Colorado Probate Blog - Wade Ash Woods Hill & Farley, P.C.

Laurie A. Hunter, graduated from Carnegie-Mellon University (B.A. 1975) and the University of Denver College of Law (J.D. 1981). Ms. Hunter has been in private law practice in Denver since 1981. Ms. Hunter was elected as a Fellow in the American College of Trust and Estate Counsel in 1998, and she serves on the State Laws and Charitable Planning Co...mmittees. Ms. Hunter is active in the Trust & Estate Section of the Colorado Bar Association, and is a frequent speaker on trust and estate issues. More

Overview of 2018 Tax Act

President Trump signed the 2018 Tax Act into law on December 22, 2017. Most of the provisions apply only to taxable years starting January 1, 2018 through December 31, 2025. The changes in the corporate tax rates are permanent. Wade Ash intends to send out a newsletter in February that will summarize more fully the provisions of the Act, especially as affecting estate planning. The following is a list of some of the major provisions:

The estate, gift and generation-skipping transfer tax exemption is doubled from $5 million to $10 million and still indexed for inflation since 2011. The 2018 exemption will be about $11.2 million.The individual standard deduction is also nearly doubled to $24,000 for married filing jointly, and $12,000 for single taxpayers; the income tax rates are slightly reduced.No more deductions for personal exemptions on individual returns (although they apparently do still apply for trusts and estates).Many itemized deductions for individuals were eliminated or reduced:$10,000 limit on the deduction for state and local taxesno deduction for interest on home equity loans, including current loansthe deduction for mortgage interest on new loans is only allowed up to $750,000 in indebtednessNo deduction for alimony on divorces finalized after 12/31/2018 (and the receipt of alimony will not be taxable income)medical expenses may still be deducted over 10% of AGIcharitable contributions may still be deducted (up to 60% of AGI instead of only 50% for cash contributions to public charities)NO miscellaneous itemized deductions, including investment advisor fees, accountants’ fees, attorney fees529 plan accounts may make qualified distributions for elementary and high school education up to $10,000 per year per studentC corporation changes are permanent and include:corporate tax rate reduced to 21% from 35%corporate Alternative Minimum Tax repealed100% expensing of new and used property used in the business, except for buildingsBusiness expense deductions include state and local taxes without the $10,000 limitNew 20% deduction for "qualified business income" under pass-through entities such as partnerships, LLCs and Sub-S corporationsMust be income earned in a "trade or business"Deduction excludes income from capital gains, dividends, interestIf total income is less than $315,000 for married filing jointly ($157,500 for single taxpayers), no further limit on the deduction.If more than the threshold, subject to limitation of greater of (a) 50% of taxpayer’s share of W-2 wages, or 25% of taxpayer’s share of W-2 wages plus 2.5% of depreciable propertyIf income is over the threshold, no 20% deduction for income from pass- through service companies, including health, law, accounting, performing arts, athletics, financial services, "reputation/skill-based" services, investment managementMany issues have not been addressed in the Act, and will need to be clarified in regulationsno deduction for business entertainment expenses (except if employees are included, like holiday parties)changes to fiduciary income tax (trusts and estates):miscellaneous itemized deductions (subject to the 2% floor) are NOT deductibleitems that are deductible are those NOT subject to the 2% floor and include trustee fees, attorney fees to administer the trust or estate, preparation of estate tax returns and fiduciary income tax returns (but not gift tax returns), and administrative expenses such as probate filing fees, appraisals and preparation of accountingsstate and local taxes up to $10,000 are deductiblecharitable contributions are deductible if required by the governing instrumenttrusts and estates still have the personal exemption ($600 for estates, $100 for simple trusts and $300 for complex trusts)
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Family Business Valuation Proposed Regulations Withdrawn

In a notice issued by the IRS on October 17, 2017, Treasury has withdrawn the Proposed Regulations issued August 4, 2016 concerning the estate, gift and GST tax treatment of valuation of family-controlled businesses. These regulations were issued under Code Section 2704 and would have impacted planning involving the valuation of such interests for transfer tax purposes. After the proposed regulations were issued, numerous written comments were submitted and a public hearing was held on December 1, 2016. President Trump issued Executive Order 13789 on April 21, 2017, instructing the Secretary of the Treasury to review tax regulations issued on or after January 1, 2016, and to submit a report to the President by September 18, 2017. The Secretary recommended that the proposed regulations be withdrawn, and the Treasury Department and IRS have now done so.

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Value of Michael Jackson’s Image

When Michael Jackson died, his estate valued his image and “right of publicity” at zero on his U.S. Estate Tax Return, as well as the value of his music interests due to the large debts encumbering those interests. The IRS disagreed, and argued that the success of the documentary and Cirque du Soleil show released after his death were foreseeable and should affect the value of his estate. The disagreement resulted in a $526 million estate tax deficiency and penalties of $205 million imposed by the IRS. The trial began in Tax Court on February 6, 2017.

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Year-End Tax Planning

Annual Exclusion Gifts. The gift tax annual exclusion is $14,000 for 2016, and stays the same for 2017. You can make gifts of this amount to each of any number of people in a calendar year and not have to file a gift tax return, and the gifts will not use up part of your estate tax exemption. You can also make gifts of an unlimited amount by directly paying a donee's medical expenses to the provider, or tuition to the educational institution. If you make the gift by a check, the donee must deposit the check and the amount must clear your account prior to the end of the year.

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2016 Colorado Law Changes

There were a few probate-related bills passed by the Colorado legislature this past session, including the following:

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2017 Inflation-adjusted Transfer and Fiduciary Income Tax Figures

Based on the CPI index for period ending August 31, 2016, RIA Checkpoint has calculated the transfer tax figures for 2017 to be the following:

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Estate of Petteys v. Farmers State Bank of Brush, 2016 COA 34, No. 14CA1581

On March 10, 2016, the Colorado Court of Appeals issued an opinion that reversed the trial court and held that an irrevocable trust, a part of which was included in the gross estate of the decedent, was required to contribute its pro rata share of estate taxes under Colorado's estate tax apportionment statute. Our firm had prepared the Will for the decedent, in which estate taxes attributable to the irrevocable trust's inclusion in his gross estate were specifically apportioned to that trust. The trust had been created in 1958. The decedent died in 2009; a U.S. Estate Tax Return was filed in 2010, the estate paid the entire tax due, and the personal representative requested that the trust contribute its share of the tax. When the trustee refused, the personal representative brought suit. Initially, the trial court held that because federal law was silent as to apportionment to such interests prior to the 1986 effective date for IRC 2207B, the Colorado statute at 15-12-916 applied, but the court did not decide certain other issues. After the IRS completed its audit in October 2012, final request for contribution was made. A hearing was held before the trial court in 2015 on the remaining issues, and the court ordered, among other things, that the effective date statute at 15-17-101 permitted the court to refuse to apply the Colorado Probate Code if it found it to be "inequitable." The trial court found that it would be inequitable to force the trustee to pay its pro rata share of the tax and entered judgment for the trustee. The personal representative appealed.

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IRS Delays Basis Reporting for the Third Time

In Notice 2016-27, 2016-15 IRB 1, the IRS again delayed until June 30, 2016 the due date for filing new Form 8971 by an estate to report basis in a decedent's estate both to the IRS and to the beneficiaries.  As noted in earlier blogs, the "Highway Bill" signed into law on July 31, 2015 requires executors of estates filing U.S. Estate Tax Returns (Form 706) on or after that date to file a statement with the IRS within 30 days, and to report the fair market value of assets on the return to the beneficiaries.  The 2015 Form 1041 (U.S. Fiduciary Income Tax Return) includes provisions requiring consistent basis reporting.  The IRS had delayed the due date for new Form 8971 until February 29, 2016, then to March 31, 2016, and now to June 30, 2016.  The Form and Instructions are posted on the IRS website and proposed regulations have been released, but numerous questions have been raised.  The requirement to file Form 8971 does not apply to "portability returns" (those filed for estates with gross value less than the filing threshold solely to increase a surviving spouse's exemption), nor to assets that qualify for the charitable or marital deductions.  Basis must only be reported to beneficiaries who may receive property from an estate where those assets increased the federal estate tax.

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2016 Cost-of-Living Adjustments

The Colorado Department of Revenue recently posted the 2016 cost-of-living adjustments (tied to inflation). The exempt property and family allowance each stayed at $32,000 and the small estates affidavit stayed at $64,000.  For more information, go to 2016 COLA Adjustments.

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IRS Delays Basis Reporting Again

In Notice 2016-19, 2016-9 IRB, the IRS again delayed the due date for filing the new Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, reporting the basis in a decedent's estate both to the IRS and to the beneficiaries. The 2015 Form 1041 (U.S. Fiduciary Income Tax Return) includes provisions requiring consistent basis reporting. As noted in earlier blogs, the "Highway Bill" signed into law on July 31, 2015, requires executors of estates and certain heirs filing U.S. Estate Tax Returns (Form 706) on or after that date to file a statement with the IRS, and to report the fair market value of assets on the return to the beneficiaries within 30 days of filing the Form 706. The IRS had delayed the due date for new Form 8971 until February 29, 2016, and has now extended that date again to March 31, 2016. The Form and Instructions are now posted on the IRS website, but numerous questions have been raised, resulting in not only another delayed due date, but a "suggestion" by the IRS that taxpayers wait until proposed regulations are issued to file the return. Proposed regulations are expected "shortly."

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Don't Forget Your Annual Exclusion Gifts!

A donor may give up to $14,000 per year per donee that qualifies for the annual exclusion from federal gift tax (generally, a gift of a present interest). Earlier in the year, it had been anticipated that amount would increase to $15,000 in 2016, but that turned out not to be true because of a low rate of inflation. So if you have not made annual exclusion gifts for 2015, and you are in a program of giving to reduce the size of your estate, you should make your $14,000 gifts before the end of the year, and you can make 2016 gifts of the same amount in January. If spouses intend to "split their gifts" by doubling the amount of the annual exclusion gifts, the election to split gifts must be made on a U.S. Gift Tax Return (form 709) filed with the IRS. The federal estate tax exemption is $5,430,000 in 2015, and it is increasing to $5,450,000 for decedents dying in 2016.

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Draft Instructions to 1041 Include Basis Reporting

As noted in a post last summer, the "Highway Bill" signed into law on July 31, 2015 requires executors of estates filing U.S. Estate Tax Returns (Form 706) on or after that date to file a statement with the IRS within 30 days, and to report the fair market value of assets on the return to the beneficiaries. These values must be used by the estate on its Form 1041, and the beneficiaries for basis-reporting purposes, but only if the estate was taxable. In Notice 2015-57, 2015-36 IRB, the IRS delayed the due date for both the information return and the statement until February 29, 2016. The draft instructions to the 2015 Form 1041 that were just released also require consistent basis reporting. The instructions to Schedule D include the statement: "The beneficiary must use a basis consistent with the estate tax value of the property to determine his or her gain or loss when the property is sold or deemed sold."

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IRS Determines no Statute of Limitations on Gifts Not Fully Disclosed on 709s

It is important to fully disclose gifts on U.S. Gift Tax Returns (Forms 709), because otherwise, no statute of limitations runs on the gift and possible gift tax. In Legal Advice issued by Field Attorneys 20152201F (issued September 2, 2015), IRS concluded a taxpayer failed to disclose gifts to his daughter in a manner that would start the 3-year statute of limitations. Here, the taxpayer attached a short paragraph to his Form 709 stating that partnership interests were given to his daughter; the partnership assets were primarily farm land and an appraisal of the land had been obtained (but was not filed with the return). The statement also said that discounts were taken for "minority interests, lack of marketability, etc." to determine the fair market value of the gifts reported on the return. IRS concluded the gifts were not adequately disclosed because (1) the partnership interests were not described as either general or limited partnership interests, (2) the partnerships were not correctly identified, (3) no appraisal of the partnership interests was included, (4) no restrictions on the transferred interests were described (such as those contained in the limited partnership agreements) giving rise to any discounts, and (5) the full value of the partnerships based upon the appraised farmland was not disclosed.

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IRS Delays Basis Reporting Due Date

As noted in an earlier blog, the "Highway Bill" signed into law on July 31, 2015 requires executors of estates filing U.S. Estate Tax Returns (Form 706) on or after that date to file a statement with the IRS within 30 days, and to report the fair market value of assets on the return to the beneficiaries. In Notice 2015-57, 2015-36 IRB, the IRS has delayed the due date for both the information return and the statement until February 29, 2016.

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Highway Bill Contains Some Tax Provisions

On July 31, 2015, the President signed H.R. 3236, the "Surface Transportation and Veterans Health Care Choice Improvement Act of 2015" which primarily continues the highway trust fund for another three months. Included in the bill is a requirement for consistency for large estates (those required to file an estate tax return): the estate must report the value of property included in the gross estate (date of death or alternate value), and the same value must be used for income tax basis reporting. Any underpayment of tax due to understatement of basis would be subject to a 20% accuracy-related penalty, and the bill also clarifies that the 6-year statute of limitations applies where an overstatement of basis results in a substantial (25% or more) omission of income.

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Colorado COLA Adjustments to Probate Numbers Now Posted on Supreme Court Website

Colorado COLA adjustments to probate numbers now posted on Supreme Court website. As immediate past chair of the Rules & Forms Committee of the Trust & Estate Section of the Colorado Bar Association, Laurie Hunter had been pushing the Colorado Supreme Court to post the chart with the annually adjusted numbers affecting the Small Estate Affidavit, allowances, intestate shares, and the supplemental share of the elective share, with the JDF probate forms, so all persons would have easy access to them. They are finally available at : https://www.courts.state.co.us/Forms/Forms_List.cfm?Form_Type_ID=189.

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Don't Forget Portability!

I have met with two surviving spouses so far this year who did not file a federal estate tax return in their deceased spouse's estate. The deceased spouse did not have sufficient assets to require the filing of a return, but an opportunity was nevertheless lost. The deceased spouse's unused estate tax exemption is only "portable" to the surviving spouse's own exemption (added on to it) if the Form 706 is timely filed (within 9 months after date of death, or 6 months after that if an extension request is timely filed). Treasury granted a one-time extension until December 31, 2014 for couples who had failed to file, but that was because with the federal recognition of same-sex marriage, a lot of couples who did not think they could have portability, now could after the Supreme Court's Windsor decision. Whether Treasury will grant another similar extension in the future is unknown. But remember that in order to possibly double the surviving spouse's estate tax exemption through portability, an estate tax return must be filed.

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Facebook's Legacy Contact

Facebook now lets users designate a person who can have access to their account after their death, as part of the security settings. In the past, Facebook and other on-line services have resisted permitting one's agent under a financial power of attorney or a personal representative of one's estate from accessing accounts. Partly, this is because federal law prohibits anyone other than the "user" from accessing an account. The Uniform Fiduciary Access to Digital Assets Act authorizes fiduciaries under state law to access accounts, but there is still a conflict with federal law. This Uniform Act may be introduced in the Colorado legislature this session. Stay tuned!

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Congress Authorizes New Accounts for Disabled Individuals

Late December 16, 2014, Congress passed (and the President indicated he will sign) the Achieving a Better Life Experience Act (ABLE), creating a new type of tax-advantaged savings account to help meet financial needs of disabled individuals and their families.  The ABLE Act authorizes states to create these accounts (similar to 529 plan accounts for paying higher education expenses) starting in 2015.  Persons could make contributions to the accounts for named beneficiaries, and the accounts grow tax-free, similar to 529 plan accounts.  The accounts would not be considered "available assets" that would limit a beneficiary's qualification for Medicaid or other needs-based government benefits. Contributions to an account each year are limited to the gift tax annual exclusion (not five times that, as for 529 plan accounts), and if distributions are made for "qualified disability expenses" the beneficiary is not taxed on the distributions as part of his or her income.  The beneficiary must be disabled or blind under Social Security, and that condition must have occurred before the beneficiary reached age 26.

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Congress Passes Extender Bill Including Charitable IRA Rollover

Late December 16, 2014 Congress passed the tax extender bill, but only through December 31, 2014.  President Obama indicated he will sign this bill. This means that those at least age 70 1/2 may make their charitable gifts up to $100,000 directly from their IRAs for 2014 (and also use that to meet part or all of their Minimum Required Distributions for 2014), but we'll have to go through this same exercise in 2015.

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