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.