Is Your Estate in Order?


Part of a series of columns exploring the estate planning challenges and opportunities flowing from enactment of the Tax Cuts and Jobs Act (TCJA)

By Donald L. Sharpe, Emeritus Professor of Tax Law and Estate Planning, Fordham Law School.

If you wish to discuss an estate planning issue with Professor Sharpe please send him an email at

Your properly structured estate plan is unique to you and needs to take into account

  • who your family members are;
  • the assets you and your family members own;
  • the form of ownership of these assets;
  • the current fair market value of these assets;
  • the potential for these assets to increase in value;
  • your current income and projected income for future years;
  • your wishes as to who will receive your assets and the timing of your gift or bequest, taking into account the ability of the potential beneficiary to handle the asset when it is received;
  • if you have made taxable gifts in the current and prior years beyond the annual gift tax exclusion amount

Here are several cases to consider:

  1. Sam, 60 years old, divorced several years ago, remains single, rents an apartment in New York City, owns as his primary asset a vacation home in Florida appraised at $5 million. Sam’s projected annual income for the next 10 years is approximately $100,000, decreasing to $40,000 thereafter. Sam’s son by a prior marriage is 30 years old with a current net worth of $12 million and his son’s two children are 5 and 3 years old.

Sam was advised by a friend that he can avoid the expense of creating and probating a will by transferring the Florida property to his son and himself as joint tenants with right of survivorship. Problem #1: Sam does not realize that any asset held in his own name at death (e.g., several savings and checking accounts, works of art, and household items) will be disposed of by the law of intestacy, and without a will there will be no executor to administer his estate. Problem #2: if Sam’s son predeceases Sam, the Florida property winds up back in Sam’s gross estate. Problem #3: Sam’s son can sever the joint tenancy with right of survivorship without Sam’s consent and create a tenancy in common.

I would suggest to Sam to:

  • have a will drafted and name an executor and successor executor. Give your executor the power to sell probate assets to pay administration expenses, debts, and taxes. Either name specific individuals as beneficiaries to receive any balance of assets or bequeath them to the trust referred to in (b) below.
  • create as a separate document a revocable trust naming yourself as the trustee and someone else as a successor trustee, reserving for yourself the power to alter, amend, or terminate the trust, but provide that the trust becomes irrevocable upon your death. Require the trust to pay administration expenses, debts, and taxes if there are insufficient assets in your probate estate to cover all of them. Transfer title to the Florida property into this trust. In this way you can maintain control of this property until you die, perhaps providing in the trust that any income generated by the property will be retained by you or distributed to your son; eliminate the possibility of conversion of the property into a tenancy in common; and decide if your son dies first you want the proceeds from the sale of the Florida property to be partially retained by you, partially to go to your son’s estate, or go to the grandchildren utilizing a portion of your generation-skipping transfer tax exemption, with appropriate language to protect the grandchildren if they are too young to handle that amount of money.
  1. Sally, 77 years old, never married, owned a very successful business she sold 7 years ago. Last year, 2018, her stocks, bonds, and bank accounts were appraised at $11 million. Her accountant told her that TCJA signed into law on December 22, 2017, doubled the unified estate/gift lifetime exemption to $10 million, which in 2018 stood at $11,180,00 after being indexed for inflation. Based on this information Sally gifted $5 million to five adult nieces and nephews, each receiving $1 million, and used up $5 million of her unified estate/gift tax exemption. What the accountant failed to tell her is that by its terms the new law sunsets on 12/31/2025 (i.e., on 1/1/2016 the exemption reverts to $5 million indexed for inflation). Assuming Congress does not intervene to change this sunset provision Sally faces a serious potential problem. One can only guess how much the unified exemption will be on 1/1/2026 after being indexed for inflation, but let us for the purpose of illustrating Sally’s problem assume it to be $7 million. If Sally dies in 2026 at the age of 85 with a combined taxable estate and adjusted taxable gifts of $11 million, $4 million will be in excess of the $7 million unified exemption and subject to tax with the maximum rate at 40%. One can only hope someone pointed this out to her before she made the $5 million gift.
  2. Bob, 70 years old, and Belle, 50 years old, were married 3 years ago, both for the first time. Belle is the daughter of a deceased wealthy real estate entrepreneur, and five years ago she received $20 million as a beneficiary named in his will. She has not used any of her lifetime estate/gift tax exclusion amount. Bob retired as a senior partner in a law firm, has $3 million in assets, none of which are held jointly with his spouse, and has made no taxable gifts. Bob would like to bequeath the $3 million to his sister but would like his spouse to be able to use his unused lifetime estate/gift tax exclusion amount under the portability provisions.

Bob needs to make sure his executor understands the following;

  • Although Bob’s estate will not be large enough to require the filing of an estate tax return Form 706 in order to pay an estate tax due, Bob’s executor must nevertheless make a portability election on a timely filed Form 706 in order for Bob’s unused lifetime estate/gift tax exclusion amount to be available to his surviving spouse. Had Bob died in 2018 his unused exclusion amount would have been approximately $8 million dollars (called his DSUE amount, deceased spousal unused exclusion amount) available under the portability provisions for use by his surviving spouse for subsequent transfers during her life or at death. Belle would then have available her own exclusion amount, $11,180,000 in 2018, plus Bob’s 8 million under portability.
  • Form 706 is required to be filed within nine months after death. However, IRS Rev. Proc. 2017-34 extends the due date for filing Form 706 until on or before the second anniversary of the decedent’s date of death. The requirements in order to elect the Rev Proc 2017-34 extension are:
  • The extension cannot be chosen if the decedent’s Form 706 reports a taxable estate and therefore an estate tax is due and required to be paid;
  • The executor must make the portability election on Form 706;
  • the executor must include on Form 706 a computation of the DSUE amount;
  • the decedent was a U.S citizen or resident on the date of death
  • the Form 706 must state at the top that the return is FILED PURSUANT TO REV PROC 2017-34 TO ELECT PORTABILITY UNDER SECT. 2010(C)(5)(A)
  • The surviving spouse is not entitled to use a portability amount from a prior deceased spouse.

It is worth reading Rev Proc 2017-34 because there are procedures discussed that extend the possibility of filing the decedent’s Form 706 even beyond the second anniversary of his date of death.

  1. Rebecca, 55 years old, and Robert, 60 years old, have been married 30 years, a first marriage for both of them. They have two children, Jake, 28 years old, and John, 26 years old, each of whom have promising careers in the law firm in which Robert is a partner. Jake and John each have one child. Robert owns stocks and bonds appraised this year at $8 million, expected to generate approximately $160,000 annual income. Additionally, Robert owns a condo in Manhattan appraised at $3 million and another condo in Florida appraised at $4 million. Rebecca devoted her life to raising the children and taking care of the household, has very little assets in her own name, no financial experience, and absolutely no interest in being burdened with the financial responsibility of taking charge of the finances if Robert predeceases her.

I would suggest to Robert:

Create in your will a qualified terminable interest property (QTIP) trust naming a knowledgeable trustee to control the trust after you die, someone whom you trust and who will understand Rebecca’s financial needs at that time. Bequeath the stocks and bonds and the two condos to this trust. The following are the requirements to have a successful QTIP trust:

  • The QTIP trust as drafted must be irrevocable;
  • The QTIP trust as drafted must name a trustee;
  • Provide in the trust that if Rebecca survives you she is to receive all trust income for her life payable annually or more frequently. She will receive the $160,000 annual projected income from the stocks and bonds she may need to support her lifestyle, including maintenance of the two condos. When Rebecca dies provide in the trust who will then receive the trust assets. You may wish to designate your two children as equal beneficiaries of one-half of the trust corpus and your two grandchildren as equal beneficiaries of the remaining one-half in order to utilize your available GST tax exemption (see discussion of the reverse QTIP election below).
  • During Rebecca’s life no person can have the power to appoint any part of the trust property to any person other than to her.
  • Your executor must make an irrevocable election on your federal estate tax return, Form 706, to have the QTIP trust qualify for the marital deduction. Your executor can elect to have only a specific portion of the trust qualify for the marital deduction.
  • The surviving spouse must be a citizen of the U.S.

What have you accomplished by creating a QTIP trust?

  • Assuming your executor makes the Form 706 election described in (e) above, the assets in the QTIP trust qualify for the unlimited marital deduction (i.e., the assets will not be in your taxable estate because of this deduction and therefore you will not need to use any of your unified estate/gift tax lifetime exemption).
  • Both the QTIP principal and income will be included in Rebecca’s gross estate when she dies, and the assets will receive a step-up in basis to current fair market value. If your executor fails to make the Form 706 election then the opposite occurs: you will not be entitled to a marital deduction for the QTIP trust assets, they will not be included in Rebecca’s estate when she dies, and they will not receive a step-up in basis.
  • Unlike an outright bequest to Rebecca as your surviving spouse over which she has total control, you were able to provide for her financial needs during her lifetime without giving her the power to spend assets unwisely, or transfer assets to a second husband or his children, and you were therefore able to maintain control over the trust and determine who the remainder beneficiaries are after she dies.

At this point I suggest you familiarize yourself with the reverse QTIP election. Generally, a decedent’s unused generation skipping transfer tax (GSTT) exemption is not available to a surviving spouse through portability. A reverse QTIP election allows a decedent who has created a QTIP trust for his surviving spouse to be treated as the transferor of the trust property for purposes of the GST tax.

Here is how it works:

  • Your executor makes the QTIP election on your federal estate tax return, Form 706, as described in (e) above.
  • Your executor makes an irrevocable reverse QTIP election on the same Form 706.
  • Assume after Rebecca dies the QTIP trust designates your two children equal beneficiaries of one-half of the trust corpus and your two grandchildren as equal beneficiaries of the remaining half. The reverse QTIP election allows you to be treated as the transferor of the trust property to be distributed to your grandchildren for purposes of the GST tax (but not for purposes of the estate tax, i.e. the QTIP trust assets are still includible in Rebecca’s gross estate when she dies).
  • Assuming the QTIP trust provides for remainder beneficiaries as suggested in (c) above, the Treasury Regulations allow your executor to divide the QTIP trust equally into two separate trusts, one trust providing Rebecca an income interest for life with remainder to your children and the other trust providing her an income interest for life with remainder to your grandchildren (skip persons). If severed on a fractional basis the new trusts need not be funded with a pro rata portion of each asset in the QTIP trust. All of this becomes relevant when your executor attempts to match the portion of QTIP trust assets distributable to your grandchildren with the amount of the GST exclusion in effect at the time of your death. If, for example, you die after 12/31/2025 when the GST tax exclusion amount is $6 million, a distribution of $7 million to the grandchildren will result in a $1 million GST taxable transfer (assuming you have not previously made any transfers to skip persons).

Finally, I suggest you familiarize yourself with the portability provisions discussed in case #3, above, in this blog (Bob and Belle). With $15 million of QTIP assets potentially includible in Rebeca’s gross estate, she may need to have available any of your unused lifetime estate/gift tax exclusion amount.

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This column is intended to make information available to its readers and does not constitute legal or tax advice. Please consult IRS Circular 230 Notice, regulations governing practice before the IRS with respect to not using a blog as written tax advice to support a taxpayer’s dispute with the IRS.


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