• The Tax Court agrees that the remainder beneficiaries made gifts in the termination of the limited interest estate (QTIP)—Clotilde McDougall died in December 2011 with an estimated fortune of $60 million. Her husband Bruce and two children survive her. Her estate plan directed that most of her estate (about $54 million) be held in a marital trust for Bruce, for which a QTIP election was made. Under the terms of the trust, upon Bruce's death, the trust would be divided equally among her children.

Five years later, the trust had doubled in value, and Bruce and his two children executed a nonjudicial agreement to terminate the marital trust. As a result, all of the marital trust assets were distributed to Bruce. That same day, Bruce then used those assets to make gifts to children's benefit funds.

The family conceded that the termination of the marital trust, under Section 2519 of the Internal Revenue Code, resulted in a deemed transfer of the remainder interest to the children. However, they argued that the children gave Bruce a “compensatory” gift because all the assets were transferred to him.

The family filed gift tax returns and disclosed the transactions, and the Internal Revenue Service issued notices of deficiency, arguing that the two gift transactions do not offset or negate each other.

IN McDougall v. Commissioner, 163 TC No. 5 (Sept. 17, 2024), the Tax Court held for the IRS, relying heavily on its precedent of The Annenberg Estate162 TC No. 9 (May 20, 2024), which had very similar facts. Under IRC Section 2519, any disposition of an income interest in a QTIP trust is treated as if the surviving spouse had made a deemed transfer of the entire remaining interest in the QTIP. However, because Bruce kept all the property, the court ruled that he had not made free gifts because nothing had actually been given to the children. The court ruled that Bruce gave nothing as a result of the purported transfer.

However, the transaction did not leave the children in the same place before and after completion. Prior to the termination, they had remaining interests in the marital trust. Upon termination, the two children had no rights to the remaining interests in the QTIP and received nothing in return. These were free transfers from each child, without any payment and subject to gift tax.

Once again, the complicated deemed transfer rules of section 2519 caught the taxpayer off guard.

• Family Limited Partnership (FLP) is not considered—IN Estate of Fields v. Comm'r (TC Memo. 2024-090), the Tax Court affirmed the IRS's determination that the decedent's estate included the value of the assets transferred to an FLP.

Anne Fields inherited an oil business from her husband when he died in the 1960s and successfully managed it herself for years, growing it significantly. Anne signed a Lasting Will and Power of Attorney in 2010. In 2011, she was diagnosed with Alzheimer's and soon after broke her hip and underwent multiple surgeries. She appointed her great grandson, Bryan, in whom she had great faith, as executor of her estate and lasting power of attorney. Under her will, she left specific bequests of $1.45 million to various family members and friends, and the balance of her estate went to Bryan.

A few years later, in 2015, Bryan consulted a friend who was also an attorney about the potential for restructuring Anne's asset holdings. Under the advice of this lawyer, Anne created two limited liability companies (LLCs). She was the only member of both. Bryan signed all LLC agreements for him, using the durable power of attorney, and for himself as manager of the LLC. One LLC kept money, bills and collectible guitars; the other had real estate in Winnsboro, Texas. The LLCs were created and funded entirely by Bryan in May of 2016. A month later, Anne died.

The Tax Court found that Anne did not maintain sufficient assets outside of the LLC for her support and trusts under her will and determined that there was an implied agreement that the partnership would make distributions to Anne for her expenses and , after her death, to fulfill the bequests in her estate plan. As a result, the partnership's assets were included in its estate under IRC section 2036(a)(1). Further, she retained the right to dissolve the partnership with respect to Bryan, giving her the right to designate the persons to enjoy the property, which triggers the inclusion of estate tax under section 2036(2). Finally, the court found no evidence of any business purpose for the LLC: There was no change in its assets or asset composition that would create a non-tax reason for asset management, the assets transferred did not require management active and were all very different, with no apparent synergy from merging them into a single entity.

Unable to find a clear non-tax business reason for the structure, the court concluded that the transfers to LLCs were not a bona fide sale for full consideration. of areas the case is a classic example of the IRS coming down on an FLP/LLC created by a decedent in an effort to reduce the estate tax bill.

The court used the formula from Moore's EstateMemo TC. 2020-40, to calculate the amount included in the gross estate for purposes of IRC Sections 2033, 2036, and 2043, as follows: (1) the date-of-death value of the amount received from the transfer to the LLC remaining in the estate ( ie, the value of its LLC units), plus (2) the date-of-death value of the LLC assets that were included in its section 2036 estate, minus (3) the value of the amount received at the time of the transfer to the LLC (ie, the value of the LLC units received when the LLC was financed). If the value of her LLC interests in the transaction increased from the date of the gift, her wealth would also have increased under this rule. However, as it turns out, the value of Anne's interests in the LLC did not increase between the date of the transfer and death (presumably because such a short time passed), so (1) and (3) were divided against each other. the other.

• The IRS issues final regulations implementing the basic consistency rules of IRC section 1014(f)—The IRS and Treasury issued final regulations (final records) (TD 9991) regarding the reporting of basis consistency rules under sections 1014(f) and 6035. These final rules apply to estate tax returns filed after September 17, 2024.

Under section 1014(f), the basis of the recipient's property received by the decedent must be the same as the value reported on the federal estate tax return. Article 6035 defines the method and requirements for reporting property values ​​for the executor of the property. The executor of an estate who is required to file an estate tax return must file a Form 8971 showing the values ​​of the estate's assets and send it to the beneficiaries who receive property from the estate.

The final rules have generally simplified the process and include the following changes:

The reporting deadline is extended. The proposed regulations (proposed regulations) had required the executor to deliver Form 8971 to each beneficiary within 30 days of filing the estate tax return. The same rule applies if the beneficiaries have already received the property by the due date or when
Form 706 is filed. But if the beneficiaries have not yet received the property by the time it is due or the estate tax return has been filed, the executor now has until January 31 of the year following the calendar year in which the Form 706 was filed.

The zero basis rule is eliminated. The proposed rules had required any property not reported on an estate tax return within the limitations period to have a zero basis. This created a punitive capital gains liability for the beneficiary who had no initial reporting responsibility. Many practitioners objected to the apparent unfairness of this provision, and it was removed in the final rules.

Reduced reporting for subsequent transactions. The proposed rules had required that subsequent transfers after death require further basic reporting. So, if a recipient of estate property later gave that property to another individual, the recipient also had to file Form 8971. The IRS agreed with the commenters that it was too much of an imposition on the beneficiaries to have reporting obligations. continuous. The final rules remove that obligation for all but trust administrators of certain trusts.

Including an extensive list of properties that are not subject to the reporting requirement:

• Household and personal items
• Property that fully qualifies for the marital and charitable deductions is exempt from the reporting requirements. (However, property subject to partial deductions is still subject to reporting requirements)
• Notes forgiven
• Surviving spouse's one-half interest in community property
• Ready money
• Trust property subject to a taxable winding-up