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Sunday, February 7, 2016

IRS Releases Form 8949 - Executors Now Required to Report Basis of Assets When Administering Estate

For many years the IRS and beneficiaries of estates had a problem figuring out how much gain should be imposed on an inherited asset because the beneficiaries did not know the basis.  The IRS did not like the fact that frequently the value reported by an Executor was not the value reported by a beneficiary when an inherited asset was sold.   
Accordingly, the government enacted Internal Revenue Code Section 1014(f) and is requiring that any estate which is required to file an estate tax return (Form 706) also file Form 8971 (including all attached Schedule(s) A), retro-active to decedents who died after July 2015. The executor must also provide Schedule A to each beneficiary receiving assets from the estate. Both requirements must be met within 30 days after the date on which Form 706 is required to be filed with the IRS, or the date that is 30 days after the date Form 706 is filed with the IRS, whichever is earlier. 
Notice 2015-57 has made February 29, 2016 the due date for all Forms 8971 (including all attached Schedule(s) A) required to be filed with the IRS after July 31, 2015, and before February 29, 2016. Penalties may be imposed for failure to comply with this new filing requirement.
If an estate is not required to file a Form 706, then there is no corresponding requirement to file a Form 8971.  However, it is probably good practice for the executor to advise the beneficiaries of the value of assets as determined on a decedent's date of death so that everyone knows what the new basis is in the inherited assets. 

Instructions for Form 8971 can be found here: https://www.irs.gov/instructions/i8971/ch01.html

I note that there are a number of important items that are not clear:
1)  Does Form 8971 need to be filed when an estate files Form 706 for purposes of porting the DSUE of a deceased spouse. Accordingly, until we receive clarification, it would probably be best practice to do so.

2) Which beneficiaries should actually receive a copy of the Form?  For example, it would make sense to give the form to the beneficiaries of a trust.  It would make more sense to give it to the trustee of a trust.

3) Form 8971 asks "Did this asset increase the estate tax liability?"  I am a little unclear on what this actually means.  I would think that you should pretty much always answer yes to this question.  However, I have heard one commentator state that this really muddies the waters because theoretically assets that qualify for the Marital Deduction, Charitable Deduction, or other similar deductions do not increase the estate tax liability.  Nevertheless, I do not believe the IRS now saying we don't get a step up in basis for those assets.  I believe this is primarily to identify non-qualified preferred stock options and potentially negative value assets.  After all, it would be shocking for the IRS to say that assets passing to a spouse do not receive a step up under the normal 1014 basis rules.  If I here otherwise, I will be sure to let you know... and join in the revolt against the politicians!

4) What about situations where a beneficiary is actually allowed to have a basis higher than a decedent's date of death value?  Examples of this potentially include:  situations where a beneficiary gifted away an asset within one (1) year of death, where a decedent dies owning an interest in a partnership or limited liability company subject to a debt, or real estate subject to a non-recourse debt. 

The American Bar Association Taxation Section has submitted a letter to the IRS requesting clarification of many of these items.  I hope we will all hear a response soon.

Friday, January 8, 2016

Do I Need An Attorney To Prepare A Simple Will?

I occasionally get asked if it is really necessary to hire an attorney to prepare simple estate planning documents.  Usually, the answer is NO, however, I find that once I start asking a few questions, most people really don't need a simple Will and they would be much better served with professional guidance.

Let me take you through some of the questions that I ask to determine whether it is worthwhile to engage legal counsel:

1) Do you have children from a previous marriage?  If so, I strongly recommend that you hire an attorney.
2) Do you minor children?  Most likely you would benefit from professional advice.
3) Are you wealthy?  If you have less than $300,000, I would say you probably would not need an attorney. Between $300,000 - $500,000 is maybe.  Between $500,000 to $2,000,000 is probably.If you have over $2,000,000, I strongly recommend that you hire an estate planning attorney with a masters in taxation.
4) Do you wish to leave money to a person with special needs child, drug/alcohol problems, going through divorce, bad with money or might otherwise require special instructions?  If so, I strongly recommend that you hire an attorney.
5)  Are you leaving money UNEQUALLY to your children or are you cutting out one of your next of kin?  If so, I strongly recommend that you  hire an attorney.
6)  Do you have concerns that your next of kin might fight over your inheritance?   If so, I strongly recommend that you hire an attorney.
7)  Do you plan to leave more than a token amount to charity?  If so, I strongly recommend that you hire an attorney with a masters in taxation.
8)  Do you plan to leave different types of assets to different people?  (For example, a business to one child, one piece of real estate to another child, and an IRA to a third child)  If so, I strongly recommend that you hire an attorney.
9)  Do you intend to leave money to a pet?  Yes - serious question for some and if you do, I recommend using an attorney.
10) Do you own any unusual items that have value (such as artwork, intellectual property, family heirlooms)?  If so, you probably wish to hire an attorney.
11) Do you own assets in more than one jurisdiction?  If so, I recommend using an attorney.
12) Are you elderly and worried that you may need to spend significant time (over 2 years) in a nursing home?  Then you should probably meet with a Medicaid attorney.
13) Where do you live?  In some states, probate is an absolute nightmare, so even with a small amount, you might wish to hire an attorney to help you avoid probate.

So what do I consider a simple situation?  Generally it is a person who has less than $300,000 of traditional assets, has responsible adult children who all get along, and the testator wishes to leave everything outright to those children in a probate friendly state.  Most others could basically save time or money with professional advice.

Tuesday, November 17, 2015

Trouble with Probate

Sometimes probate can be a simple process.  Sometimes it can be a royal nightmare... and sometimes it can be an expensive royal nightmare.

I'm not sure if it is a sign of the times or just a coincidence, but our office has had numerous estates where the probate has not been very easy.  To give an example of some of the problems we have run into recently:
1) An estate where even though there was a Will, the beneficiaries were not the next of kin.  While there was nothing untowards going on as the next of kin were very remote, we had to spend a lot of time and money tracking them down because state law required us to give notice to all next of kin, regardless of whether they are a beneficiary in the Will or not.
2) An estate where the decedent owned worthless land in another state.  This was an estate that was otherwise taxable, so we needed to get a valuation for this property and figure out how to dispose of it because no one wanted the headache.
3) Preparing a last minute amended estate tax return before the time to amend lapsed.  A bad return was prepared by an accountant and when the client came to us to review it, we had to stop all other work to prepare a revised return in order to save our client over $100,000.
4) An estate where the original Will could not be found, so we requested that the Court probate a copy of the Will.
5) An estate where the Will is unclear and requires judicial interpretation on who the beneficiaries are.
6) An estate where the client had many different types of assets and assets located in more than one country.
7) An estate where the executor is unable to travel, so our office is handling all the affairs of the estate and assisting in finding other professionals to value and sell local assets at a fair value.
8) An estate where the beneficiary has contacted us to obtain information from an executor who is refusing to disclose information.
9) An estate where the decedent, rather than formally update his Will, wrote a side letter saying where he wanted some of his assets to go - begging the question of how to handle that letter.

In most of these situations, considerable time and expense could have been saved if the decedent had consulted with an estate planning attorney on a regular basis.  While having a Will and trust can certainly make the estate administration process easier and less expensive, the benefit of hiring an experienced professional is not just that we can draft the routine paperwork.  An attorney that focuses on tax and estate planning can also make sure that you title assets in such a way as to make things smoother and more cost efficient.

Thursday, October 29, 2015

2016 Federal Estate Tax Exemption Amount

The IRS recently released Revenue Procedure 2015-53, announcing the inflation adjustments to many tax provisions.  Of note, the unified credit against the federal estate tax for Calendar Year 2016 is $5,450,000.  This is up from $5,430,000 in 2015.

The annual gift tax exclusion of $14,000 per person/per donee remains the same.  However, the annual gift exclusion to non citizen spouses has increased to $148,000 from $147,000.


Thursday, October 22, 2015

The Difficulty of Porting a Deceased Spouse's Unused Exemption Amount in Second Marriage Situations

Many estate planning commentators have joked that estate tax portability will lead to rich individuals marrying others simply to make use of their estate tax exemption.  I have found, in practice, that planning can be far more complicated.

Let me take you through a common situation that I am dealing with:
1) I represent a wealthy person (let's say $10M+) who is married to someone not as well off, but not poor (about $1M);
2) Each spouse has children from a previous marriage; and
3) The spouse who has less money has no real desire to give money to the surviving spouse and wants everything to go to his/her children.

I'll call the wealthy person Wendy and the less wealthy spouse Harry.  In a situation like this, if Harry dies first, and leaves his entire $1M to his children, then he will only have used up $1M of his $5.43M federal estate tax exemption.  Wendy is entitled to receive the Deceased Spouse's Unused Exemption Amount (DSUEA) of $4.43M.  This concept is known as portability and would increase what she can pass on to her children tax free from $5.43M to $9.86M - an estate tax savings of $1,772,000.

Now, if Harry is leaving everything to his children, it is likely that one of them is the Executor, and not Wendy.  This is important because the only way for Wendy to receive the DSUEA is for the Executor of Harry's estate to file a federal estate tax return.  Harry's executor might not want to incur the trouble or expense of filing a return that does not benefit them in any way.  After all, there is no need to file the federal estate tax return if the estate is less than $5.43M.

If Wendy gets along well with the Executor, she can agree to pay for the return, but that is no guarantee.  The safest approach to ensure that Wendy has access to Harry's DSUEA is to get Harry to redo his Will and make a specific bequest of his DSUEA to Wendy AND require the executor to file the federal estate tax return (or do whatever is necessary to ensure that the wealthier spouse actually gets to port his unused estate tax exemption amount).

Harry can of course require that Wendy pay for all costs associated with such return, which I would imagine she would be happy to do.  After all, a federal estate tax return, even on the expensive side, is likely to save Wendy's heirs millions of dollars.

Monday, August 10, 2015

New York Reserves Right to Subject Real Estate Owned By Single Member LLC to Estate Tax

In a recent New York tax advisory opinion, TSB-A-15(1)M, the Commissioner of Tax and Finance stated that if a single member LLC owns an interest in New York real property, that property can be subject to the New York estate tax upon the death of the sole owner.

In this situation, the Petitioner had set up a single member Delaware LLC to own an interest in New York real estate. The Petitioner then wished to permanently leave New York to live in another jurisdiction.  New York has a state estate tax on real estate but it does not have an estate tax on intangible property.

Typically, an interest in corporation, partnership or trust is considered an interest in intangible property and therefore not subject to New York's estate tax laws.  This raised the question of how to treat the interest in an limited liability company.  An LLC can be taxed as a partnership, a corporation, an S-Corporation or as a disregarded entity.  Single member LLCs are taxed as a disregarded entity unless the taxpayer elects to have it taxed differently.

The rationale behind the opinion in this case is that if the federal government disregards the entity for tax purposes, so should the state of New York.  Accordingly, if you own real property in New York and are not a New York resident, you should speak with your tax advisers about the best way to minimize your estate tax burden.

The nice thing about an LLC is that you can always make an election to have it taxed in a different manner simply by filing a form with the federal government.  By electing to have it taxed as a Corporation or S-Corporation, or by adding your children on as owners of the LLC and having it taxed as a partnership, the LLC will no longer be treated as a disregarded entity.

Sunday, August 9, 2015

Moving Office Location and Adding Franklyn Z. Aronson as Of Counsel

We are pleased to announce that Franklyn Z. Aronson, Esq. has joined our firm as Of Counsel.  Mr. Aronson's practices in the area of Wills, Trusts and Estates and Small Business Law.

Additionally, we have moved our New Jersey offices from Pennington, NJ to:

100 Federal City Road
Building C, Suite 104
Lawrenceville, NJ 08648

Our other contact information has not changed.