Probate & Trust Law Section Conference Manual ... - Minnesota CLE

Many clients name their spouse and children as beneficiaries. In the case of multiple beneficiaries, the
life expectancy of the oldest beneficiary is used to determine the payout period for all beneficiaries. Thus, if
the beneficiaries have disparate ages, the younger beneficiaries are forced to receive a shorter payout period
and thus less tax deferral. However, due to the regulation determining the identity of designated beneficiaries
on September 30 of the year following the year of the participant’s death, the IRA may be divided into
separate accounts even after the participant dies. If the IRA is so divided, each beneficiary’s distribution
schedule will be calculated individually. A participant may leave a percentage share of the account to multiple
beneficiaries, and the IRA funds will be considered split into “separate accounts.” The separate accounts must
be established by December 31 of the year following death. Treas. Reg. § 1.401(a)(9)-8, A-2. Generally, it is
not necessary to physically divide property in one IRA into separate IRAs, but watch out for IRA plan
agreements with restrictions against separate accounts. In that circumstance, the IRA plan terms control, and
the client should set up separate IRAs for separate beneficiaries during lifetime, if possible.
IV.
DISCOUNTS
A. General Concept. If discounts are available, make sure to preserve them. Avoid
unnecessary aggregation of assets if it increases estate tax values. Consider the value of
each asset by looking at exactly what the decedent has the power to transfer, not
necessarily what the decedent owned.
B. Advantages and Disadvantages.
1. Advantages: Preserving or creating minority interest discounts
a. Interest held in QTIP and interest owned by decedent are not merged. See Estate of
Bonner v. United States, 84 F.3d 196 (5 th Cir. 1996) (holding that decedent’s interest in
property owned individually did not merge with interest in same property held in QTIP for the
benefit of decedent and, accordingly, that decedent’s estate was entitled to fractional interest
discounts when valuing property); Estate of Mellinger v. Commissioner, 112 T.C. 26 (1999)n
(ruling the shares of company held in QTIP trust should not be aggregated with the shares held
by decedent individually for valuation purposes despite fact that shares were eventually sold in
a single block and, thus, that valuation discounts are available to estate); Estate of Nowell v.
Commissioner, T.C. Memo 1999-15 (ruling interest in QTIP trusts and in revocable trust shall
not be merged for estate tax valuation even though many subjective factors show overlap in
trust and asset administration).
b. Planning opportunities:
1) Consider using a QTIP trust to prevent the aggregation of interests, especially
if the couple has a closely held business or valuable real estate.
2) Partnerships should be drafted with discounts in mind at the time of funding
and when transfers will be made in the future, especially on death.
2. Disadvantages: The discounts may work against the estate if charitable deductions are sought.
See Ahmanson v. United States, 674 F.2d 731 (9 th Cir. 1981); rev’d on other grounds, 733
F.2d 623 (9 th Cir. 1984) (ruling an estate may only be allowed a deduction for estate tax
purposes for what is actually received by the charity where a majority interest was severed
resulting in a reduced charitable deduction.
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