first installment;

d.        The number of annual installments, including the first installment, in which the tax is to be paid;

e.         The properties shown on the estate tax return that constitute the closely held business interest (identified by schedule and item number); and

f.          The facts supporting the executor’s conclusion that the estate qualifies for deferral and for payment of the estate tax in installments. Treas. Reg. §20.6166-1(b).

5.                       If there is uncertainty whether the estate will qualify for the deferral provisions of Section 6166, the executor should consider making a protective election pursuant to Treas. Reg. §20.6166-1(d).

a.         A protective election may be made to defer payment of any portion of tax remaining unpaid when values are finally determined and to any deficiencies attributable to the closely held business interest. Treas. Reg. §20.6166-1(d).

b.        It does not extend the time for payment of any amount of tax. Id.

c.         It is made by filing a Notice of Protective Election with a timely filed estate tax return stating the election is being made and by checking “Yes” to box 3, page 2, Part 3 of the Form 706. Id.

d.        Within 60 days after it is determined that the estate qualifies for the election, the executor must file a final notice setting forth the information required in Treas. Reg.
§20.6166-1(b). Id.

6.                       The executor can request that the Section 6166 election be treated alternatively as a request for an extension pursuant to Section 6161, if the estate fails to qualify for Section 6166. Treas. Reg. §20.6161-1(b).

7.                       Section 6166(g) of the Code provides specific events which will accelerate the payment of unpaid installments of tax deferred under Section 6166.

a.         If 50% or more of the aggregate value of the closely held business interest is distributed, sold, exchanged or otherwise disposed of. §6166(g)(1)(A).

b.        If any payment of principal or interest due under Section 6166 is not paid on or before its due date. §6166(g)(3). However, the Code provides an expensive exception to this rule, if the estate tax installment or interest payment is made within 6 months after its due date. Here, the estate will lose eligibility for the 2% interest rate for the payment and will incur a penalty charge equal to 5% of the payment due, multiplied by the number of months the payment was overdue.
§6166(g)(3)(B).

c.         If the executor fails to pay an amount equal to the estate’s “undistributed net income” in liquidation of the unpaid portion of the tax payable in installments in each taxable year after the due date of the first installment of estate tax.
§6166(g)(2).

8.                       The Service may require the posting of a bond pursuant to Section 6165, as a condition to granting an extension under Section 6166. §6166(k)(1). However, if the estate does not wish to post a bond, the Service may agree to a special lien for estate tax deferred under Section 6166 as an appropriate alternate method of security. §6324A.

9.                       Determine whether the estate qualifies for a similar election to defer the payment of estate taxes under local law. For example, see New York Tax Law §997.

K.                    Portability Election – Section 2010(c)(5)(A)

1.        History

a.         Portability of the unified credit was first introduced under Section 303(a) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) but was slated to expire after December 31, 2012.

b.        The provisions were made permanent on January 1, 2013 under the American Taxpayer Relief Act of 2012.

2.        What is Portability?

a.         Portability is the ability of a surviving spouse to apply a deceased spouse’s unused estate and gift tax exclusion amount against transfers made by the surviving spouse during his or her lifetime or at death.

b.        A decedent’s unused exclusion amount is referred to as the Deceased Spousal Unused Exclusion Amount (“DSUE”).

c.         The DSUE amount is added to the surviving spouse’s unused exclusion amount.

d.        Portability applies to decedents who die on or after January 1, 2011. Treas. Reg.
§20.2010-1T(e).

e.         Portability only applies to a deceased spouse’s estate and gift tax exclusion amount. The generation-skipping transfer (“GST”) tax exclusion amount is not portable and any unused amount will be lost at the first spouse’s death.

3.        Making the Election

a.         Executors or administrators who have filed a complete and timely Federal estate tax return (Form 706) are deemed to have elected portability (provided there is a surviving spouse). There are no affirmative boxes to check or statements to be made. Treas. Reg. §20.2010-2T(a)(1)-(7).

b.        If an estate is not otherwise required to file a Federal estate tax return, the fiduciary must nevertheless complete and file the return in order to elect portability. Treas. Reg. §20.2010-2T(a)(7)(ii).

i.      Special reporting rules exist for certain property of estates under the filing threshold. For property qualifying for a marital or charitable deduction, a fiduciary is permitted to report only the description, ownership and beneficiary of the property, and estimating the fair market value of the estate. Treas. Reg. §20.2010-2T(a)(7)(ii).

c.         If no executor or administrator has been appointed, any individual in actual or constructive possession of any property of the estate (referred to as a “non- appointed executor”), may elect portability by completing and filing the Federal estate tax return. Treas. Reg. §20.2010-2T(a)(6)(ii).

4.        Relief for Estates of Decedents Dying Before January 1, 2014. Rev. Proc. 2014-18

a.         Executors and administrators of estates of decedents who died in 2011, 2012 or 2013 and were not otherwise required to file and did not file a Federal estate tax return, may obtain an extension of time to make the portability election.

i.      The extension is obtained by filing the return on or before December 31, 2014, including “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A)” at the top of page 1 of the return.

b.        This relief is also available to the non-appointed executor.

5.        Opting-Out of Portability
a.         In order to opt out of portability, the individual filing the return must affirmatively state that the estate is not electing portability. Treas. Reg. § 20.2010-2T(a)(3)(i).

i. Form 706 includes a box under “Section A. Opting Out of Portability” of “Part 6 – Portability of Deceased Spousal Unused Exclusion (DSUE)” on page 4 of the return, which the executor must check in order to opt-out of portability.

b.        For estates of decedents dying after January 1, 2014, an executor, administrator or non-appointed executor who fails to file a timely return will be treated as having opted out of portability. Treas. Reg. § 20.2010-2T(a)(3)(ii).

6.        Election is Irrevocable

a.         The portability election becomes irrevocable once the final filing date for the Federal estate tax return has passed. Treas. Reg. § 20.2010-2T(a)(4).

i. An executor or administrator who files a supplemental return prior to the final due date of the return may change a prior election.

b.        The election by a court-appointed executor or administrator cannot be changed by a non-appointed administrator.

c.         The election of a non-appointed executor cannot be changed by the filing of a subsequent return by a separate non-appointed executor; the first to file controls. Treas. Reg. § 20.2010-2T(a)(6)(ii).

7.        Non-U.S. Decedents

a.         Portability is available for assets passing to a Qualified Domestic Trust (“QDOT”) for the benefit of a non-citizen surviving spouse.

i.      Special rules for determining the DSUE amount available to the surviving spouse will apply at the termination of the QDOT. Treas. Reg. § 20.2010- 2T(c)(4) & Example 3.

b.        Portability is unavailable for the estate of a non-resident, non-citizen decedent. Treas. Reg. § 20.2010-2T(a)(5).


8.        DSUE Amount

a.         The DSUE amount is the lesser of 1) the exclusion amount available in the year of the decedent’s death or 2) the excess of the decedent’s exclusion amount over the sum of the decedent’s taxable estate plus adjusted taxable gifts on which no gift tax has been paid. Treas. Reg. § 20.2010-2T(c).

b.        The DSUE amount must be computed and reported on the estate tax return.

i.      Until such time as Form 706 is amended to include a computation of the DSUE, a complete and timely filed return is deemed to include the computation. Treas. Reg. § 20.2010-2T(b)(2).

9.        Using DSUE Amount

a.         DSUE amount can be applied against transfers made by the surviving spouse during his or her lifetime or at death.

i.               The DSUE amount may be applied to lifetime taxable transfers by the surviving spouse by filing a United States Gift and Generation-Skipping Transfer Tax Return (Form 709) and checking “Yes” on Line 19 and completing Schedule C of the return.

ii.                DSUE amounts applied against transfers at death require disclosure and calculation under Section D of Part 6 on Form 706.

b.        Multiple Predeceased Spouses

i.               A surviving spouse with multiple predeceased spouses will be limited to the DSUE amount of the most-recently deceased spouse, even if the most- recently deceased spouse did not have any exclusion amount remaining or the fiduciary did not make the portability election. Treas. Reg. § 20.2010- 3T(a)(2).

ii.                Remarriage alone does not affect DSUE amounts received from a prior deceased spouse. Only the death of a subsequent spouse will affect which DSUE amount a surviving spouse may apply against a transfer. Treas. Reg.
§ 20.2010-3T(a)(2).

iii.               A surviving spouse with multiple deceased spouses may utilize the DSUE amounts from prior spouses in succession, utilizing each DSUE amount of a prior spouse before the death of a subsequent spouse Treas. Reg.
§ 20.2010-3T(b).








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