We are now nine months into 2010 and many of the same questions facing estate planners and their client earlier this year in January are still unanswered.
Will we see estate tax legislation prior to 2011 preventing a return to a pre-EGTRRA tax regime?
Will that legislation affect the current estate tax environment and provide for the retroactive installment of an estate tax?
How do I handle this carryover basis business?
What federal estate tax form should be filed for persons dying during 2010?
Thus, with these and other unanswered quizzical queries floating around the estate tax world, what’s an estate planner to say at the next neighborhood BBQ when his/her clients, tax preparing colleagues, and/or the throngs of interested parties and neighborhood children are almost certain to ask if a 706 needs to be filed during 2010? Unfortunately, as far as we can tell, these and many similar questions are no closer to being answered today than they were at the beginning of the year. And with a pivotal election season on the horizon, it’s unlikely we’ll see any resolution on the estate tax front before November. That being said, there are some hints of guidance and forthcoming information in the area of estate tax return compliance which we are wont to share with you, our readers, as expressed below:
First, Internal Revenue Code Section 6075 addresses the time for filing an estate tax return. Section 6075 states that those required to file estate tax returns are required to do so by the due date on which the final federal income tax return the decedent would have filed, i.e. April 15, 2011. At this point, you might be saying, “That’s great! But, on what form do I report the pertinent information, and how do I file it, seeing as how there is no IRS Form 706, United States Estate (and Generation- Skipping Transfer ) Tax Return for 2010 available?” To which I would reply, “See my second point below.”
Second, the word on the street is that the IRS will not be releasing a traditional Form 706 for 2010. Rather, the Service will be providing a new type of return meant to address the carryover basis provision of the 2010 estate tax law as well as the accompanying allocation of stepped-up basis allowances ($1.3 million to anyone and $3 million going to a spouse or QTIP-like trust) feature. Apparently the new return will require that within 30 days of its due date, each person receiving property as part of the administration of the trust/estate is to receive the basis information being reported on the return. Additional information from the IRS supports the rumor that the death of the 706 for 2010 is not exaggerated seeing as how an attorney for the IRS (Patrick Leahy) publicly stated that it is not necessary to file a Form 706 this year and that if one is filed, it will be returned to the party that filed the form. Consequently, in an estate tax world of many uncertainties, at least three things are quite certain: (1) The IRS will provide a mechanism to report the allocation of stepped-up basis on inherited assets for 2010; (2) the tracking of this basis will likely be the bane of many a CPA’s existence for years to come; and (3) whatever you do, don’t file a Form 706 for 2010.
Third, if new estate tax legislation is not put in place in the near future, the estate tax regime formerly known as a “55% rate and a $1 million exemption”s will be making an encore appearance come 2011. In the event of such an occurrence, rest assured, one more thing is relatively certain: enough federal estate tax returns will be filed for deaths taking place in 2011 to more than make up for the dearth of such filings this year.
Fourth, plan accordingly.
- Attorney Jeremy Cooper
An interesting case recently was reported concerning valuation of assets within a corporation upon a person’s death and the estate tax deduction applicable to the taxes which the heirs will ultimately pay upon the sale of those assets.
Here’s the problem: When a person dies with a corporation which has assets, e.g. real estate, equipment, etc., that are worth more than the depreciated basis, if those assets are sold, there will be a big capital gain or ordinary income tax to pay. So even though you may inherit assets worth $100,000, if the subsequent tax on sale of those assets will be $25,000, and if there is nothing you can do to avoid that tax on sale, you are really getting something less than $100,000 because of this built-in tax.
A federal court recently ruled that the estate would receive a dollar-for-dollar estate tax deduction for each dollar of tax related to the built-in gain which the heirs would have to pay if the properties were sold. The IRS, as one might imagine, opposed this deduction, but the judge held for the taxpayer in granting a substantial estate tax deduction because of this built-in gains tax. There were numerous legal theories discussed by the judge in his opinion, which are beyond the scope of this blog at this time. The important thing to take from this is that there are many creative techniques available to estates if you obtain competent counsel who are aware of these opportunities. We often see people who choose to “go it alone” in their tax filings, and yes, they are probably saving some money up front, but it is likely they will never know how much they gave up on the back end by not taking advantage of the opportunities which an experienced tax professional can provide.
Most people in this day and age establish a revocable trust during their lifetime that becomes irrevocable upon their death. When the Trustor dies, beneficiaries of the Trust, of course, want to receive their share of the Trust as soon as possible after the death occurs. However, the Trustee obviously does not want to distribute the assets of the Trust to the beneficiaries per the terms of the Trust agreement only to then face subsequent litigation contesting the validity of the Trust agreement. What, if anything, can a Trustee do if the Trustee anticipates that someone may contest the validity of the trust?
Nevada law, namely NRS 164.044, furnishes one solution. Under this Nevada statute, the Trustee may provide written notice to any beneficiary of the Trust, to any heir of the Trustor, or to any other interested person within 90 days after the Trust becomes irrevocable (the date of death of the Trustor). The recipient of the notice must bring an action to contest the validity of the Trust within 120 days of the notice being served upon him or her. If the recipient fails to bring an action within such 120 day period, they are barred from doing so later on. Accordingly, once the 120 day period passes without the commencement of litigation, the Trustee can feel relatively safe in making the Trust distributions and not facing subsequent litigation.
A Trustee should also always require a beneficiary to sign a written Receipt and Release in which the beneficiary acknowledges receipt of all property that he, she or it is entitled to under the Trust and the beneficiary releases the Trustee from any and all liability as Trustee. This signed Receipt and Release should be obtained prior to, or contemporaneous with, the Trust distribution to the beneficiary. A Trustee does not want to make a Trust distribution to a beneficiary only to have the beneficiary use the distribution to hire an attorney and initiate litigation against the Trustee and the Trust.
At Jeffrey Burr, our attorneys have many years of experience assisting Trustees in the administration of a Trust after the death of a Trustor and protecting them from the potential pitfalls in serving as a Trustee.