On Feb. 7, 2018, the Internal Revenue Service and the Treasury Department released its Priority Guidance Plan with Updates for the Second Quarter, which sought to identify what regulatory projects would be most needed in light of the 2017 Tax Legislation.1 The purpose of the Priority Guidance Plan is for the IRS and the Treasury Department’s Office of Tax Policy to identify areas of tax law that should be addressed by regulation or other administrative pronouncements. The Priority Guidance Plan that was just released is the second plan issued by the Trump administration. The first Priority Guidance Plan it issued was notable for eliminating many of the Obama administration proposals. To give some examples in the estate and gift tax field, the Trump administration removed projects which would’ve addressed defined value formula clauses and the valuation of promissory notes for transfer tax purposes. This updated Priority Guidance Plan carries forward the estate and gift tax proposals from the first Trump administration plan. It also adds 29 different projects, several of which are related to estate planning topics, to account for changes made by the 2017 Tax Legislation. On Feb. 13, the IRS and the Treasury Department released a notice of proposed rulemaking, which proposes removing 298 Treasury Regulations and amending 79 others. Here’s a brief overview of the added proposals, a recap of the proposals carried over from the first Trump Priority Guidance Plan and previous Priority Guidance Plans from the Obama administration, as well as a summary of the estate and gift tax Treasury Regulations that are proposed to be removed or changed.
Three New Projects
Three projects related to various estate planning issues were added to the updated Priority Guidance Plan in response to the 2017 Tax Legislation.
- Clawback: Under the 2017 Tax Legislation, the unified lifetime exemption is being nearly doubled. However, this increase is only temporary and will revert back to the current $5 million exemption (indexed for inflation) in 2026. This raises the potential for what practitioners refer to as “clawback.” Clawback would affect a donor who makes transfers during the increased exemption period that doesn’t trigger a gift tax payment given the exemption amount, but who, at a later date, either makes an additional gift or dies with a taxable estate that, when aggregated with prior taxable gifts, exceeds the lower exemption in effect at that time. The effect is retroactively taxing the gifts previously made. Congress didn’t address explicitly whether the potential for clawback should or shouldn’t exist. Instead, Congress left it to the IRS to address by regulation by adding Internal Revenue Code Section 2001(g)(2), which states, “The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out this section with respect to any difference between—(A) the basic exclusion amount under section 2010(c)(3) applicable at the time of the decedent's death, and (B) the basic exclusion amount under such section applicable with respect to any gifts made by the decedent.” The Priority Guidance Plan indicates that the IRS will be addressing the issue as it will provide “[g]uidance on computation of estate and gift taxes to reflect changes in the basic exclusion amount.” Note that the statutory language and the language in the Priority Guidance Plan doesn’t suggest what the outcome might be, but the assumption by many commentators is that the IRS will take regulatory action to prevent the application of clawback.
- ESBT: The 2017 Tax Legislation made changes for the Electing Small Business Trusts. Specifically, nonresident aliens are now eligible potential current beneficiaries. Further, the charitable deduction for ESBTs is now determined under IRC Section 170 instead of IRC Section 642(c). The new Priority Guidance Plan calls for “[g]uidance implementing changes to §1361 regarding electing small business trusts.”
- 529 plans: The use of 529 plans is a useful planning technique to transfer wealth to the next generation by using the annual exclusion amount to fund the plan while also potentially receiving a state income tax deduction. Under the 2017 Tax Legislation, 529 plans may now be used to pay up to $10,000 per year for tuition to elementary or secondary school. The Priority Guidance plan calls for “[g]uidance implementing changes to §529.”
Three Projects Return
The second Priority Guidance Plan issued by the Trump administration keeps the same three projects in the gifts, estates and trusts section contained in the initial Priority Guidance Plan; these projects have also been included in Priority Guidance Plans issued by the Obama administration. These projects are:
- Basis of grantor trust assets at death: Various theories have been proposed as to the treatment of the basis of assets held in a grantor trust that aren’t included in the decedent’s estate for estate tax purposes (that is, an intentionally defective grantor trust). Some contend that the assets do receive a step-up in basis under IRC Section 1014(b)(1) as the property is “acquired by bequest, devise, or inheritance ... from the decedent.” Others contend that a basis step-up isn’t available because the assets aren’t includible in the decedent’s gross estate based on the wording of Section 1014(b)(9). In 2015, the IRS announced that it would no longer issue rulings on the topic pending formal guidance on the issue.2 The issue was soon added to the Priority Guidance Plan as “[g]uidance on basis of grantor trust assets at death under §1014.” At this point, there have been no proposed regulations or other administrative pronouncements.
- Final IRC Section 2032 regulations: This regulatory project has been outstanding for some time as the project was first mentioned in the 2007-2008 Priority Guidance Plan. The overriding purpose of the regulatory project is to clarify how certain post-death actions impact the alternate valuation date. This project is in part a response to the Kohler case, in which the Tax Court allowed valuation discounts for transfer restrictions added to stock that was issued two months after the decedent’s death in a tax-free reorganization.3 Proposed regulations were first issued in 2008 and then again in 2011. One of the intended goals of the proposed regulations was to prevent estates from taking actions that would reduce the value for estate tax purposes by accelerating the valuation date, which would result in such valuation not reflecting post-death actions. In addition, the regulations clarify the availability of the alternate valuation date for items that pass by beneficiary designation, such as retirement accounts.
- IRC Section 2053 regulations: Since the 2008-2009 Priority Guidance Plan, the IRS has listed “[g]uidance under §2053 regarding personal guarantees and the application of present value concepts in determining the deductible amount of expenses and claims against the estate” as an item. This proposal could impact the deductibility of Graegin loans, as well as costs that are incurred over the course of estate administration, such as attorney fees.
One of the most interesting takeaways from the new Priority Guidance Plan is the omission of a proposal related to the deductibility of executor and trustee fees under IRC Section 67(e). The new tax legislation added Section 67(g), which states that until 2026, “[n]otwithstanding [Section 67](a), no miscellaneous itemized deduction shall be allowed.” Section 67(a) is often thought of as the 2 percent floor rule in which miscellaneous deductions are only allowed to the extent they exceed 2 percent of adjusted gross income. Section 67(b) defines the term “miscellaneous itemized deductions” as all deductions other than those listed in Section 67(b); fees incurred in the administration of a trust or estate under Section 67(e) aren’t among those listed in Section 67(b). Given that Section 67(g) only refers to Section 67(a), and the legislative history suggests that the intent underlying this change was limited to targeting deductions subject to the 2 percent floor, to which deductions pursuant to Section 67(e) aren’t subject, there’s a strong argument that the new law doesn’t impact Section 67(e) deductions. Nevertheless, there’s some ambiguity as to whether the new Section 67(g) does or doesn’t change the treatment of fees deductible under Section 67(e). IRS official, Catherine Hughes, of the Treasury Department’s Office of Tax Policy, stated at the ABA Tax Section’s meeting on Feb. 10, 2018 that the IRS was working on guidance on this topic and it will likely be one of the first projects to come out. Despite this oral recognition of the need for guidance, no such project was included in the Priority Guidance Plan.
Proposed Changes to Current Regulations
President Trump’s Executive Orders 13777 and 13789 directed the Treasury Department and the IRS to “reduce the regulatory burden” on taxpayers by revoking or revising Treasury regulations which are unnecessary. On Feb. 13, a copy of a notice of proposed rulemaking, which will be published in the Federal Register on Feb. 15, became available. This proposal calls for the removal of a regulation if it (1) interprets code sections that have been repealed since the regulation was issued, (2) interprets code sections that have been significantly revised since the regulation was issued or (3) has no future applicability as the regulation has expired by its terms or the relevant code section no longer applies given the time limitations in the code section. One estate tax regulation and one gift tax regulation are among those proposed to be removed and are summarized as follows:
- Removal of 20.2201-1. IRC Section 2201 provides reduced estate tax rates to those who die in combat, certain terrorist victims, and astronauts who die in the line of duty. This IRC section was originally introduced in 1949 to apply retroactively to World War II veterans who died in the line of duty and has been amended several times. The current regulation predates the most recent updates to the IRC section, which lead the Treasury Department to conclude that “these regulations [are] no longer applicable.” Certain parts of the regulation are now obsolete, such as a provision pertaining to the credit for state death taxes under the repealed IRC Section 2011. Other provisions remain instructive but will be repealed nevertheless. As a minor technical issue, Treasury Regulation Section 20.0-1(b)(3) will be amended to delete the reference to Treasury Regulation Section 20.2201-1.
- Removal of 25.2522(a)-2. IRC Section 2522 provides for a charitable deduction for gift tax purposes for transfers to organizations that meet certain requirements. For split-interest transfers (where the beneficial interest is divided between qualifying charitable organizations and non-charitable beneficiaries), IRC Section 2522(c) governs such transfers made after July 31, 1969. Treasury Regulations Section 25.2522(a)-2 applies to transfers occurring prior to Aug. 1, 1969. The Treasury Department is proposing to remove this regulation because it has “no future applicability under the Code or Regulations.”
The updated Priority Guidance Plan notably sets out the “near term priorities” of the IRS and the Treasury Department as a result of the changes brought about by the 2017 Tax Legislation. The Priority Guidance Plan is meant to identify projects that the Treasury Department and the IRS hope to complete during the period beginning July 1, 2017 and ending June 30, 2018. However, as noted above, multiple projects have been outstanding since the prior administration. It’s unclear whether these projects will be addressed within this period or whether they will be carried forward again in future Priority Guidance Plans. Expectations of forthcoming regulatory guidance on projects that aren’t described as near-term priorities should be tempered by considerations of the Trump administration’s stated goal of deregulation and minimization of tax regulatory burdens, as evidenced by the notice of proposed rulemaking.
- An Act to provide for reconciliation pursuant to Titles II and V of the concurrent resolution on the budget for fiscal year 2018, Pub. L. No. 115-97, Stat. 2054 (2017). This legislation has also been referred to as the “Tax Cuts and Jobs Act.”
- Revenue Procedure 2015-37.
- Kohler v. Commissioner, 92 TCM 48 (2006).