Posted tagged ‘Form 706’

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!

 

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