Gifts, Bequests, Deductible Expenses, And Estate Tax

Estate of Spizzirri v. Comm’r, T.C. Memo 2023-25 | February 28, 2023 | Urda, J. | Dkt. No. 19124-19


Short Summary. Decedent was a wealthy lawyer and investor. During the last few years of his life, decedent paid significant sums to one of his daughters, one of his stepdaughters, and multiple women with whom he was either socially or romantically connected.

At the time of his death, decedent was married to his fourth wife. Decedent and wife had entered into a prenuptial agreement, which was subsequently amended over the course of several years. As amended, the prenuptial agreement provided that wife would receive at decedent’s death the right to reside at one of decedent’s properties for five years free of charge and that decedent’s will would include a bequest of $1,000,000 to each of wife’s daughters. This provision of the prenuptial agreement acted as a “waiver and release . . . of all rights in and to each other’s estate under any rule or law . . . entitling a surviving spouse to all or any part of the estate or property of a deceased spouse or to any interest therein.”

Decedent passed away in 2015. Decedent’s will did not include the payments reflected in the prenuptial agreement. Wife and her daughters brought claims against decedent’s estate. Eventually, the estate entered into a binding settlement with wife and paid each of wife’s daughters $1,000,000. The estate reported these payments to the Internal Revenue Service on Forms 1099-MISC.

The estate’s Form 706, United States Estate (and Generation Skipping Transfer) Tax Return, was due on February 10, 2016. On February 19, 2016, the estate requested a six-month extension to file the return, which was granted, extending the deadline to August 12, 2016. In July 2016 the estate’s tax return preparer requested a second extension of the filing deadline because of the ongoing probate litigation with wife. The IRS informed the estate that a second extension could not be granted as a matter of law.
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Let Me Tell You About The Rich; They Live Very Differently From You And Me When It Comes To Estate Taxes

If there is one absolute certainty in life, it is one day all of us will have our last day.  The unfortunate reality is that death does not just come calling for the aged and infirm. Every day in the United States thousands of people die from causes that are not natural, such as auto accidents, accidental poisoning (mostly drug and alcohol related), falls, drowning, boating and aircraft accidents, and even animal attacks.  Some years ago, not far from this author’s home in Southern California a jogger was killed by a mountain lion.  Not long after this incident, another runner was killed by an alligator in Florida.  In fact, Florida seems to have more than its share of gruesome unnatural deaths.  In 2013, Jeffrey Bush, a 37-year-old resident of Hillsborough County, Florida, was at home in bed, and a giant sinkhole swallowed the entire house—with him in it.  They never found the body.

In the vast majority of cases involving sudden deaths, Federal Estate Tax is not an issue due to the current $11.70[1] Million Estate Tax exemption (as of the date of this writing) that is granted to each natural person[2].  Most people do not have estates that come anywhere near this amount.  But what of the ultra-wealthy?  Those 1/10 of one percent who fly through rarified air at 40,000 feet in their private Gulfstream and Lear Jets and take their summers in the Hamptons?  What happens when they make their final exit without the chance to say goodbye?  At least as far as Federal Estate Taxes are concerned the answer may be—not much.  On the other hand, it may be—quite a lot. Which answer applies to any particular case depends on the quality and quantity of the estate planning done by the recently departed.

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Estate Tax Lien

When an individual dies, the estate tax lien automatically arises upon death for any estate tax liability. The IRS is not required to take any action to create the estate tax lien. This means that the estate tax lien is in existence before the amount of the tax liability it secures is even determined. Detroit Bank v. United States, 317 U.S. 329 (1943).

The estate tax lien is a function of the amount of the estate tax a decedent’s estate ultimately owes. The lien attaches to the decedent’s entire “gross estate,” exclusive of property used to pay charges against the estate and administration expenses, for a period of ten years from the date of the decedent’s death. IRC § 6324(a)(1). The majority of courts have held that the ten-year estate tax lien is of absolute duration and thus, lien foreclosure must be completed before expiration of ten years. SeeUnited States v. Davis, 52 F.3d 781 (8th Cir. 1995); United States v. Cleavenger, 517 F.2d 230 (7th Cir. 1975). The Service follows this majority rule. On the other hand, an administrative levy is completed once the notice of levy is served or in the case of tangible property, when the notice of seizure is given. Thus, any suit outside the ten-year period to enforce a levy would not be barred.

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Assets Of A Foreign Individual (Nonresident Alien) Subject To U.S. Estate Tax

Unlike a U.S. citizen, who is subject to estate taxation on worldwide assets, the gross estate of a nonresident alien (meaning, a foreign individual who is not a U.S. citizen or resident alien) only includes property that is situated in the U.S. at the time of the nonresident alien’s death.1

For purposes of determining what property is situated in the U.S., any property which the decedent has transferred, by trust or otherwise, which would be taxable within the provisions of IRC Sections 2035 through 2038 (relating to termination of certain property interests within three years of death, transfers with a retained life estate or to take effect at death, and revocable transfers), is deemed situated in the United States if it was so situated either at the time of the transfer or at the time of death.2

For a decedent who was a nonresident alien at the time of death, property is considered located in the U.S. if it falls into any of the following categories:

(1)Real property located in the U.S.;

(2)Tangible personal property located in the U.S., including clothing, jewelry, automobiles, furniture or currency. Works of art imported into the U.S. solely for public exhibition purposes are not included;

(3)A debt obligation of a citizen or resident of the U.S., a domestic partnership or corporation or other entity, any domestic estate or trust, the U.S., a state or a political subdivision of a state or the District of Columbia; or

(4)Shares of stock issued by domestic corporations, regardless of the physical location of stock certificates.3

However, in the case of a nonresident alien who dies while in transit through the U.S., personal effects are not considered located in the U.S. Neither is merchandise that happens to be in transit through the U.S. when a nonresident alien owner dies.

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IRS Estate Taxes

The Treasury Department and the Internal Revenue Service issued final regulations confirming that individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.

Treasury Decision 9884, available today in the Federal Register, implements changes made by the Tax Cuts and Jobs Act (TCJA), the tax reform legislation enacted in December 2017. Though the final regulations largely adopt the proposed regulations published last November, they also include clarifying technical language addressing concerns raised in several public comments as well as four examples which, among other things, illustrate the impact of inflation adjustments. As a result, individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025.

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