April 30, 2015
Re: Estate Tax Exemption to the Postponed Inheritance Tax
Dear *****:
This is in response to your letter to the Department of Taxation ("the Department") requesting an informal resolution regarding whether a remainder interest in a marital trust qualifies for the estate tax exemption to the postponed inheritance tax. Because this response may be of interest to other taxpayers and practitioners, your letter is being treated as a ruling request under Va. Code § 58.1-204.
FACTS
***** ("the Decedent") died in 1963, and was survived by his wife, ***** ("the Surviving Spouse"), and their four children. The Decedent's estate was divided into a marital trust and a residuary trust. The Surviving Spouse received a life interest in and a general testamentary power of appointment over the marital trust. The inheritance tax on the remainder interest in the marital trust was postponed until the date that the Surviving Spouse died. The inheritance tax on all of the other trust interests was paid in full.
The Surviving Spouse died in 2013, and the remainder interest in the marital trust became subject to the postponed inheritance tax. You contend that the remainder interest in the marital trust is exempt from the postponed inheritance tax because it was included in the Surviving Spouse's taxable estate and subject to the estate tax.
DETERMINATION
Virginia Estate and Inheritance Taxes
Prior to January 1, 1980, Virginia imposed an inheritance tax on property that beneficiaries received from decedents. See Va. Code §§ 58-152 through 58-217.14, as in effect on December 31, 1979. As set forth in Va. Code § 58-173, as in effect on December 31, 1979, if a beneficiary did not become entitled to the possession or enjoyment of a remainder interest until the expiration of a life interest or another temporary interest, then the inheritance tax on the remainder interest was suspended until a beneficiary became entitled to the possession or enjoyment of the remainder interest.
The inheritance tax was repealed by the General Assembly and replaced with an estate tax, effective January 1, 1980. See 1978 House Bill 442 (1978 Acts of Assembly, Chapter 838) and Va. Code §§ 58.1-900 through 58.1-938. The estate tax was imposed on the transfer of a taxable estate at a rate equal to the maximum amount of the federal credit for state estate taxes as it existed on January 1, 1978. See Va. Code §§ 58.1-901 and 58.1-902, as in effect on December 31, 2006. Although the inheritance tax was repealed, it continued to apply to remainder interests on which the inheritance tax had been postponed. See 1978 House Bill 442 (1978 Acts of Assembly, Chapter 838). During the 1994 General Assembly Session, the Virginia General Assembly enacted House Bill 700 (1994 Acts of Assembly, Chapter 208), which stated that the postponed inheritance tax did not apply to remainder interests that were included in the taxable estate and subject to the Virginia estate tax. This legislation was declaratory of existing law, and simply clarified the Department's long-standing policy of imposing either the Virginia estate tax or the inheritance tax, but not both, on such remainder interests.
In 2005, the federal credit for state estate taxes was temporarily repealed by the Economic Growth and Tax Relief Act of 2001. See Public Law ("P.L.") 107-16 § 532(a). This repeal was made permanent by the American Taxpayer Relief Act of 2012, effective January 1, 2013. The Virginia estate tax was initially unaffected by the 2005 repeal of the federal credit for state estate taxes because the Virginia estate tax was equal to the maximum amount of the federal credit for state estate taxes as it existed on January 1, 1978, rather than the credit amount under current law.
Effective January 1, 2007, the General Assembly temporarily repealed the Virginia estate tax by basing the tax on the current amount of the federal credit allowable for state estate taxes, which had already been repealed by Congress. See 2006 Senate Bill 5019 (2006 Acts of Assembly, Chapter 5). Because the elimination of the federal credit for state estate taxes was not initially made permanent by Congress, Virginia's estate tax was scheduled to be reinstated in 2013. Once the elimination of the federal credit for state estate taxes was made permanent on January 1, 2013, the Virginia estate tax was effectively repealed. See. P.L. 112-240 § 101(a)(1).
The Remainder Interest is Not Subject to the Virginia Estate Tax
You asserted that, even though the Virginia estate tax was effectively repealed and is not collected by the Department, the remainder interest in the marital trust was subject to the Virginia estate tax because the statutory provisions imposing the tax have not been removed from the Code of Virginia. You cited several cases from other jurisdictions to support your argument that a taxpayer does not have to pay a particular tax to be considered subject to that tax. However, none of these cases involve obsolete and unenforceable taxes. Therefore, these cases are not persuasive in determining whether the remainder interest in the marital trust was subject to the Virginia estate tax.
This determination hinges on an interpretation of the Virginia General Assembly's usage of the term "subject to" in regard to the Virginia estate tax in 1994 House Bill 700 (1994 Acts of Assembly, Chapter 208). Although this term is used throughout the Code of Virginia, it is never specifically defined. However, the meaning of "subject to" for purposes of the Virginia estate tax may be derived from that usage of the term in Va. Code § 58.1-902, which permits the reduction of a Virginia resident's Virginia estate tax liability if the resident had real or tangible personal property located outside of Virginia that was "subject to" a death tax imposed by another state for which the federal credit for state estate taxes was allowed. Pursuant to Internal Revenue Code § 2011, this federal credit was allowed only if an estate, inheritance, legacy, or succession tax was "actually paid" to a state or the District of Columbia. Therefore, for purposes of the credit under Va. Code § 58.1-902 B, an estate is not considered "subject to" a tax unless it actually makes a payment of taxes.
When this same meaning is applied to the issue at hand, 1994 House Bill 700 (1994 Acts of Assembly, Chapter 208) clearly requires that a tax be paid before a taxpayer is considered "subject to" such tax. The 1994 legislation specifically applied to "any remainder interest included in the taxable estate and subject to the tax imposed by Chapter 9 of Title 58.1, consisting of sections numbered 58.1-900 through 58.1-938." Accordingly, it is clear that the General Assembly intended that the term "subject to" have the same meaning as it does for purposes of the credit set forth in Va. Code § 58.1-902 B. Therefore, the exemption from the inheritance tax provided in 1994 House Bill 700 (1994 Acts of Assembly, Chapter 208) does not apply unless the Virginia estate tax was actually paid.
This is further demonstrated by the fact that the Virginia General Assembly intended the exemption from the postponed inheritance tax set forth in 1994 House Bill 700 (1994 Acts of Assembly, Chapter 208) to apply only "if a Virginia estate tax is paid on an estate that includes a remainder interest coupled with a general power of appointment." See the Fiscal Impact Statement for 1994 House Bill 700 (Enclosed). This exemption was designed to prevent both the Virginia estate tax and the postponed inheritance tax from being imposed on remainder interests that were coupled with a general power of appointment. A similar exemption was unnecessary for other types of remainder interests because such interests are not generally subject to the federal estate tax and, therefore, were not subject to the Virginia estate tax. See IRC § 2031, 2041, 2051, and Va. Code § 58.1-902 A.
Because the Virginia estate tax was effectively repealed, remainder interests are no longer at risk of the double taxation contemplated by the Virginia General Assembly when the 1994 legislation was enacted. Therefore, the exemption set forth in 1994 House Bill 700 (1994 Acts of Assembly, Chapter 208) was no longer effective when the Virginia estate tax was effectively repealed on January 1, 2007, and such exemption cannot be used to exempt remainder interests from the postponed inheritance tax.
If the federal credit for state estate taxes is reinstated by Congress, certain remainder interests would again be subject to the Virginia estate tax. If this were to occur, remainder interests would be subject to the Virginia estate tax, and 1994 House Bill 700 (1994 Acts of Assembly, Chapter 208) would again apply to exempt such remainder interests from the postponed inheritance tax.
Because Va. Code §§ 58.1-900 through 58.1-938 do not currently impose a tax, no remainder interests are subject to the Virginia estate tax. Therefore, the remainder interest in the marital trust was not subject to the Virginia estate tax and is not exempt from the postponed inheritance tax.
CONCLUSION
For the foregoing reasons, the remainder interest in the marital trust is not exempt from the postponed inheritance tax. To pay the amount of postponed inheritance tax due, please contact ***** in the Department's Business Processing Unit at *****. The
Code of Virginia provisions and regulations cited, along with other reference documents, are available online in the Laws, Rules & Decisions section of the Department's website, located at www.tax.virginia.gov. If you have additional questions, please contact ***** in the Office of Tax Policy, Policy Development Division, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner