Could trust beneficiaries reduce Virginia inheritance tax on a 2007 remainder by the actuarial value of life interests taxed after the decedent's 1962 death?

Subject

Full trust remainder value was subject to old inheritance tax

Plain-English summary

Virginia denied the beneficiaries' refund because the grandchildren inherited the full remainder interest in 2007. The original Virginia resident died in 1962, when Virginia imposed inheritance tax on what each beneficiary received.

Tax had previously been paid on temporary income interests held by the decedent's wife and daughter. Those payments did not tax the trust property itself and did not reduce the value of the grandchildren's later remainder.

Under former Va. Code § 58-173, tax on the remainder waited until the grandchildren became entitled to possession and enjoyment. When the daughter died in 2007, the grandchildren succeeded to the entire residual-trust property, so tax was based on the full value they received at that time.

The Department rejected the claimed double-tax theory and denied the refund.

What this means for you

• This ruling applies to historical inheritance-tax liabilities tied to pre-1980 decedents.
• Temporary income interests and remainder interests were separate taxable successions.
• Earlier valuation of a life interest did not reduce the later remainder's taxable value.
• The remainder was valued when the beneficiaries obtained possession or enjoyment.

Common questions

Why did the old tax still apply in 2007?

The 1978 legislation preserved prior inheritance-tax law until taxes for pre-1980 decedents were collected.

Was the trust property taxed twice?

No, under the ruling's analysis. Different beneficiaries were taxed on different interests they received.

Did the beneficiaries receive a refund?

No. The Department upheld the assessment on the full remainder value.

Citations and references

• Former Va. Code §§ 58-152, 58-153, and 58-173.
• Chapter 838, 1978 Acts of Assembly.
• Commonwealth v. Morris, 196 Va. 868, 86 S.E.2d 135 (1955).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-183

Original ruling text

October 17, 2008

Re: § 58.1-1821 Application: Inheritance Tax

Dear *:

This will reply to your letter in which you seek a refund of inheritance tax paid by the beneficiaries on the remainder interests in the * (the "Taxpayer").

FACTS

A Virginia resident (the "Testator") died testate in 1962 and an inheritance tax return was filed in 1964. His will created two trusts. The first trust was a marital trust with a life interest for his wife (the "Wife"). The second trust was a residual trust with a life interest for the Testator's Wife and daughter (the "Daughter"), with the remainder of this trust being left to the Testator's grandchildren. The Wife had an 80% interest in the net income of the residual trust for her lifetime and the Daughter had a 20% interest in the net income of the residual trust for her lifetime, with the Daughter getting 100% of the net income from the residual trust upon the Wife's death.

The Wife died in 1978. Assets in the marital trust were passed by the exercise of a general power of apportionment to the Daughter. The Wife's will also directed that estate and inheritance taxes attributable to the marital trust be paid from the marital trust. An amended inheritance tax return was filed for the Testator's estate in 1978, which referred to the return for the Wife's estate for the details of the tax owed.

With respect to the residual trust, the 1978 amended inheritance tax return reported the current value of the trust property, and valued the Daughter's interest in 80% of the income. No tax was due upon the Daughter's succession to the Wife's 80% interest in the income of the residual trust because that interest had been taxed in 1964. No tax was due on the remainder interest because the Testator's grandchildren had not yet become entitled to possession or enjoyment of any of the property.

The Daughter died in 2007, thereby vesting the remainder interest in the residual trust in the Testator's grandchildren. The grandchildren filed another amended inheritance tax return and paid inheritance tax on the remainder interest. The Department reviewed the return, determined that the value of the remainder interest had not been correctly calculated, and assessed additional inheritance tax. The assessment was paid in full, and the Taxpayer filed this appeal requesting a refund.

DETERMINATION

On January 1, 1980, the Virginia Estate Tax Act of 1978 took effect. This act is effective for transfers of Virginia gross estates on or after January 1, 1980. For estates of decedents dying before January 1, 1980, an inheritance tax was imposed on each beneficiary receiving property, or any interest in property, from the decedent. Although the inheritance tax law was repealed, the 1978 Act provided that the inheritance tax law continued in force until all taxes due with respect to decedents dying before January 1, 1980, are collected. See Chapter 838, 1978 Acts of Assembly .

Pursuant to Va. Code § 58-152, inheritance taxes are levied on each beneficiary's share of inherited property. The tax is based on the actual value of the inherited property with the rates determined by the relationship of the beneficiary to the decedent. See Va. Code § 58-153. Although inheritance taxes would normally be paid soon after the Testator's death, this case involves the special provisions made for taxation of temporary interests and remainder interests under Va. Code § 58-173.

In this case, when property is devised to a trust with temporary interests (such as the income interests received by the Wife and Daughter in this case) and a remainder interest to others, "the tax shall be assessed on the actual value of such remainder at the time when the beneficiary becomes entitled to the same in possession or enjoyment. The value of all such temporary interests or estates shall be determined as of the death of the decedent . . ." Pursuant to this requirement an inheritance tax was paid in 1964 on the following temporary interests using the appropriate valuation tables:

The Wife's interest in the income of the marital trust;

The Wife's interest in 80% of the income of the residuary trust;

The Daughter's interest in 20% of the income of the residuary trust; and

The Daughter's successive interest in 80% of the income of the residuary trust after the Wife's death.

The Taxpayer contends that the value of the Daughter's income interest at the time of the Wife's death in 1978 was actuarially valued at an amount equal to approximately 40% of the trust value, and that inheritance tax was paid on this amount in 1964. As such, the Taxpayer argues, the inheritance tax due upon the death of the Daughter should be on only 60% of the estate as it was valued at the time of the Daughter's death in 2007.

The inheritance tax, however, is not based on the value of the assets transferred from an estate, but rather on the value received by the beneficiaries. In Commonwealth v. Morris , 196 Va. 868, 86 S.E.2d 135 (1955), the Virginia Supreme Court explained the underlying basis of the tax when it stated:

The tax imposed is a succession tax, laid upon the right to succeed to the property or to an interest therein as distinguished from an estate tax laid on the right to transmit property. An inheritance or estate tax is not levied on the property of which an estate is composed. Rather it is imposed upon the shifting of economic benefits and the privilege of transmitting or receiving such benefits. While it is a succession tax, it is the value of the property succeeded to that determines the amount of the tax.

The Taxpayer's argument focuses on the underlying property value placed in the residual trust by the Testator's will rather than the value of the property actually received by the Testator's grandchildren following the expiration of all temporary interests created with respect to that property.

In 1964, the temporary interests in the residual trusts were taxed. Although the 1964 value of the property in the trust was used as part of the calculation of the taxable value of the temporary interests, the result was not a tax on the trust property itself. Similarly, the use of 1978 values in the 1978 amended inheritance tax return did not result in a tax on the trust property. Under the terms of the Testator's will, the grandchildren had to wait until 2007 before coming into possession and enjoyment of the entire trust property. Under Va. Code § 58-173, the Commonwealth had to similarly wait to collect the inheritance tax upon the value to which the Testator's grandchildren succeeded. While the various temporary interests caused a delay in the tax on the remainder interest, they have no impact on the amount of the tax on the remainder interest. Thus, the tax calculation must be based upon the full value of the property the grandchildren received in 2007.

The Taxpayer has presented two scenarios that attempt to bolster its argument that show that the estate is paying a double tax. These two scenarios, however, are based upon the mistaken premise that the tax is imposed on the property transmitted by the Testator ( i.e. , an estate tax) rather than on the value of what each beneficiary receives ( i.e. , an inheritance tax). As stated above, the inheritance tax is a tax on the receipt of each interest of an estate by its beneficiaries, not on the transfer of the property itself.

Based on the foregoing, the Department's assessment of the grandchildren's inheritance tax liability is correct and the Taxpayer's request for the refund of inheritance tax is denied. If you have any questions regarding this determination, please contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2177300234.B