Source: https://www.actec.org/resources/recommendations-for-2013-2014-guidance/
Timestamp: 2019-04-18 21:28:41
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ACTEC Recommendations for 2013-2014 Guidance Priority List (Notice 2013-22) - Resources | The American College of Trust and Estate Counsel
ACTEC Recommendations for 2013-2014 Guidance Priority List (Notice 2013-22)
CC:PA:LPD:PR (Notice 2013-22)
Re: Recommendations for 2013-2014 Guidance Priority List (Notice 2013-22)
The American College of Trust and Estate Counsel (the “College”) is pleased to submit these recommendations pursuant to Notice 2013-22, I.R.B. 2013-15released on March 22, 2013, which invites recommendations for items that should be included on the 2013-2014 Guidance Priority List.
1. Guidance identifying the “successor beneficiaries” of a trust who may be dis- regarded in determining a decedent’s designated beneficiary when a non- conduit “see-through” trust is named beneficiary of qualified plan or IRA benefits.
2. Regulation changing the due date for filing Form 3520A from March 15 to April 15.
If you or your staff would like to discuss the recommendations, please contact Ellen Harrison, Chair of the ACTEC Washington Affairs Committee, at (202) 663-8316, or ellen.harrison@pillsburylaw.com; or Leah Weatherspoon, ACTEC Communications Director, at (202) 688-0271, or lweatherspoon@actec.org.
The American College of Trust and Estate Counsel (ACTEC) Recommendations for the 2013-2014 Guidance Priority List (Notice 2013-22)
1. Guidance identifying the “successor beneficiaries” of a trust who may be disregarded in determining a decedent’s designated beneficiary when a non-conduit “see- through” trust is named beneficiary of qualified plan or IRA benefits.
Reg. §1.401(a)(9)-4, A-5 provides that if a trust is named as beneficiary and certain threshold requirements for a “see-through trust” are satisfied, the beneficiaries of the trust (and not the trust itself) will be treated as having been designated for purposes of determining the minimum required distribution period under Section 401(a)(9). Reg. §1.401(a)(9)-5, A-7 provides that “contingent beneficiaries” of such a trust must be counted among the trust’s beneficiaries for purposes of determining the distribution period, but “successor beneficiaries” will be disregarded. The distinction between the two is not articulated in the regulations apart from two examples. From one example (Reg. §1.401(a)(9)-5, A-7, Ex. 2), one may extrapolate that remaindermen of a conduit trust (a trust under which all plan or IRA distributions are required to be paid out currently as opposed to accumulated in the trust) that lasts for the lifetime of the conduit beneficiary will be treated as successor beneficiaries. The second example (Reg. §1.401(a)(9)-5, A-7 Ex. 1,) deals with a non-conduit trust, but is of limited utility since it de- scribes a trust which in the real world would not exist.
Please see the attached March 27, 2003 ACTEC letter addressed to Marjorie Hoffman, Esq., Senior Technician Reviewer, Employee Benefits & Exempt Organizations, Internal Revenue Service (also transmitted to George Bostick, Esq., Benefits Tax Counsel, Office of Tax Policy at the Department of Treasury by the attached July 1, 2010 ACTEC letter). The 2003 letter provides examples of six non-conduit trusts named as beneficiaries of qualified plan or IRA benefits, suggests which beneficiaries should be identified as successor beneficiaries in each case, discusses the rationale for the results, and emphasizes the need for clear rules to make these determinations. The 2003 letter letter reviews the “snapshot rule” that has been applied in many private letter rulings and compares that rule to a suggested “life expectancy rule” that might instead be applied to a greater number of non-conduit trust provisions.
The 2003 letter letter also proposes for consideration a rule to apply to trusts that defer dis- tributions to a younger beneficiary until a specified age is attained. The proposed rule is contrary to the result reached in certain private letter rulings, but it is supported by strong policy con- siderations [recognized in the generation-skipping transfer (GST) tax law] and produces a simpler, more understandable method of determining successor beneficiaries in this common form of non-conduit trust. Finally, the 2003 letter letter discusses instances where a trust beneficiary’s estate is the recipient or potential recipient of trust benefits upon the beneficiary’s death and the reasons such a circumstance should not prevent the trust beneficiary from being treated as a designated beneficiary.
The basic fact pattern found in the private letter rulings arises frequently. Therefore, we be- lieve that a published ruling is needed. Currently, after the death of a plan participant or IRA owner, the spouse may be obliged to obtain his or her own ruling at considerable cost and inconvenience, either because the plan administrator or IRA sponsor insists on a ruling or simply because the spouse knows that even numerous private letter rulings issued to others may not be relied on. A Revenue Ruling would provide assurance to plan sponsors and guidance to taxpayers as to the circumstances (whether a spouse’s unilateral control over the decision to distribute the decedent’s interest in the plan or account, the spouse’s actual receipt of a distribution, or both) under which a spousal rollover is valid if an estate or trust is named as the beneficiary.
Rev. Proc. 2001-38, 2001-24 I.R.B. 1335, announced circumstances in which the IRS “will disregard [a QTIP] election and treat it as null and void” if “the election was not necessary to reduce the estate tax liability to zero, based on values as finally determined for federal estate tax purposes.” The procedure “does not apply in situations where a partial QTIP election was required with respect to a trust to reduce the estate tax liability and the executor made the election with respect to more trust property than was necessary to reduce the estate tax liability to zero.” The procedure “also does not apply to elections that are stated in terms of a formula designed to reduce the estate tax to zero.”
Thus, the paradigm case to which Rev. Proc. 2001-38 applies is the case where the taxable estate would have been less than the applicable exclusion amount anyway, so the estate would not be subject to federal estate tax, but the executor listed some or all of the trust property on Schedule M to the estate tax return and thus made a redundant QTIP election.
Rev. Proc. 2001-38 is a relief measure. The transitional sentence between the summary of the background law and the explanation of the problem states that “[t]he Internal Revenue Service has received requests for relief in situations where an estate made an unnecessary QTIP election.”
The American Taxpayer Relief Act of 2012 made permanent the “portability” of the unused exclusion amount of a predeceased spouse for the use of the surviving spouse. By statute (section 2010(c)(5)(A)) and regulation (Reg. §20.2010-2T(a)) portability is available only if it is elected on a federal estate tax return for the estate of the predeceased spouse. The regulations (Reg. §§20.2010-2T(a)(1) & (7)(ii)(A)) contemplate that a federal estate tax return will be required for the purpose of electing portability even if it would not be required for federal estate purposes alone, such as a return for an estate where the gross estate, and thus necessarily the taxable estate, are less than the applicable exclusion amount, the paradigm case to which the relief of Rev. Proc. 2001-38 applies.
This leads to the question whether a QTIP election that is “not necessary to reduce the estate tax liability to zero,” because it is made on a federal estate tax return filed to elect portability but not otherwise required for federal estate tax purposes, is therefore “null and void,” by reason of Rev. Proc. 2001-38. The “relief” origin of Rev. Proc. 2001-38, the likelihood that a revenue procedure announcing the Service’s administrative forbearance would not be used to negate an election authorized by statute, and the unseemliness of denying a QTIP election to smaller estates while allowing it to larger estates all suggest that a QTIP election will be respected in such a case. This view is reinforced by the explicit reference in Reg. §20.2010-2T(a)(7)(ii)(A)(4) to QTIP elections in returns filed to elect portability but not otherwise required for estate tax purposes.
Clarification of that result would be appropriate and welcome.
As an example, Rev. Rul. 62-13, 1962 C.B. 180, ruled a transfer in trust incomplete because trustees had discretion to pay income and/or principal to the grantor and others during the grantor’s life and there was therefore “no assurance that anything of value would ever pass to the remaindermen,” even though the grantor retained no power to direct the disposition of the remainder. Thus, CCA 201208026 presents the anomaly that its Donors with a power of appointment over the trust property at death were left with “no power to change [the trust property’s] disposition,” while the grantor in Rev. Rul. 62-13 who retained no power had not “parted with dominion and control.” But CCA 201208026 does not cite Rev. Rul. 62-13 (or Rev. Rul. 77-378, 1977-2 C.B. 347, which “clarified” it).
We appreciate that CCA 201208026 is necessarily a part of a larger file, that it is addressed to Area Counsel and thus possibly written in contemplation of litigation (or at least serious pursuit of issues in audit), and that it recites that it “may contain privileged information” (although no redaction other than identifying details, including identification of the jurisdiction, is apparent), and for all those reasons it may not tell the whole story. We also appreciate that CCA 201208026 may not be used or cited as precedent (and it so recites). Nevertheless, such documents, when made available for public inspection, are used by practitioners to guide their own best practices and assist them in advising clients. Thus, balanced (and citable) guidance that seeks to resolve questions rather than to pursue a litigation position would be desirable and would foster uniform treatment and compliance. As we have seen in other contexts (such as Rev. Rul. 81-51, 1981-1 C.B. 458, and Rev. Rul. 2004-64, 2004-2 C.B. 7), such guidance could and perhaps should address the extent to which it will be applied prospectively under Section 7805(b)(8).
While it may not be necessary to address the full range of variations that should result in trusts that need not be uncrossed, it should be possible to create greater clarity by acknowledging a set of safe harbors such as the existence of separate trustees (or co- trustees when the settlors have been named as fiduciaries) or differences in the powers granted to the spouses, both of which would make it possible to have trusts with a common purpose without requiring some of the differentiation and distortion commonly applied currently to avoid the application of the Doctrine.
• What are the tax consequences of the receipt by the trust of compensation for the use of trust property paid by a grantor, beneficiary or related person? For example, will a beneficiary realize gross income from payments such beneficiary herself made to the trust which are distributed
or required to be distributed back to her? If the rental is for the use of U.S. property, is tax withholding required? Will compensation for the use of property include expenses of use (such as utilities and condominium fees) paid by the person who uses the property and, if so, will the foreign trust be deemed to have received gross income where such person pays such expenses?
ACTEC submitted comments to representatives of the Department of the Treasury on January 7, 2011, concerning the application of FATCA to trusts and their beneficiaries. A copy is attached. Since that time, proposed and temporary regulations were issued under Section 6038D, final Form 8938 was issued, and final regulations were issued concerning Sections 1471-1474. This guidance clarified a number of important issues, but some additional guidance would be very helpful. In addition, a number of intergovernmental agreements (“IGAs”) have been signed modifying the rules for purposes of Sections 1471-1474.
The regulations under Sections 6038D and Sections 1471-1474 were extremely helpful in providing bright line tests for determining when a beneficiary has a beneficial interest that must be reported and quantifying the value of such interest. In particular, the regulations are helpful in stating that a person whose interest is mandatory is deemed to own a portion of the trust based on his or her mandatory distribution rights valued using the rules under Section 7520, a beneficiary whose interest is wholly discretionary is considered to own only the value of what he or she actually received from the trust in the relevant year, the interest of a beneficiary in a trust that is deemed owned by another U.S. person under the grantor trust rules may be disregarded (so that only the U.S. person who is deemed to be the owner under Sections 671-679 is considered to own the trust) and certain de minimis interests may be disregarded. This rule acknowledges the difficulty of allocating beneficial interests to discretionary beneficiaries. However, certain questions remain such as whether mandatory distribution rights include remainder and contingent interests, whether the de minimis rules apply to trusts classified as foreign financial institutions (“FFIs”) as well as to trusts classified as non-financial foreign entities (“NFFES”), whether the rules for determining beneficial interests are applicable to owner reports filed by owner-documented FFIs, and whether Treas. Reg. section 1.1473- 1(b)(2)(v) (attributing ownership among related parties) applies to related parties who are foreign persons and to trusts that are FFIs. For example, if a foreign person is treated as owning all or a portion of a trust, will a U.S. relative of that foreign person be attributed ownership even though the U.S. relative received no distribution?
In addition, the regulations under Sections 1471-1474 do not allow the bright line test for determining beneficial ownership of a trust to be applied for purposes of determining indirect ownership of shares of a holding company owned by a trust. Instead, Treas. Reg. section 1.1473-1(b)(2) requires that a “facts and circumstances” test be used. The same bright line rule is necessary to determine indirect ownership of the holding company in order to make administration of the withholding rules practicable. The use of different rules for determining ownership of the trust and holding company may lead to illogical results. For example, it may be possible for a beneficiary whose interest in the trust is zero percent to be considered to indirectly own some of the shares of the underlying holding company owned by the trust.
A simplified method for determining ownership of shares of foreign corporations held indirectly through foreign trusts also is necessary to comply with the new passive foreign investment company (“PFIC”) information reporting rules under Section 1298(f). FATCA requires annual reporting of PFIC interests held or deemed held indirectly through a foreign trust even if the taxpayer has not received a distribution or made any of the elections available to PFIC shareholders. A preferable alternative to aggressive application of indirect ownership rules would be adoption of reforms to the treatment of corporations owned through trusts which are discussed in paragraph 4 below.
a. How to determine who is the “payee” for purposes of withholding under Section 1471 when payment is made to a trust (i.e., is the payee the trustee, the custodian, the holding company owned by the trust, the trust itself as an entity, the grantor in the case of a grantor trust, or the beneficiary in the case of a beneficiary-owned trust), is the payee different depending upon whether the trustee is an FFI or an NFFE, whether the payment is U.S. source fixed and determinable annual periodic income and whether the trust beneficiaries are exempt persons? In particular, the rules of Treas. Reg. section 1.1471-3(a)(3)(ii) are confusing.
b. Whether an estate is disregarded as a specified U.S. person for all withholding tax purposes or whether the exception to the definition of U.S. accounts to exclude accounts held by an estate[10] applies only to accounts held directly by a U.S. estate. For example, is a trust that has only a U.S. estate and foreign persons as beneficiaries considered to be a U.S. owned entity?
c. Whether a trust that is a participating FFI must report “accounts” deemed held by U.S. beneficiaries or may report account information in the aggregate in the same manner as an owner-documented FFI or NFFE may report or in the alternative whether the trustee may elect to instead file those forms that a U.S. trustee would file, such as Forms K-1 (in lieu of Forms 1099 or FATCA reports).[11]
d. Guidance for determining when and how a beneficiary of a foreign trust can claim a refund of overwithheld tax as the “beneficial owner” of the income. The beneficiary is the beneficial owner to the extent of distributions made to such beneficiary that carry out income of the trust to the beneficiary. However, the beneficiary could not be the beneficial owner of that portion of trust income that has been withheld to pay tax unless the trustee were able to assign that tax refund to the beneficiary.
f. Clarification of when a trust is eligible to avoid withholding by becoming an owner-documented FFI, and in particular, those affiliations that make a trust ineligible to be an owner-documented FFI.[12]
g. Guidance concerning an election by a foreign trustee to file US information returns.
[1] According to the House Report to H.R. 8 as passed by the House on April 4, 2001, the “Committee recognizes that there are situations where a taxpayer would desire allocation of generation-skipping transfer tax exemption, yet the taxpayer had missed allocating generation-skipping transfer tax exemption to an indirect skip, e.g., because the taxpayer or the taxpayer’s advisor inadvertently omitted making the election on a timely-filed gift tax return or the taxpayer submitted a defective election. Thus, the Committee believes that automatic allocation is appropriate for transfers to a trust from which generation-skipping transfers are likely to occur.” House Report, p. 35.
[4] I.R.C. § 2632(c)(3)(B)(i), which provides that a trust is not a GST trust if the trust instrument provides that more than 25% of the trust corpus must be distributed to or may be withdrawn by one or more non-skip persons before that individual reaches 46 years of age, on or before one or more dates specified in the trust instrument that will occur before such individual attains 46 years of age, or upon the occurrence of an event that in accordance with Treasury regulations may reasonably be expected to occur before the date that such individual attains age 46. I.R.C. § 2632(c)(3)(B)(i) That exception applies, for example, to a trust that will terminate in favor of its beneficiary when the beneficiary reaches age 45.
[7] The fourth exception, for example, provides that a trust is not a GST trust if any portion of it would be included in the gross estate of a non-skip person (other than the transferor) if such person died immediately after the transfer. I.R.C. § 632(c)(3)(B)(iv).
[10] Treas. Reg. section 1.1471-5(b)(2)(iii) and 1.1471-2(a)(4)(vii).
[11] Treas. Reg. section 1.1471-4(d)(3).
[12] Treas. Reg. section 1.1471-3(d)(6).