Archive for the ‘Tax Returns’ category

When Do I Get My Money?

May 9, 2013

 By Ashley Alderman

This question is often the first one asked by beneficiaries of an Estate after someone has passed away. They might ask it in a more tactful manner, but the general meaning of the question is the same: When do I get my money?

We’ve all seen the movies…grandfather dies, the family all gathers in the fancy, wood-paneled office around the large conference table, a lawyer begins reading grandfather’s will, and when he’s finished, he hands everyone an envelope with their check. Unfortunately, this scene is purely fiction. For many beneficiaries, however, the movies might be their only exposure to the probate process prior to the death of their loved one, thus creating expectations that the money will be readily available.

Managing the expectations of beneficiaries is one of the first tasks that should be undertaken by the Personal Representative after the Personal Representative is appointed by the Probate Court. In Georgia, the timing of distributions depends on many factors such as statutory notice periods, whether the estate has outstanding liabilities, whether the estate is subject to estate tax, and the terms of the will itself. I briefly address these factors below. Of course, every estate is different, and unique challenges may delay distributions for various other reasons.

After the decedent dies, Georgia law requires the Personal Representative to publish notice of the decedent’s death to debtors and creditors in the legal newspaper of the county of the decedent. The notice to debtors and creditors must be published within 60 days of the date of qualification of the Personal Representative, and must run once a week for four weeks before the Personal Representative can close the estate.

Under Georgia law, the Personal Representative is not required to pay the debts of the estate until six months from the date of qualification. Therefore, the Personal Representative has six months to determine the debts and expenses of the estate so that the Personal Representative may pay them in the correct order (as mandated by Georgia code), and ensure that all debts and liabilities are satisfied prior to making any distributions from the estate. During the course of the estate administration, the Personal Representative may decide to make partial distributions to beneficiaries prior to closing the estate, which may not present a problem as long as there are sufficient assets to pay the expenses and liabilities of the Estate. However, beneficiaries should not receive their final distributions until the Personal Representative has completely paid all taxes, liabilities, and expenses of the Estate.

If the decedent or estate owes any taxes, the payment of these taxes may prolong distributions to beneficiaries for a period extending beyond the Georgia statutory notice periods. In particular, under the Internal Revenue Code, if the estate has a gross estate value of $5,000,000, indexed for inflation (currently $5.25 million in 2013), then the Personal Representative must file a Form 706, Federal Estate Tax Return. This return is not due until nine months after the decedent’s date of death, and may be automatically extended for an additional six months. If there is a possibility that the estate will owe estate taxes, the Personal Representative should not make distributions prior to the payment of the taxes. If the Personal Representative makes distributions, leaving the estate insolvent or unable to pay the full tax liability, the Personal Representative may be personally liable for the underpayment of estate tax. The IRS generally has 3 years from the date of filing in which to audit the estate tax return, but if the IRS is not going to audit the return, it often issues a Closing Letter much earlier than three years after the filing date stating that the tax liability has been satisfied. I strongly encourage Personal Representatives not to make complete distributions of the Estate prior to receiving the IRS Closing Letter.

Finally, the Personal Representative must follow the terms of the Will when making distributions. If the Will contains contingency requirements or timing specifications, the Personal Representative must follow them when making distributions. For example, the Will might provide that a distribution should not be made until one year after the decedent’s death, or until a beneficiary graduates from college.

In summary, many different factors can affect the timing of distributions to an estate beneficiary. In a large, taxable estate, it could be many years before a beneficiary gets his money…a very different situation than depicted in the movies!

 

Drafting your Last Will and Testament – You May Delay, but Time Will Not

May 8, 2013

 By Rose Wilson

You may have heard stories in the news recently about Roman Blum, the multi-millionaire from New York who died without a will, leaving an estate of $40 million without any named beneficiaries.  Today, almost a year and a half from the date of his death, it is possible that the money will stay in the hands of the state government as none of his heirs have been found.

Many people procrastinate when it comes to completing their estate planning, but what happens if you die without a will?  A common misconception is that the government will receive your assets.  In reality, the answer to this question depends on the “intestacy” law of the state in which you reside at the time of your death.  To die “intestate” means to die without a will.  When this occurs, the identity of your heirs will be determined by state law, and intestacy laws vary from state to state.

In the state of Georgia, the intestacy law generally provides for distribution of the estate in the following order.  If you are married and have no children at the time of your death, your spouse will receive all of your assets.  If you are married with children at the time of your death, then your spouse and your children share the estate in equal shares, although your spouse will receive at least one-third of the estate.  If you die unmarried and without descendants, then your property will pass in equal shares to your nearest living relatives (parents, then siblings if your parents are not alive, then your nieces and nephews, and continuing out along the family lines according to degree of kinship).

In the event that you die intestate and no heirs can be identified, then your estate will remain with the government.  The scenario in which an individual has no heirs seems unlikely because one must have a living relative somewhere on the planet.  The real trouble comes in identifying the heirs, but cases where no heirs can be identified are uncommon.

What if your heir under state law is your third cousin twice removed, whom you barely know, and you prefer that your money go to friends or charity?  Then you must sign a will to make that happen.  Whether you’re a multi-millionaire like Roman Blum, or simply an average Joe, a last will and testament may be one of the most important legal documents you will ever prepare.  Not only does it provide for the disposition of your assets in the manner that you desire, it can provide numerous other benefits to your estate beneficiaries, such as asset protection, tax savings, and more.

Estate Tax Exclusion Portability: Policy to Planning Ideas

October 2, 2012

 By Ashley Alderman

The introduction of the concept of “portability” in the Tax Relief, Unemployment insurance Reauthorization, and Job Creation Act of 2010 was the first time that a married couple could potentially take advantage of both spouses’ estate tax applicable exclusion amounts without engaging in complex estate planning and proper titling of assets.  Despite the significant opportunity, the law enacted by Congress left many holes in the application of portability, most importantly for 2012 planning, whether gifts by a surviving spouse used the Deceased Spousal Unused Exclusion Amount (DSUEA) first or whether they used the surviving spouse’s own basic exclusion amount first in the calculation of gift tax owed.   Additionally, the concept of portability will sunset with the Act on December 31, 2012.  Without Congressional action, portability of the estate tax exclusion amount will not exist in the estate tax law on January 1, 2013.

In June of 2012, the IRS and Treasury finally issued regulations on portability which clarified many of the open-ended questions from the statute.  These regulations are extremely taxpayer friendly, and the use of portability may provide a planning opportunity for practitioners, but reliance on portability is not without significant risks.

My article from the October 2012 issue of Estate Planning discusses some of the following issues regarding portability:

  • Policy of treating married taxpayers as a single unit;
  • Requirements to elect portability and report DSUEA;
  • Computation of DSUEA;
  • Coordination of DSUEA with gift tax liability;
  • Advantages and planning opportunities;
  • Disadvantages and planning risks; and
  • Future of portability.

What Gifts are Excluded from Gift Tax? The Answer is Not Always Easy

August 10, 2012

 By Rose Wilson

The federal gift tax annual exclusion is an easy to use and often overlooked planning tool.  Gifts qualifying for gift tax annual exclusions are not subject to gift tax and do not trigger gift tax reporting obligations.  The gift tax annual exclusion amount is $13,000 per donee in 2012.  With this exclusion amount available, a married couple could give away as much as $26,000 per year to every child and grandchild of theirs, every year, with no gift tax liability or reporting obligations resulting from such gifts (note, however, that these gifts need not be made to a relative to qualify for the annual exclusion from gift tax).  If the annual gifts to any one individual exceeds $13,000, all gifts must be reported. The application of gift tax annual exclusions can result in significant tax savings, especially if utilized regularly over a number of years.

The annual gift tax exclusion is only available for gifts of present interests in property.  I.R.C. § 2503(b).  A present interest in property is “an unrestricted right to the immediate use, possession, or enjoyment of property or the income from property (such as a life estate or term certain).”  Treas. Reg. § 25.2503-3(b).  Any direct or indirect restriction on enjoyment of the transferred property can prevent the donor from using the benefit of annual exclusions.  Restrictions can be imposed in a number of ways, such as through written agreements governing the permissible uses of the property, state or federal laws governing the type of property given, or existing third party rights to the property.  Thus, the determination of whether a gift of property qualifies as a present interest depends on the legal rights and restrictions resulting from the nature of the property given and the method by which such property is transferred to the donee.  While this determination is relatively easy when the gift is an outright transfer of cash or publicly traded stocks, it can become quite difficult when more complicated property interests, such as gifts of closely held business interests, are involved.

The United States Tax Court recently analyzed a gift transaction involving gifts of interests in a closely held partnership.  In Estate of Wimmer v. Commissioner, T.C. Memo 2012-157, a married couple created a limited partnership and subsequently gave limited partnership interests to their children, grandchildren, and other relatives.  The couple made gifts of partnership interests over a period of years and claimed the benefit of annual gift tax exclusions against such gifts.  The IRS argued that the gifts did not qualify for gift tax exclusions because the partnership interests were restricted.

When gifts of partnership interests are concerned, the rights and restrictions affecting a donee’s use of the partnership interest or the income from the partnership is governed primarily by the partnership agreement and state law.  Therefore, the Tax Court in Wimmer examined the partnership agreement to determine if the donees’ rights to use, possess or enjoy the partnership interests or the income from the partnership were restricted by the agreement.  The Tax Court found that the donees’ right to use the partnership interests was restricted because the partnership agreement provided that a partner could not transfer his or her partnership interest without the prior written consent of the general partners and 70% in interest of the limited partners (with some exceptions for certain transfers to related parties).   However, the Tax Court found that the donees’ right to income from the partnership was not restricted by the partnership agreement or otherwise.  Accordingly, the Tax Court held that the gifts of limited partnership interests were not unduly restricted by the governing partnership agreement and therefore qualified for the annual gift tax exclusion.

Although the Wimmer case was favorable for the taxpayer involved, the case is an important reminder that the application of annual gift tax exclusions may be denied based on the facts and circumstances of a particular case.  Taxpayers who are concerned with the eligibility of a particular gift may be well advised to consult with legal counsel before claiming the benefit of gift tax annual exclusions.

IRS Guidance Anticipated for Tax Effects of Trust Decanting

January 25, 2012

 By Rose Drupiewski

The IRS announced that it would place the issue of trust “decanting” on its priority list of items to focus on in 2011 and 2012 for purposes of providing taxpayer guidance.   Decanting occurs when a trustee, pursuant to authority provided in the trust agreement or under state law, transfers property from one trust to another.  Decanting powers have recently become popular with trust drafters as a way to provide additional flexibility to trustees when managing trust assets on behalf of beneficiaries.

The reason for the popularity of decanting powers is that such powers can provide flexibility to otherwise inflexible irrevocable trust agreements.  For example, if a trust agreement provides for an outright distribution of assets to a trust beneficiary at age 25 and the trustee has determined that the beneficiary lacks enough maturity at that age to handle a large distribution, the trustee could (if permitted under the trust agreement or state law) transfer the assets to another trust for the benefit of such beneficiary that will not terminate at age 25 but at a later date.

Although decanting can be extremely useful from the standpoint of flexibility, such flexibility may come with undesirable tax consequences.  The gift, estate, GST and income tax consequences of decanting are less than clear.  For example, there has been some concern that the presence of a decanting power may transform an otherwise irrevocable trust into a revocable trust for estate tax purposes, thus causing the assets in the trust to be included in the grantor’s gross estate.  This is obviously an undesirable consequence because many irrevocable trusts are created for the purpose of enabling a grantor to make gifts to family members in trust without causing estate tax inclusion.  There is also some concern as to whether, if the trustee is a beneficiary of the trust, the trustee’s decanting power might be deemed a general power of appointment for estate tax purposes, which might cause unwanted estate tax consequences for the trustee.  These are just a few examples of multiple unresolved gift, estate, GST and income tax issues relating to trust decanting powers.  Because of the lack of clarity regarding the tax effects of decanting and the hope for favorable guidance, the IRS’s announcement is welcome news for many tax planners and their clients.

In connection with the IRS priority plan, the IRS has recently requested comments from the general public regarding the tax implications of decanting powers.  Comments should be submitted to the IRS by April 25, 2012.

Jingle Bells or Ringing Out the Year Gone By – Time Is Short to Complete Annual Planning

November 14, 2011

 by Jeff Waddell

Each year at this time our section of the office begins to get really busy.  Clients we have reached out to all year but who have not responded suddenly begin appearing.  Yes, its year end annual gifting time.  Pay heed to the sounds of the approaching holiday season, for in all the merriment those sounds signal the last days to take advantage of annual exclusion gifting or the last opportunity to capture a loss to offset a gain in the same tax year.

Take the opportunity to be proactive.  Review what you have done and what can, or should, be done before year-end.  Be aware that the annual gifting exclusion for each individual is currently $13,000.  Consider consulting your accountant (now is a relatively quiet period for them) to determine whether you are likely to experience an unpleasant April surprise on your tax bill and if so what might help offset that unwanted occurrence.  Then give your estate planning attorney a call to discuss what needs to occur before year end.

Just as with holiday giving, estate planning gifts come in all shapes and sizes.  Annual gifting is something, as the name implies, to consider every year.  This year and next, unless and until the law changes, larger opportunities exist than ever before in the gifting arena (with lifetime $5 million dollar gifting exemptions) so, if your current financial situation allows, consider making it a truly memorable holiday season for yourself and your loved ones.

IRS Issues Guidance on 2010 Estate Tax Return Filing Requirements and Deadlines

September 14, 2011

 By Ashley Alderman

On September 8, 2011, the IRS released the updated Form 706, “United States Estate (and Generation-Skipping Transfer) Tax Return” for decedents dying in 2010.  A link to the Form 706 and the accompanying instructions appears below.  The Form incorporates the changes made to the Estate and Generation-Skipping Transfer Taxes in the 2010 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act.  According to the Instructions for the Form 706, estates of decedents who died in 2010 with a gross estate (including adjusted taxable gifts and specific exemptions) in excess of $5,000,000 must file a Form 706, unless the Executor of the Estate makes an election to apply the modified carryover basis treatment.

The deadline for filing the Form 706 is September 19, 2011, but the Executor may apply for an automatic six-month extension by filing Form 4768, “Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes.”  A link to this form is also included below.  The automatic extension extends the deadline for filing the Form 706 and paying the tax to March 19, 2012.

If the Executor elects to apply the modified carryover basis treatment, then Form 706 does not have to be filed, but the Executor must file a Form 8939, “Allocation of Increase in Basis for Property Acquired from a Decedent” instead.  This Form 8939 has not been finalized by the IRS.  The Form 8939 was originally due on November 15, 2011, but pursuant to Notice 2011-76 issued on September 13, 2011, the deadline is now January 17, 2012.  In accordance with earlier guidance in Rev. Proc. 2011-41 and Notice 2011-66, in Notice 2011-76, the IRS stated that it would not allow extensions for time to file this Form 8939, to make a carryover basis election or to amend or revoke such election except under certain specific exceptions.  We will update the Blawg when that final form becomes available on the IRS website.

Because a Form 8939 will not have another extension period, it is important that Practitioners and Executors quickly determine whether it is beneficial for the estate to elect the modified carryover basis treatment (and file such election by January 17, 2012) or file an extension to file the Form 706 by September 19, 2011 and then proceed with the filing of a Form 706 prior to the final deadline of March 19, 2012.  This determination may be more complex in situations where the estate is over the $5,000,000 exemption amount, but due to very low basis assets in the estate it may be beneficial for the Estate to pay some estate tax in order to receive a stepped-up basis rather than elect into the carryover basis treatment and eliminate any estate tax due.

 Resources: Forms

Form 706: United States Estate (and Generation-Skipping Transfer) Tax Return

Instructions for Form 706

Form 4768: Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes

Instructions for Form 4768