July 18, 2019

Colorado Court of Appeals: Equitable Denial of Apportionment of Estate Taxes Improper

The Colorado Court of Appeals issued its opinion in Estate of Petteys v. Farmers State Bank of Brush on Thursday, March 10, 2016.

Robert Petteys established a trust for his children and surviving descendants. He also executed a will providing that all death taxes shall be apportioned among the recipients of his estate as provided by Colorado law. He died in 2009, leaving a substantial estate. The estate’s personal representative paid the federal estate taxes from the estate’s liquid assets, then filed an action in district court against the trust, seeking reimbursement for the taxes attributable to the value of the property Petteys contributed to the trust that was included in the gross estate.

The parties filed cross motions for summary judgment. The estate argued it was entitled to reimbursement under the terms of Petteys’ will and Colorado’s apportionment statute. The trustee argued that federal estate tax controls and does not allow reimbursement in this case, alternatively urging the court to deny reimbursement on equitable grounds and also arguing the will provision was unenforceable as an invalid revocation of the trust.

The district court agreed with the estate that Colorado law applied, ruling the estate was presumptively entitled to reimbursement under Colorado’s apportionment statute but material issues of fact precluded summary judgment. After a bench trial, the district court denied apportionment on equitable grounds and entered judgment for the trustee. The district court also sua sponte ruled that Colorado’s apportionment statute was unconstitutional as applied to the trust. The estate appealed, and the trustee cross-appealed the district court’s determination that Colorado law governs apportionment of estate taxes.

The Colorado Court of Appeals agreed with the estate that Colorado’s apportionment statute requires apportionment of the estate taxes to the trust and the district court erred in denying apportionment on equitable grounds, as well as finding the apportionment statute would be unconstitutional as applied to the trust. The court of appeals found no exception to Colorado’s apportionment statute that would allow equitable consideration of tax liabilities. The court also held that although the trust beneficiaries had vested rights to receive income from the trust, they did not have a right to receive income free from taxation.

The court of appeals reversed and remanded with instructions to enter judgment in favor of the estate.

The American Taxpayer Relief Act of 2012: Bidding Adieu to the Sunset

Editor’s Note: This is Part 1 of a series. Stay tuned for Parts 2 and 3.

By Merry H. Balson and Laurie A. Hunter

On January 1, 2013, while the ink on many year-end gift tax transfers was still wet, the 112th Congress passed the American Taxpayer Relief Act of 2012 (the “2012 Tax Act”).[1] The 2012 Tax Act was signed into law the following day, ending more than a decade of estate and gift tax uncertainty. This article summarizes the estate and gift tax provisions of the 2012 Tax Act, discusses the Act’s impact on estate planning, and outlines select income tax provisions affecting planning for individuals.

Phase-Ins and Sunsets: A Brief History of the Federal Estate, Gift and Generation-Skipping Transfer Tax System

The federal tax on transfers at death has been in existence since 1916 and the tax on inter vivos gifts has been part of the federal tax system since 1924, with the exception of a brief hiatus during its repeal between 1926 and 1932.[2] Phased in changes to the unified credit against estate and gift taxes and applicable transfer tax rates have been part of the estate planning practice for over three decades. In 1976, with the passage of the Tax Reform Act (“TRA”) of 1976, Congress created a unified estate and gift tax system and added the generation skipping transfer tax (“GST”).[3] It also phased in increases in the estate tax exemption from $60,000 in 1976 to $175,000 in 1981. The Economic Recovery Tax Act of 1981 (“ERTA”), among many other things, phased in increasing unified credit amounts over six years, increasing exemption equivalent amounts from $175,625 to $600,000 by 1987.[4] The top estate tax rate under ERTA was reduced to 55%, down from a maximum tax rate of 70% prior to enactment. Similarly, the Taxpayer Relief Act of 1997 provided for a phased in exemption equivalent from $600,000 to $1,000,000 in 2006.[5] The TRA ‘97 phase in never fully took effect because in 2001, when the exemption was only $675,000 and the estate and gift tax rate remained at 55% (plus 5% for estates over $10,000,000), the Economic Growth and Tax Relief Reconciliation Act (“EGTRRA”) of 2001 changed the estate and gift tax unified credit and rates yet again.[6] EGTRRA increased the exemption equivalent to $1,000,000 in 2002 and then incrementally through 2009 to $3,500,000, maintaining the gift tax exemption at a flat $1,000,000, decreasing the top rate to 45% by 2009 (which was subsequently accelerated to 2007), repealing the estate and gift tax in 2010 (but a carry-over basis regime) and sunsetting all EGTRRA provisions on January 1, 2011, with the effect of reverting to the law as it existed on January 1, 2001.[7] At the end of 2010, after nearly a year of estate and gift tax repeal, Congress passed the taxpayer friendly Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “2010 Tax Act”).[8] The 2010 Tax Act extended EGTRRA’s sunset provisions for two additional years (through January 1, 2013), increased the exemption equivalents to $5,000,000 for estate and gift tax (indexed for inflation starting in 2012) and reduced the tax rate to 35%.[9] The 2010 Tax Act also introduced the concept of “portability,” whereby a surviving spouse could “port” or use his or her deceased spouse’s unused unified credit provided certain conditions were satisfied.[10]

Finally a “Permanent” Tax Bill? After 12 years of planning under a looming sunset, finally there is no automatic sunset date for the 2012 Tax Act (although as noted below, certain extenders are set to expire). The major estate planning provisions include the following:

  • The estate and gift tax exemptions remain unified, and will stay at $5 million, but will be indexed for inflation. For 2013, both exemptions are $5,250,000.[11]
  • The GST exemption will also stay at $5 million, again, as indexed for inflation. The GST exemption is also $5,250,000 for 2013.[12]
  • Portability is permanent.[13] A deceased spouse’s unused estate tax exemption is “portable” if the surviving spouse timely files a U.S. Estate Tax Return (form 706). With certain exceptions, portability allows the surviving spouse to use the deceased spouse’s unused estate tax exemption immediately in addition to their own exemption. Importantly, however, the GST exemption is not portable and any unused portion at the first spouse’s death is lost. The 2012 Tax Act also corrected a technical problem in the 2010 Tax Act to be consistent with Treasury Regulations issued last summer that were favorable to the taxpayer by permitting “tacking on” of more than one former deceased spouse’s unused exemption to the surviving spouse.
  • Gift, estate and GST tax rate increases to 40% on the amount over the exemption.[14] The rate was 35% in 2011 and 2012, but had been 45% in 2009.

Additional effects of the repeal of the EGTRRA Sunset. The result of finally repealing the looming sunset provisions of EGTRRA and the strange results from it disappearing “as if it had never been enacted,” are among the following:

  • QFOBI is truly gone. The Qualified Family Owned Business Interest deduction, a complicated estate tax deduction that had no effect after 2003 due to the increase in estate tax exemptions, is now permanently repealed.
  • The state death tax credit was converted to a deduction, and now stays that way. For Colorado and about half the states, this means no state death tax, but the other half of the states changed their laws to include a state inheritance or estate tax, so continue to check local laws if your clients own real estate outside Colorado.
  • GST automatic allocation rules[15] and GST qualified severance rules both remain in effect.[16] These taxpayer-friendly rules are now permanent.

This is Part 1 of a 3-part series. Stay tuned for parts 2 and 3.

 

Merry H. Balson is Of Counsel at Wade Ash Woods Hill & Farley, P.C., where her practice emphasizes estate planning, estate and trust administration and forming and advising exempt organizations. She can be reached at mbalson@wadeash.com or 303-329-2215.

Laurie A. Hunter is a Shareholder at Wade Ash Woods Hill & Farley, P.C., where her practice emphasizes estate planning, probate and trust administration. She can be reached at lhunter@wadeash.com or 303-329-2227.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

 


[1] Pub.L. 112-240, H.R. 8, 126 Stat. 2313 (2013).

[2] The estate tax was enacted by the Revenue Act of 1916 (39 Stat. 756). The gift tax was first put in place by the Revenue Act of 1924 (43 Stat. 253), repealed by the Revenue Act of 1926 (44 Stat. 9), then reenacted by the Revenue Act of 1932 (47 Stat. 169).

[3] Pub. L. 94-455, H.R. 10612, 90 Stat. 1520 (1976).

[4] Pub. L. 97-34, H.R. 4242, 95 Stat. 172 (1981).

[5] Pub. L. 105-34, H.R. 2014, 111 Stat. 787 (1997).

[6] Pub. L. 107-16, H.R. 1836, 115 Stat. 38 (2001).

[7] See Sec. 901, Sunset Provisions of EGTRRA.

[8] Pub. L. 111-312, Title III, H.R. 4853, 124 Stat. 3296 (2010).

[9] Id.

[10] Id., Sec. 303.

[11] Rev. Proc. 2013-15, Sec. 2.13, 2013-5 IRS 444 (January 11, 2013).

[12] Under I.R.C. Sec. 2631(c), the GST exemption is equal to the basic estate tax exclusion amount.

[13] Pub.L. 112-240, Sec 101, H.R. 8, 126 Stat. 2313 (2013).

[14] Id. at Sec 101(c).

[15] See I.R.C. Sec. 2632(b-c) for deemed GST allocation rules.

[16] See I.R.C. Sec 2642(a)(3) for qualified severance rules.

New Tax Law for a New Year

JenniferMSpitzBy Jennifer M. Spitz

On January 2, 2013, the President signed into law the American Taxpayer Relief Act of 2012 (ATRA). ATRA extends much of the prior tax laws, by extending tax acts passed in 2001 and 2010. ATRA also makes some changes to prior law. Much of ATRA is permanent, meaning it is not scheduled to expire. Select highlights of ATRA of particular interest to trust and estate attorneys, including changes to some key exemptions and rates, are summarized below.

2013 Tax Act 01 18 13

Portability: The 2010 tax act included a provision allowing a surviving spouse to utilize the unused estate tax exclusion amount of the first spouse to die, if a timely election is made. This concept is referred to as portability. ATRA extends portability. The IRS has issued Treasury Regulations clarifying some aspects of portability. Also ATRA included a technical correction to make clear there is no “privity” requirement.

GST Tax: ATRA extends the generation-skipping transfer tax benefits that have been in place since 2001, such as qualified severances, automatic allocation of GST exemption to certain lifetime transfers, and 9100 relief.

Clawback: During 2011 and 2012 there was much discussion about whether there would be a “clawback” if the gift and estate tax exclusion amount dropped from the $5,120,000 amount applicable in 2012 to a lower amount in 2013. Since the exclusion amount did not drop, the clawback issue is moot.

IRAs:  ATRA reinstates the ability for certain individuals to make tax-free distributions to charity from individual retirement plans. ATRA includes special transition rules in light of the fact that this benefit was not extended until after December 31, 2012. This provision of ATRA is not permanent. It applies to years 2012 and 2013, and then expires.

Colorado Estate Tax: With the passage of ATRA, the state death tax credit is still repealed. C.R.S. § 39-23.5-103(1) imposes a Colorado estate tax equal to the state death tax credit. Since there is no credit, Colorado continues to impose no estate tax. However, about half of the states do impose estate tax, and many of those states have an estate tax exclusion amount much lower than the federal level.

Jennifer M. Spitz practices law in Longmont, Colorado with Stover & Spitz LLC, a Tier 1 Trust and Estates law firm, as recognized by U.S. News Best Law Firms. Jennifer primarily practices in the areas of estate planning, probate and trust administration. She is a graduate of the University of Colorado School of Law. She is a Fellow of the American College of Trust and Estate Council (ACTEC) and is listed in The Best Lawyers in America® and Colorado Super Lawyers.  Jennifer is very active in the Trust and Estate Section of the Colorado Bar Association, including recently serving as the Section’s Chair.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.