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News Letter 2
I have decided to present a short article in each issue of this newsletter. There have been several problems that have bothered me over the last few years that are related to the computation of the Federal Estate Tax. I will discuss one in each issue.
Rev. Rul. 82-23 and the Equalization ClauseIn Smith, 66 TC 415 (1976), 565 F2d 455, 77-2 USTC ¶13,125, 40 AFTR2d 77-6277 (CA-7 1977), the marital deduction clause called for a bequest which would "result in the lowest Federal estate taxes in Settlor's estate and Settlor's wife's estate on the assumption settlor's wife dies after him, but on the date of his death ...". There was also a following clause which provided that "Settlor's purpose is to equalize, ..., his estate and her estate for Federal estate tax purposes, ...". The marital deduction clause in Estate of Meeske v. Comm., 72 TC 78 [CCH Dec. 35,987] (1979) Acq., and Estate of Laurin v. Comm., [81-1 USTC ¶13,398], 645 F2d 8 (6th Cir. 1981) are similar. The marital deduction clause in Rev. Rul. 82-23 reverses the formula. The main part of the bequest indicates a desire to equalize the taxable estates of the decedent and his surviving spouse. There is then a "Purpose Clause" that states that it is the settlor's intent to obtain a marital deduction for Decedent's estate that would result in the lowest amount of federal estate taxes on Decedent's and the spouse's estate. All of the above seem to assume that if you equalize the taxable estates of the decedent and his surviving spouse you will get the smallest total Federal estate tax. This is not true. They are not equivalent. Tax Computation in Rev. Rul. 82-23Using the facts in Rev. Rul. 82-23, a bequest of 325,000 from the decedent to his surviving spouse will give a total Federal tax in the two estates of $313,100.00 and equalize the taxable estates. A bequest of either $250,000 or $400,000 would minimize the total Federal estate tax in the two estates with a total Federal tax of $312,700.00. Note that the bequest can move in a range of over $150,000 while changing the total Federal tax by only $400.00. There should be a better way to fin tune your estate. To see why we get different answers you need only look at the tax tables furnished for both the tentative tax and the state death tax credit. If you compute the net federal tax rate, you will find that the net rate is not a smooth continuous function of the taxable estate. Because of the relationship between the tentative tax table and the state death tax credit table with their brackets having different boundaries, the net Federal tax moves from one bracket to another in a zigzag manner.
Total Federal Tax in the two estates Note that for 1981 (The date of death used in the Revenue Ruling.) the net marginal rate from 500,000 to 700,000 is 33% while the marginal rate from 700,000 to 750,000 is 32.2%. It seems logical that if two estate both fall just below $700,000, the total tax can be reduced by increasing one and decreasing the other to move one of them into the lower bracket between $700,000 and $750,000. This is just what happens in the computation for Rev. Rul. 82-23. I will assume for the rest of this discussion that the computation in Rev. Rul. 82-26 is incorrect and that the correct marital deduction in that case was $250,000 and the tax in the first estate should have been $1280,900 instead of the marital deduction of $325,000 and a tax in the first estate of $156,550 as computed in the Rev. Rul. The "minimize tax in combined estate" clauseThis brings me to the point of this discussion. If you happen to have a marital deduction clause that requires you to minimize the total Federal tax in two estates how do you make the computation. Inter-Est will not do these computations, but it can be used to help.
An attempt to compute the minimum total tax can be complicated by several factors, If there is a Credit for Tax on Prio9r Transfers where the second limitation controls, a gift tax credit where the second limitation controls, or other similar problems, you can have additional problems. Interest deductions of §6166 problems would also complicate things. A Simple SolutionIf you find that you have a problem like this, the first thing you should consider is some kind of disclaimer or reformation to eliminate the problem. If this is possible this would be your solution. Offer of HelpWhen Rev. Rul. 82.26 first came out, I had a great fear that a lot of wills would be interpreted to have "minimize total Federal tax" type clauses. This would have made the development of Inter-Est much harder. This type of clause adds complications of a different order than the ones Inter-Est has been designed to solve. My fears have not been realized, and I have not heard of a single estate where this problem has arisen. The work I did no the Rev. Rul. 82-26 computation was completed using a test program whose sole purpose was to explore the "minimize Federal tax" formula. It could do none of the normal things that can be accomplished by Inter-Est. The project was terminated with the decision that the feature was too complex to add to Inter-Est. If you have a problem in this area, I would be glad to help as a way of exploring the problem one more time. No guarantees, just an offer to try. Problems of this nature might not be solved the first time you look at them, but if you look at several actual problems over a period of time, some ideas might come. The time frame would be longer than one or two weeks.
Restricted InterestWhile our provision for restricted interest is still a little clunky, we have been able to go over six months without having a computation come up that could not be handled. The main problem with restricted interest is that the IRS does not have a consistent policy. Restricted interest per TAM 8947005 is being set up in some areas and not in others. One reason for this is that there are no guidelines for processing these cases.
Convergence ProblemsLast winter and spring we found several computations that would not converge correctly using the GUESS Toggle. Since then we have added the FORCE option, no new computations have come up that could not be handled.
Inter-Est is now smallerInter-Est is now smaller. This will allow some users to run Inter-Est on a computer with a LAN. It will still require a computer with at least 640K of memory.
Not Associated with IRSNeither Cammack Computations Co. nor any of its employees are associated with the Internal Revenue Service. This means that there is no impediment to ordering Inter-Est if you are with the Internal Revenue Service.
Regular Office Hours at Last!!!Starting November 26, 1990, we are maintaining an office with regular office hours to provide support and answer you questions. Previous NewsLetter Home Page Top of Page Next NewsLetter
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