By Laura Angel-Lalanne & G. Warren Whitaker
Clients frequently make their choices regarding the disposition of their tangible personal property based on emotional considerations. Nevertheless, they must be aware of the tax costs and benefits associated with the various methods of disposition they may be considering, so they can make fully informed decisions. This article will focus on the rules applicable to clients who are collectors – those who purchase tangibles created by others for personal pleasure. Certain of these rules are quite different for clients who are either artists (or the creators of other collectible items), art dealers or investors in art or collectibles as a business motivated by profit.
LIFETIME GIFTS TO INDIVIDUALS
Lifetime transfers of tangibles are subject to gift tax (absent any applicable exemptions, such as the marital deduction). The gift tax is calculated based on the fair market value (“FMV”) of the gifted object on the date of the gift.[1] Although clients may wish to consider using available gift tax exemptions, including the annual exclusion amount, to make gifts of tangibles to family members or to trusts held for their benefit, planners should consider whether clients have other assets that could take better advantage of the available exemptions, as further discussed below.
Dominion and Control. To avoid an IRS argument that a donor retained dominion and control over a gifted item (which would make the item includible in the donor’s estate under IRC Section 2036), it is essential that the donee have physical possession of the property. Clients may not be willing to part with tangibles to the extent legally necessary to effectuate a completed gift. For those who are willing to do so, in addition to physical delivery of the gifted object, clients should execute a deed of gift in the form valid under applicable state law to effectuate the transfer of tangibles and should change title on the object’s insurance policy to the donee. Additionally, for gifts that exceed the annual exclusion amount (currently $15,000), the gift should be reported on a gift tax return.[1]
Volatility. Although tangibles have the potential to appreciate in value, the markets for various art and collectibles are volatile. Tangibles gifted at a high value may be more likely to later decline in value. Assets that have a higher likelihood of consistent appreciation may better accomplish the goal of reducing the value of a client’s taxable estate.
LLCs and Fractional Ownership: Clients sometimes establish LLCs to hold artwork or other collectibles. While some clients are motivated primarily by tax considerations (e.g., sales tax avoidance or a domicile change), others choose the LLC structure to facilitate better management of a collection. A manager is named to oversee insuring, storing and maintaining the collection, and to make determinations as to the use collection items. An appropriately structured LLC can also offer the opportunity for clients to gift membership interests to family members or trusts held for their benefit.[2] However, the significant discounts for lack of control and marketability that are often allowed by the IRS in the context of gifts of minority interests in LLCs or similar structures that hold other types of assets are typically not available in the context of gifts of fractional interests in artwork, including gifts of membership interests in LLCs holding artwork.[3] [4]
Additionally, the “dominion and control” issues discussed above remain relevant in the context of LLCs. The manager should permit use of collection items held in the LLC in proportion to the members’ percentage interests. For clients who wish to retain possession of collection items for a time period in excess of their retained membership interest, rent could be paid to the LLC for the use of the items. It can be very challenging, however, to establish a fair market rental value for artwork and collectibles based on a comparable market, thereby risking estate tax inclusion under IRS Section 2036 if the client is deemed to be retaining possession or enjoyment of gifted items that are ultimately deemed to have been rented at below fair market value.
Carryover Basis: The donee’s basis of property received as a gift is equal to the donor’s basis (although any gift tax paid at the time of the gift is added to the donee’s basis).[6]
TESTAMENTARY BEQUESTS TO INDIVIDUALS
Estate Tax Valuation. Tangibles owned by a client at death are includible in the gross estate, valued at FMV as of the client’s date of death (or alternative valuation date).[7] If a client’s estate includes household and personal effects with “marked artistic or intrinsic value of a total value in excess of $3,000 (e.g., jewelry, furs, silverware, paintings, etchings, engravings, antiques, books, statuary, vases, oriental rugs, coin or stamp collections),” an expert appraisal, submitted under oath, must be attached to the estate tax return.[8] The FMV of artwork and collectibles must be determined by the sales price in the market in which the article is most commonly sold.[9] The IRS has taken the position that the FMV for items that can only be sold in an illicit market is the price that would be paid by a willing buyer in such illicit market.[10]
Blockage Discounts. As is the case in the gift tax context, the IRS does not allow the types of discounts, for estate tax purposes, of bequeathed fractional interests in tangibles that are often allowed with other types of assets. In certain circumstances, however, the IRS has allowed blockage discounts, which are allowed when it can be shown that a large number of items of artwork by the same artist coming to market at once lowers the sales price of such artwork.
The factors considered by the IRS in determining the appropriate blockage discount include:
(1) The state of the artist’s reputation at his death;
(2) The market for works of such size and character;
(3) Comparison to the artist’s other works, such as by size, time in his life when they were created and quality;
(4) Whether the works were part of a complete series owned by the artist;
(5) The number and price of sales during the artist’s life and the prices achieved immediately before death; and
(6) The accessibility of the works of art (meaning the cost of transporting the works to be sold and other similar sale expenses).
In Georgia O’Keeffe’s estate, the court set forth a test for applying a blockage discount to artwork based on the artwork’s quality, uniqueness and salability. Based on this analysis, half of her artwork was discounted by 75%, under the theory that a hypothetical buyer would take into account (i) that fact that her works would have to be held for years, (ii) selling costs, (iii) interest, (iv) promotion costs, (v) maintenance costs, (vi) carrying charges and (vii) market fluctuations. The other half of her artwork was discounted by only 25%, under the theory that these items were more easily saleable.
Step Up Basis: Tangibles held in an estate receive step up in basis to FMV as of the client’s date of death (or alternate valuation date).
LIFETIME DISPOSITIONS TO CHARITY
FMV Income Tax Deduction for Appreciated Tangibles. A charitable donation of long-term capital gain tangible personal property will entitle a client to an income tax charitable deduction equal to the FMV of the property on the date of the donation if all of the following conditions are satisfied:
(1) The recipient charity is a U.S. public charity or private operating foundation.[17] [18]
(2) The charity uses the property in a manner related to its tax-exempt purpose (the “related use” requirement). For example, donating a painting to a museum for exhibition is a related use, whereas a donation of the painting to the museum to be sold, with the proceeds used to fund other exhibitions, is not a related use.[19]
(3) If the charity sells the property within three years of the donation, the charity either:
(a) certifies that its use of the property was substantial and related to its tax-exempt purpose and describes how it used the property and how such use furthered its tax-exempt purpose, or
(b) describes its intended use of the property at the time of the contribution and certifies that such intended use became impossible or infeasible to implement.[20] [21]
(4) The client attaches to his or her income tax return a Form 8283 (if the value of all noncash contributions exceeds $500) and meets the IRS’s substantiation and documentation requirements, which include obtaining “qualified appraisal” prepared by a “qualified appraiser” for property valued at more than $5,000.[22]
(5) The client parts with “dominion and control” to effectuate a completed gift, by signing a deed of gift meeting state law requirements for the transfer of personal property and delivering the property to the charity.[23]
Cost Basis Income Tax Deduction for Artwork. A charitable donation of tangible personal property will entitle a client to an income tax charitable deduction equal to the lesser of the client’s cost basis and the FMV of the property on the date of the donation if all of the following conditions are satisfied:
(1) The charity is a U.S. private foundation; or the charity is a U.S. public charity or private operating foundation but the property either will not be put to a “related use” or is short-term capital gain or ordinary income property.[24]
(2) The client meets the Form 8283, substantiation and documentation requirements and effectuates a completed gift, as discussed above.
Deduction Limits: The charitable income tax deduction for donations of tangibles is capped at the lesser of (i) 30% of the client’s adjusted gross income for the year of the donation (“AGI”) or (ii) 50% of AGI, reduced by the value of the client’s other donations to public charities. (The client may instead elect to deduct only cost basis for such donations, in which case the 50% limitation will apply).[25]
Charitable income tax deductions for tangibles donated to private foundations (cost basis) are capped at the lesser of (i) 20% of AGI or (ii) 30% of AGI reduced by value of the client’s other donations of long-term capital gain property to charities that qualify for the 50% limitation.[26]
Generally the client can carry forward for five years the portion of the income tax deduction that is not used by reason of the percentage limitations.[27] For elderly clients, planners may wish to suggest retitling tangibles in joint name prior to a charitable gift, to enable the surviving spouse to fully utilize any carryforward.
Copyright Interests. If a client owns both an item of artwork and its copyright (an unusual situation for the average collector), no charitable income tax deduction is available unless both the artwork and its copyright are donated to charity.[28] Additionally, if such a client donates artwork to charity but retains the copyright or gives it to a non-charity, the donation will be subject to gift tax unless the recipient charity is a public charity or private operating foundation that will put the artwork to a “related use” (a so-called “qualified contribution”). If the donation is not a qualified contribution, no gift tax deduction is available unless both the artwork and copyright are donated. No gift tax deduction is available if the copyright is donated to charity and the artwork is not.[29]
Gift Tax Deduction: Transfers of tangibles to charitable recipients are also gifts subject to gift tax, although they can qualify for the gift tax deduction under IRC Section 2522 (which is more akin to the estate tax charitable deduction under IRC Section 2055 than it is to the charitable income tax deduction under IRC Section 170). Importantly, although the income tax deduction is available only for gifts to U.S. charities, the gift tax deduction is available for gifts to entities, wherever located (but only if the donor is a U.S. citizen or resident), which meet these requirements:
“a corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, which is not disqualified for tax exemption under section 501(c)(3) by reason of attempting to influence legislation, and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”[30]
This difference in treatment could be useful for clients who want to make lifetime donations of tangibles to foreign charities, and are willing to forgo an income tax charitable deduction.[31]
Gift Tax Returns. In any year in which clients file a gift tax return, they should also report on the return charitable gifts made in such year. If the only gifts made during the year, however, are charitable gifts that qualify for the charitable gift tax deduction, a gift tax return does not need to be filed unless the charitable gifts are of partial interests (e.g., charitable split interest trusts), in which case a return does need to be filed and all charitable gifts reported.[32]
Fractional Gifts of Tangibles: Unless a specific exception applies, no charitable income tax or gift tax deduction is available for gifts to charity of less than the donor’s entire interest in tangible personal property.[33]
There is an exception to the partial interest rule for a “contribution of an undivided portion of the taxpayer’s entire interest in property.”[34] However, specific rules apply to gifts of fractional interests in tangible personal property. In order for a client to obtain an income tax charitable deduction:
(1) Property must be wholly owned by the client or by the donee charity and the client.
(2) The client must give an undivided portion of his full interest in the property (i.e., a vertical slice and not a horizontal slice) to avoid a partial interest rule violation.
(3) The deduction available for subsequent fractional gifts is limited to the lesser of FMV at the time of the subsequent gift and FMV at the time of the initial gift (thereby eliminating a charitable deduction for further appreciation).
(4) The charity must have substantial physical possession of the property, at least for the portion of each year equal to its percentage ownership.
(5) The gift of the entire interest in the property must be completed by the earlier of ten years after the initial fractional gift was made or the client’s death.[35]
The gift must also meet the related use requirement discussed above.
Although changes to the fractional gift rules in 2006 have made fractional gifts less popular, they are still an option to consider for high value tangibles for which a client could not utilize the full income tax deduction over six years (year of gift and five-year carryforward).[36] Not all museums are willing to accept fractional gifts, however, due to the risks and costs associated with moving the property back and forth during each year.
Charitable Split Interest Trusts. An important exception to the partial interest rule also applies to qualified charitable remainder trusts, charitable lead trusts, pooled income funds and annuities.[37] A detailed discussion of these vehicles is beyond the scope of this article. Planners should exercise caution before funding such vehicles with tangible personal property. Tangibles will not provide sufficient liquidity to pay the lead interests unless tangibles are sold, and an income tax deduction won’t be available until sale.[38] Additionally, the trust’s use of the property won’t be a related use, thus limiting the client’s income tax charitable deduction for appreciated tangibles to cost basis.
Bargain Sales: For clients who want to see their tangibles in a museum but can’t afford to fully part with their value, a bargain sale to the museum can be a good option. The client sells objects to a charity for less than FMV, recognizes any proportional gain attributable to the sale portion of the transfer, but receives an income tax deduction for the differential.[39] There must, however, be clear intent from the outset to make a charitable donation. You don’t want a situation where the original intent was a full sale, but negotiations of purchase price led to a final agreed upon price slightly below the client’s estimated value for the objects. There should be a substantive difference between appraised value and sale price.
TESTAMENTARY CHARITABLE DISPOSTIONS
Estate Tax Charitable Deduction: Unlike the income and gift tax rules for charitable gifts of tangibles during lifetime, a charitable bequest of tangibles entitles a client to a full estate tax charitable deduction regardless of whether the property is long-term capital gain property or is put to a related use, regardless of whether the recipient is a public charity, a private operating foundation or a private non-operating foundation, and there are no percentage limitations comparable to those applicable to the income tax charitable deduction.[40] An estate tax charitable deduction is also available for gifts to foreign charities that are the equivalent of U.S. public charities and private foundations.[41] However, the partial interest rules applicable in the gift tax context do apply to the estate tax deduction as well.[42] Clients should understand that while the estate tax charitable deduction exempts charitable bequests from estate tax, it does not provide a deduction against income tax. Thus, for donations that would allow a full income tax charitable deduction, lifetime donations may be preferable, as long as the client is comfortable parting with the tangibles during their life.
Ascertainable as of Date of Death: In order for a client’s estate to receive a charitable estate tax deduction, the value of the charitable bequest must be ascertainable as of the date of the client’s death.[43] Clients frequently want dispositive plans for their tangibles that, without proper drafting or post mortem planning, run afoul of this requirement, thereby jeopardizing the charitable estate tax deduction. For example, a provision that family members may select the tangibles they want, and the balance will be distributed to charity, would result in a charitable bequest value that is not ascertainable as of the date of death so that no charitable deduction would be obtained. However, a plan that utilizes either qualified disclaimers pursuant to IRC Section 2518 or a power to appropriate according to the flush language of IRC Section 2055(a) can salvage the deduction. A client may also wish to place restrictions on a charitable bequest of tangibles (for example, an exhibition mandate or deaccessioning prohibition). If there is a chance that is not “so remote as to be negligible” that the named charity will be unwilling to accept the restrictions (thereby causing the bequest to fail), the charitable estate tax deduction will be denied, unless the executors or trustees are directed to distribute the rejected property to an alternative charity.[44]
Bequests on Death of First Spouse: Couples who wish to make a charitable bequest upon the death of the first spouse to die may want to instead consider leaving the sum to the surviving spouse and having him or her make the donation; The estate tax charitable deduction is not needed for an estate that would otherwise receive a full marital deduction, but the surviving spouse can utilize the charitable income tax deduction.
Copyright: Paralleling the gift tax charitable deduction, if a client owns both an item of artwork and its copyright, an estate tax deduction is available only if (i) the artwork and its copyright are bequeathed to charity or (ii) the artwork is bequeathed to a public charity or private operating foundation that will put the artwork to a “related use” (in which case the copyright can be bequeathed to anyone). No estate tax deduction is available if the copyright is bequeathed to charity and the artwork is not.[45]
Charitable Pledges: Legally binding charitable pledges that remain outstanding as of a client’s date of death are not deductible as charitable bequests, but as claims against the estate under IRC Section 2053, so long as the payment would have qualified for a charitable estate tax deduction had it been structured as a bequest.[46]
SALE OF TANGIBLES
Sale During Lifetime: Appreciated tangibles held more than one year that are “collectibles,” as defined in IRC Section 408(m) (without regard to paragraph (3)) (i.e., works of art, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages), are taxed at a special 28% capital gains tax rates applicable to “collectibles gain.”[47] For collectors (as opposed to investors), collectibles sold for a loss do not provide a “collectibles loss” deduction, as such deductions are not available for personal losses.[48]
Sale by Estate: As previously discussed, tangibles passing at death receive a step up in basis to the FMV as of the decedent’s date of death (or the alternate valuation date, if applicable).[49] Therefore, individuals receiving bequests of tangibles will recognize little gain if they choose to sell items shortly after receiving them from an estate.
If a married couple has a strong expectation of which spouse will predecease the other, tangibles could be gifted by the spouse who is expected to survive (under the unlimited marital deduction) to the spouse who is expected to predecease, to enable the surviving spouse to obtain a step up in basis on the death of the predeceasing spouse. However, to curtail potential abuse, the IRS does not allow a step up basis if the gift from the predeceasing spouse is made within one year of his or her death, to the extent that the property (or sales proceeds from the property, if sold by the estate) passes, either directly or indirectly, from the predeceasing spouse to the surviving spouse (who was the original donor of the property).[50]
Valuation, Buyer’s Premiums and Commissions: Although the general rule is that tangibles included in a client’s gross estate are valued at FMV (established by appraisal) as of the decedent’s date of death, the IRS typically takes the position that the sale of tangibles at public auction within a reasonable time after the decedent’s death establishes their value for estate tax purposes.[51] Items purchased at auction, however, include a buyer’s premium – a percentage fee of the hammer price, added to the purchase price and paid by the buyer. The IRS takes the position that the FMV of items sold by an estate (for purposes of determining the value of the gross estate) includes the buyer’s premium and sales commissions, even though such sum is paid to the auction house or art dealer, and not the estate.[52] Additionally, in the author’s experience, the IRS has imputed a buyer’s premium, to increase the FMV of tangibles for estate tax purpose, even when tangibles were sold via private sales.
Buyer’s premiums and sales commissions may be deducted as estate administration expenses only to the extent the sales are necessary to pay the decedent’s debts, administration expenses or taxes, or to preserve the estate or “effect distribution.”[53] Although a direction to sell tangibles in the testamentary instrument may bolster the estate’s position to deduct such expenses as those necessary to “effect distribution,” in the authors’ experience the IRS is reluctant to allow such a deduction. If the estate tax deduction is not allowed, the estate can deduct the sale expenses against the gain on sale (if any) on the estate’s fiduciary income tax return.[54]
Sales and Use Tax: Although a detailed discussion of sales and use tax is beyond the scope of this outline, clients should be aware that sales of tangibles may be subject to state and city sales tax, depending upon the client’s and purchaser’s state of residence, and where purchased items are delivered. The seller is responsible for paying applicable sales taxes to the taxing state. Some states also impose a use tax on purchases of tangibles bought outside the state but then used or stored within the state. Typically these use taxes only apply to purchases from sellers in other states who were not required to collect sales tax. Sales or use taxes paid by a purchaser are included in the purchaser’s basis in the purchased property.[55]
[1] Clients may consider filing a gift tax return even if the transfer is not taxable, to start the statute of limitations running as to the value of the transferred property, which requires disclosure on the return in a manner adequate to apprise the IRS of the item. IRC Section 6501(c)(9) and Treas. Reg. 301.6501(c)-1(f). Additionally, clients seeking certainty, for income, estate or gift tax purposes, as to the IRS’s position on the valuation of tangibles valued at over $50,000 can seek an advance ruling under Rev. Proc. 96-15.
[2] See “BNA Tax Management Portfolio No. 722-4th: Wealth Planning With Family Limited Partnerships and Limited Liability Companies.”
[3] See Estate of Elkins v. Comm’r, 767 F.3d 443 (5th Cir. 2014), aff’g in part, rev’g in part 140 T.C. 86 (2013), in which the Tax Court lowered a claimed 44.75% discount to 10%. Although the higher discount was allowed on appeal, the Fifth Circuit’s opinion focused on the IRS’s lack of evidence at trial to support its burden of proof. It is likely that the IRS would be better prepared to support its no-discount position at a future trial. Additionally, the IRS’s position is consistent with the fact that the IRS does not typically require that a minority discount be applied, for purposes of valuing a charitable income tax deduction, to fractional gifts of artwork to charity, discussed below. Theoretically, however, such a discount could be applied, in which case gift agreements could be drafted to minimize such risk (for example, by including a provision allowing either party to compel sale).
[4] The IRS has allowed blockage discounts, discussed below, for lifetime gifts. See Calder v. Comm’r, 85 TC 713 (1985).
[5] The same valuation considerations are relevant when clients enter into sale-leaseback arrangements with grantor trusts to which they have sold their collections.
[6] IRC Section 1015.
[7] Treas. Reg. 20.2031-1(b).
[8] Treas. Reg. 20.2031-6(b).
[9] Treas. Reg. 20.2031-1(b).
[10] See TAM 9152005 (Aug. 30, 1991), relating to the stolen Quendlinburg treasures, and Eileen Kinsella, “Rauschenberg Eagle Ruffles Feathers,” ARTNews (May 1, 2012), relating to artwork that could not be sold under U.S. law because it included a stuffed bald eagle.
[11] Smith Estate v. Comm’r, 57 TC 650 (1972).
[12] O’Keefe Estate v. Comm’r, TC Memo 1992-210.
[13] IRC Section 1014(a).
[14] IRC Section 170(f)(16).
[15] IRC Section 170(f)(12).
[16] IRC 170(f)(15).
[17] IRC Sections 170(c) and 170(e)(1)(B)(ii).
[18] Although clients sometimes consider creating a private museum to house their collection utilizing a private operating foundation structure (to maximize the available income tax charitable deduction), the IRS is unwilling to grant tax-exempt status to private museums that do not clearly benefit the public (for example, those located on or in close proximity to a client’s residence, with limited or “by appointment only” visiting hours).
[19] IRC Section 170(e)(1)(B).
[20] IRC Section 170(e)(7).
[21] Note that in the case of donations to organizations that are U.S. “friends of” foreign museums, in order to ensure a charitable income tax deduction, it is advisable to provide in the governing gift instrument that the “friends of” will maintain ownership of the donated property for at least three years following the gift and, during such time period, loan the donated property to the foreign organization. It is necessary to ensure, however, that loaning property is deemed a “related use” by the “friends of,” per its governing documents and basis for tax exemption.
[22] IRC Sections 170(f)(8) and 170(f)(11).
[23] Note that conditions placed on the use of the donated property in a governing gift instrument, including provisions requiring the return of donated objects to the donor in the event conditions aren’t fulfilled, can jeopardize a donor’s tax deduction or reduce the appraised value of the donation. See Treas. Reg. 1.170A-1(e) and Silverman v. Comm’r, TC Memo 1968-216.
[24] IRC Section 170(e)(1).
[25] IRC Section 170(b)(1)(C).
[26] IRC Section 170(b)(1)(D).
[27] IRC Sections 170(b)(1)(C)(ii) and 170(b)(1)(D)(ii).
[28] IRS Notice 2004-7, 2004-3 I.R.B. 310 (1/20/2004).
[29] IRC Section 2522(c)(3).
[30] IRC Section 2522(a)(2). But be aware of the limitations on deductions described in IRC Sections 508(d) and 4948(c)(4).
[31] Note, however, that documentation relating to such gifts should be carefully reviewed to ensure that the legal structure and restrictions would not prevent a charitable gift tax deduction. See PLR 201825003 (June 22, 2018).
[32] Instructions to IRS Form 709 (2019), at p. 2.
[33] IRC Sections 170(a)(3), 170(f)(2)-(3) and 2522(c)(2).
[34] IRC Section 170(f)(3)(B)(ii).
[35] IRC Section 170(o)
[36] See footnote 2, above, for a discussion of valuation issues.
[37] IRS Section 170(f)(2).
[38] IRC Section 170(a)(3).
[39] Treas. Reg. 1.170A-4(c)(2).
[40] As is the case with lifetime charitable gifts, the planner should be aware of the impact restrictions on the bequest might have on the value of the charitable deduction, particularly since such restrictions will not reduce the FMV of the tangibles for purposes of calculating the value of the gross estate, potentially resulting in a differential between the two values that is subject to estate tax. See PLR 200202032 (Oct. 26, 2001).
[41] IRC Sections 2055(a)(2)-(3), 508(d) and 4948(c)(4).
[42] IRC Section 2055(e)(2).
[43] Estate of Marine v. Comm’r, 990 F.2d 136 (4th Cir. 1993), aff’g 97 T.C. 368 (1991).
[44] Treas. Reg. 20.2055-2(b)(1).
[45] IRC Section 2055(e)(4).
[46] IRC Section 2053(c)(1)(A) and Treas. Reg. Section 20.2053-5.
[47] IRC Section 1(h)(4)-(5).
[48] IRC Section 165(c).
[49] IRC Section 1014.
[50] IRC Section 1014(e). Note, however, that the applicability of Section 1014( e) is unclear with respect to a transfer to a trust for the benefit of the surviving spouse (and original donor), particularly a QTIP trust (as opposed to a trust of which the surviving spouse is merely one of multiple discretionary beneficiaries, such as a credit shelter trust). Section 1014(e)(2)(B) provides that, in the case of any appreciated property otherwise subject to Section 1014(e) that is sold by the predeceasing spouse’s estate, rules similar to the rules of Section 1014(e)(1) apply if the surviving spouse is entitled to the proceeds from the sale. However, if the estate does not sell the property, Section 1014(e)(2)(B) seems inapplicable, and the surviving spouse does not become the owner of the property, which Section 1014(e) seems to require. Although property passing to a QTIP trust is includible in the surviving spouse’s estate, the surviving spouse would not be deemed the owner of the property for income tax purposes, and Section 1014(e) relates to income tax attributes.
[51] Rev. Proc. 65-19, 1965-2 CB 1002.
[52] TAM 9235005 (May 27, 1992).
[53] Treas. Regs. 20.2053-3(d)(2).
[54] IRC Section 642(g).
[55] Treas. Reg. 1.1012-1(a).
Wealth Strategies Journal 