Official Inflation Adjustments for 2021

Posted on by October 27, 2020

The Internal Revenue Service has released Rev. Proc. 2020-45 with inflation adjustments for 2021 and, consistent with earlier predictions, the changes in the most significant federal estate and trust planning numbers will be as follows:

  • The base applicable exclusion amount (and generation-skipping tax exemption) will be $11,700,000 (was $11,580,000 for 2020).
  • The annual gift tax exclusion will be $15,000 (unchanged).
  • The annual gift tax exclusion for a non-citizen spouse will be $159,000 (was $157,000).
  • The “2 percent” amount for purposes of section 6166 will be $1,590,000 (was $1,570,000).
  • The limitation on the special use valuation reduction under section 2032A will be $1,190,000 (was $1,180,000).
  • The top (37%) income tax bracket for estates and trusts will begin at $13,050 (was $12,950).
  • The alternative minimum tax exemption for estates and trusts will be $25,700 (was $25,400), and the phaseout of the exemption will start at $85,650 (was $84,800).

Draft Instructions to Schedule K-1 of Form 1041 for 2020

Posted on by October 25, 2020

The latest (10/21/2020) draft of instructions to the Schedule K-1 for Form 1041 provides guidance for reporting excess 67(e) deductions by beneficiaries of terminating estates and trusts that is similar to the guidance that was previously reported from the IRS website. The instructions now say:

“Box 11, Code A–Excess Deductions on Termination – Section 67(e) Expenses
“If this is the final return of the estate or trust, and there are excess deductions on termination that are section 67(e) expenses reported to you as a beneficiary, you may deduct the excess deductions shown in box 11, code A, as an adjustment to income. Report this amount as a write-in on Schedule 1 (Form 1040), Part II, line 22. On the dotted line next to line 22, enter the amount of the expense using the code ‘ED67(e)’. Include the expense in the total amount reported on line 22.”

Excess deductions that are not 67(e) deductions and are not miscellaneous itemized deductions are reported by individuals on Schedule A of Form 1040 on the appropriate line for the type of deduction. (The draft instructions state that “The fiduciary will provide you with a statement of allowable deductions.”)

What is not addressed by the draft instructions is how a testamentary trust would report excess 67(e) deductions on the termination of an estate, and that question has been submitted to the IRS as a comment on the draft.

For an explanation of the new regulations on the treatment of excess deductions on termination of estates and trusts, see “Final Regulations on Administration Expenses and Excess Deductions.”

Decedent Substantially Complied with Policy to Retain Former Spouse as Beneficiary

Because 20 Pa.C.S. § 6111.2(b)(4) does not require that a post-divorce “designation of a former spouse as a beneficiary” be in writing, and because the decedent “substantially complied” with the life insurance policy provisions for beneficiary designations by orally advising the insurance agent that he was divorced but wished his former spouse to remain the beneficiary of the policy, and it was reasonable for him to take no further action after the agent advised him (incorrectly) that no additional written documentation was needed because the former spouse was already designated as the beneficiary, the proceeds of the policy were properly payable to the former spouse. State Farm Insurance Company v. Kitko, ___ A.3d ___, 2020 PA Super 253 (10/20/2020).

Redacted Time Records Did Not Support Attorney Fees

Executor and her attorney were surcharged for excessive and unreasonable attorney fees because the attorney time records that were submitted had the descriptions of services redacted and so they failed to meet their burden of proof. Stoughton Estate, 10 Fid.Rep.3d (Lawrence O.C. 2020).

No DNA Test Required of Child

The administrator of an estate cannot require an alleged child of the decedent to take a DNA test, and the child may rely on the other factors in 20 Pa.C.S. § 2107(c) to establish paternity. Ackley, Sr. Estate, 10 Fid.Rep.3d 253, 55 Monroe, No. 41, P. 10 (Monroe O.C. 2020).

Charity May Sell Building with Exterior Mosaic

Posted on by October 21, 2020

When a charitable nonprofit corporation did not agree to maintain a mosaic on the outside of the building it owns, the preservation of the mosaic would be expensive and is not within the charity’s exempt purposes, and the decision of the charity to sell the building is a reasonable business decision, it was error for the Orphans’ Court to deny the charity’s petition to sell the building, effectively imposing on the charity an obligation to maintain the mosaic. In Re: Painted Bride Art Center, Inc., No. 1642 C.D. 2019 (Cmwlth. Ct. 10/20/2020) (not reported).

New Record Low Short-Term Rate for November

Posted on by October 19, 2020

The Internal Revenue Service has announced federal rates for the month of November under §§ 1274 and 7520 of the Internal Revenue Code (“IRC”), one of which will be the lowest rate since the IRS began publishing federal interest rates in 1984.

  • The federal short-term rate under §1274, which would apply to (among other things) an intra-family loan under §7872 with a term of not more than three years, will be 0.13%, which is lower than the 0.14% which applied in September and October.
  • The November mid-term and long-term rates of 0.39% and 1.17% will be somewhat higher that the rates of 0.35% and 1.00% that applied in September.
  • The §7520 rate, which is used to value life estate, annuities, and remainders, will remain at 0.4%, which is the record low first set in August.

For information on estate planning techniques to take advantage of these low rates, see “Low-Interest Estate Planning Strategies” (subscription required), which contains links to the Webcalculators overviews of long-term GRATs and interest-only term notes (no subscription required for those overviews) and sample calculations from Webcalculators.