Posts Tagged ‘estate tax’

IRS gives mulligan to elect portability for $5 million estate exclusion

Tuesday, January 28th, 2014 by Joe Kristan
Flickr image courtesy quinn.anya under Creative Commons license

Flickr image courtesy quinn.anya under Creative Commons license

It’s bound to happen.  Dad Taxpayer dies suddenly, leaving behind a car on blocks and a paid-for 12-wide for his widow.  A lawyer friend of the family handles the estate paperwork for the widow for a nominal fee.  Two years later the widow buys a winning lottery ticket, and dies of a heart attack shortly after she learns she won $50 million.

Her surviving children are happy that Dad’s $5 million lifetime estate exemption is “portable,” meaning Mom could use it to reduce the estate tax on her shiny new $50 million estate by $2 million or so.  Except for one thing: lawyer friend didn’t file an estate tax return electing to pass the unused $5 million exemption to the widow ($5,340,000 for 2014, with inflation adjustments).

The permanent estate tax enacted last year allows a surviving spouse to use the lifetime exemption the first spouse doesn’t use, saving the need for sometimes complex estate planning to make sure the first spouse’s estate exclusion doesn’t go to waste.  But that only works if the first spouse files a timely estate tax return electing to pass the unused exemption to the survivor.  

The IRS yesterday gave a limited mulligan to family lawyer with Rev. Proc. 2014-18.  Tax Analysts reports ($link) on how Catherine Hughes,  attorney-adviser, Treasury Office of Tax Legislative Counsel, explains the relief:

     Estates eligible for the simplified method under Rev. Proc. 2014-18 are those for which the decedent is a U.S. citizen or resident, the decedent died after 2010 and before 2014, the decedent is survived by a spouse, the estate was not required to file an estate tax return under section 6018(a) because the estate lacked sufficient assets, and the estate did not file a timely estate tax return.

“Estates of decedents that meet that criteria have an automatic extension of time to file a timely estate tax return until the end of 2014,” Hughes said.

So all sins up until 2014 are forgiven if an estate return is filed this year.  Unfortunately, the requirement to file a return remains for decedents dying in 2014 and later to achieve portability, even if a return wouldn’t be required otherwise.  This is a stupid foot-fault requirement.  The election should be available on the surviving spouse’s Form 706 unless the decedent elects out.  Until then, though, every first spouse estate should consider filing an estate return, just in case the widowed spouse picks the right Powerball.

The TaxProf has more.


IRS loses farm ‘special use valuation’ case (again)

Monday, March 26th, 2012 by Joe Kristan

Roger McEowen has the scoop.


We’ll put you prison if you sell that, but we’ll tax it at a $65 million value

Friday, February 24th, 2012 by Joe Kristan

When Joseph Heller wrote Catch 22, he didn’t realize he was also writing the manual for IRS estate tax examinations. Janet Novack tells the bewildering story of modern art dealer Ileana Sonnabend and the most famous piece that she owned when she died in 2007:

As I report in a story here that appears in the March 12th issue of Forbes, Sonnabend


IRS extends deadline for ‘portability’ election for 2011 deaths

Monday, February 20th, 2012 by Joe Kristan

You can’t file joint estate tax returns, for reasons that are obvious on a moment’s reflection. Because each spouse gets a lifetime exemption from estate tax, couples with estates over the exemption amount have tried to make sure each spouse has enough assets to use their exemption.
The estate tax enacted for 2011-2012 makes life simpler for these couples by allowing estates to elect to carry any unused exemption to the surviving spouse. You make the election on the dead spouses estate tax return.
That’s great, but what if you don’t realize you need the exemption. It’s easy to imagine situations where a surviving spouse comes into a fortune and really wishes she had filed that Form 706. It’s just as easy imagining a lawsuit against the executor who had only the deceased’s double-wide to probate from the surviving spouse who wins the Powerball.
The trap is still there, but the IRS last week gave estates extra time to avoid it, even if they didn’t extend their estate tax return. From the TaxProf: IRS Extends Deadline to File Estate Tax Portability Election ?
Link: IR-2012-24


Why you should file that unneeded estate tax return

Wednesday, November 30th, 2011 by Joe Kristan

It seems odd. With the estate tax exclusion at $5 million — higher than ever — why is the IRS bracing for a flood of estate tax returns? Roberton Williams explains at TaxVox:



Getting the family partnership all wrong

Thursday, November 3rd, 2011 by Joe Kristan

Many wealthy families use family partnerships as part of their estate planning. A minority interest in a family partnership is worth less than the value of the underlying assets because a third-party buyer would not pay full value for assets controlled by somebody else. When the tax law respects this discount, it can reduce estate and gift taxes. But you have to do it right. If not, the tax law ignores the partnership and includes its assets in the contributing partner’s taxable estate.
Paul Liljestrand was born in Waterloo, Iowa in 1911. He didn’t linger. He went to China with his parents when he was four, and eventually settled in Hawaii after becoming a physician. He apparently had a successful enough career that he needed to do some estate planning. When well into his 80s he formed the Paul H. Liljestrand Partners Limited Partnership (PLP). But the execution went awry.
What went wrong? According to the Tax Court:
-Nobody told the tax preparer that there was a partnership at first, and so no partnership return was prepared for its first two years.
– Dr. Liljestrand contributed so much of his net worth to the partnership that he didn’t have enough other assets to live on. As a result, he used the partnership assets to pay his living expenses.
– There was only one meeting of the partners between its formation in 1997 and the taxpayer’s death in 2004.
– They didn’t treat the partnership in a businesslike way. Partners withdrew cash without executing loans and without formal action or documentation.
– The estate failed to convince the Tax Court that there was any non-tax reason for the partnership.
These are all bad facts. The judge decided that the partnership should be included in the taxpayer’s estate (my emphasis):

The record is devoid of any significant change in Dr. Liljestrand’s relationship with the assets before his death. Dr. Liljestrand received a disproportionate share of the partnership distributions, engineered a guaranteed payment equal to the partnership expected annual income, and benefited from the sale of partnership assets. The objective evidence points to the fact that Dr. Liljestrand continued to enjoy the economic benefits associated with the transferred property during his lifetime. With regards to Dr. Liljestrand’s motivation for forming PLP, Dr. Liljestrand was concerned with the disposition of his property after death. The estate claims he wanted to protect the property from partition and guarantee Robert’s management of the property after his death. These motives are primarily testamentary in nature. The objective and subjective evidence lead to a conclusion that the partnership was simply a vehicle for controlling Dr. Liljestrand’s property after his death.
In summary, we are satisfied that PLP was created principally as an alternate testamentary vehicle to the trust. Taking this feature in the light of all the factors discussed above, we conclude that Dr. Liljestrand retained enjoyment of the contributed property within the meaning of section 2036(a).

As a result, the Tax Court upheld a $2,573,171 assessment of additional estate tax.
The Moral? If you are going to use a family partnership for estate planning, you need to do it right. You want to have a non-tax use for it. You need to respect the formalities, including documentation of activity, maintaining a bank account, and following the partnership agreement. And you can’t use it for all of your assets. If you don’t leave enough assets outside the partnership to finance your lifestyle, you pretty much guarantee that your estate plan will fail.
Cite: Estate of Paul H. Liljestrand, T.C. Memo. 2011-259.


IRS issues estate return instructions for 2011

Thursday, September 29th, 2011 by Joe Kristan

The first estate tax returns for 2011 decedents are about to come due. Just in time, the IRS has issued instructions for Form 706. Roger McEowen and The Tennessee Tax Guy have more.


How much can you give away to your family without paying gift tax?

Wednesday, September 28th, 2011 by Joe Kristan

The limits now: $13,000 per year per donee, plus (through 2012) $5 million lifetime exclusion. Paul Neiffer has more at Farm CPA Today.


Estate tax return deadline extended

Wednesday, September 14th, 2011 by Joe Kristan

The IRS has extended the due date for the “carryover basis” computation for large 2010 estates to January 17. The due date had been November 15. Seeing that the IRS hasn’t gottern around to issuing Form 8939, the form for making the computation, it’s quite sporting of them to not require us to file it yet.
More coverage:
Roger McEowen


IRS issues guidance for 2010 estate tax filings; returns due November 15.

Monday, August 8th, 2011 by Joe Kristan

The IRS has finally issued the rules for estates of 2010 decedents. The guidance is crucial for estates using the election available for those dying in 2010 to pay no estate tax in exchange for a limited basis adjustment.
Roger McEowen explains the new guidance; some key points:

Form 8939 is the form to be used to both elect out of the estate tax and make the income tax basis allocations applicable for deaths in 2010.
The election, once made, is irrevocable.
If a filing has already been made purporting to make the election, it must be replaced with a Form 8939 filed by November 15, 2011.
The filed Form 8939 must show the basis allocations for the assets in the estate.

The TaxProf has more.
Notice 2011-66
Rev. Proc. 2011-41


How adding IRS agents increases tax revenues

Wednesday, June 29th, 2011 by Joe Kristan

The executor files an estate tax return valuing a 15% interest in an LLC at $34,936,000.
The IRS audits the estate tax return. They value the interest at $49,500,000, assiessing a deficiency of $6,990,720.
The Tax Court yesterday rules the correct value is $32,601,640. At the 48% estate tax rate that applies for 2004, that gives the estate a refund of $861,422.
It’s a good thing they audited that return, because that will help Commissioner Shulman pay to regulate more preparers.
Cite: Estate of Louise Paxton Gallagher, T.C. Memo. 2011-148


Estate tax. What’s it good for? Absolutely nothing.

Thursday, June 23rd, 2011 by Joe Kristan

David Logan puts it starkly:

Simply put, the federal estate tax does nobody any good.


Estate taxes are generally levied for two reasons: To break up concentrations of dynastic wealth and to raise significant tax revenues. The seminal 1987 NBER paper by B. Douglas Bernheim, Does the Estate Tax Raise Revenue?, suggests that the estate tax accomplishes neither of these goals.

In fact, according to Mr. Logan, the net effect of the estate tax may be to reduce revenue.
Anybody working in the financial world quickly realizes there is a much more powerful force to break up dynastic wealth than the estate tax. They’re called “beneficiaries.”

To the extent the estate tax does any good, it’s does so through the basis-step up at death — solving the need to dig through ancient or lost records to determine tax basis. Still, that goal could be accomplished by other means at much lower marginal rates.


‘Palimony’ may be deductible claim for estate tax purposes

Wednesday, February 23rd, 2011 by Joe Kristan

The TaxProf reports that the Ninth Circuit Court of Appeals has ruled that payments to an estranged live-in girlfriend under a “Palimony” suit may be deductible against a decedent’s estate tax. The decision reverses a district court, which was ordered to do more factfinding to determine what amount may be deductible.
This could open the door for a do-it-yourself marital deduction for unmarried couples in the right circumstances. Roger McEowen of the ISU Center for Agricultural Law and Taxation e-mails: “Just think of the collusion that unmarried couples could accomplish!”
It’s a fun idea, but a lot of things have to fall into place:
– You have to be in a state that recognizes palimony as a cause of action.
– You need to get a palimony suit going before the one with the money is dead.
– You need to make it look good enough to sell to a judge.
All in all, it would probably be easier to get married on your deathbed, if estate tax is what you’re worried about. But that’s between you, the object of your affection, and your respective lawyers.


Dealing with the 2010 estate tax holiday

Friday, February 18th, 2011 by Joe Kristan

Estates of taxpayers worth over $5 million who died in 2010 can elect out of the estate tax and instead pass on assets without a step-up in asset basis to full fair-market value. Roger McEowen covers the latest guidance for such estates.


Got $5 million to spare? Now might be the time to spare it.

Monday, January 31st, 2011 by Joe Kristan

The tax law passed at the end of 2010 extending the Bush-era tax cuts also quintupled the lifetime gift-tax exemption, to $5 million. That provision expires at the end of 2012. This could mean there is a two-year window for large family gifts. The Smartmoney Tax Blog has more.


You can’t take it with you, but maybe your spouse can use it

Thursday, January 20th, 2011 by Joe Kristan

Joel Schoenmeyer explains the new estate tax exemption “portability” rules at Death and Taxes.


Covering all of the Basis

Friday, January 14th, 2011 by Joe Kristan

Estate attorney Joel Schoenmeyer explains how the basis rules of the new estate tax law work:

One of the few benefits of the federal estate tax system (from the taxpayer’s POV) is that it is accompanied by a step-up in basis. In plain language, that the value of the decedent’s property as of the date of his or her death becomes its basis. Basis is no longer the cost the decedent paid for it. An example:

Mary Smith bought shares in ABC Company over 50 years, paying a total of $50,000 for the stock. At the time of her death in 2009, the shares were worth $1,000,000. At Mrs. Smith’s death, the basis for the stock became $1,000,000.

Basis is then used to compute capital gain when the property is sold. (If the ABC Company shares are sold after her death for $1,500,000, then there’s a taxable gain of $500,000 at sale. If the shares were sold by Mrs. Smith during life for $1,500,000, then the taxable gain would have been a whopping $1,450,000.)

It’s part of his series on the new estate tax rules at Death and Taxes.


Out of death comes life

Wednesday, January 12th, 2011 by Joe Kristan

The estate tax changes enacted last month have stirred the Death and Taxes blog to life with “25 Things You Need To Know About The New Estate Tax Laws.” Here’s Thing 6:

6. The exemption amount for decedents dying in 2011 or 2012 is $5 million. So, to take an example:

John Smith is a widower with two kids, Sam and Dave. Sam and Dave are John’s only beneficiaries under his Will. John leaves an estate worth $5 million when he dies on January 18, 2011. No federal estate tax will be due at John’s death. If John’s estate was instead worth $7 million given the above facts, an estate tax would be due on $2 million (the amount by which John’s estate exceeded the exemption amount for 2011).

Read the whole, er, things.


Bush-rate extension passes; what it means

Friday, December 17th, 2010 by Joe Kristan

After a day of posturing, the extension of the Bush-era tax cuts ended up passing easily last night, 277-148. The vote was held up to enable people to say how upset they were that they had to pass it, and for a vote to replace the bill’s 35% estate tax and a $5 million exemption with a 45% tax and a $3.5 million exemption (which failed). The President is expected to sign the bill (UPDATE: Signed @3:17 pm Central. Thanks to Going Concern for the live link.).
So what does it do?
The Bush-era rates are extended through 2012. That means 35% top rates on ordinary income and 15% rates on dividends and capital gains.
The bill allows “bonus depreciation” of 100% of the costs of new business depreciable assets. Unlike “Section 179” depreciation, “bonus depreciation” only applies to new property — not used machinery. The 100% bonus depreciation applies to new assets acquired after September 8, 2010 and placed in service starting September 9, 2010 through 2011 — so it applies to many assets already placed in service. 50% bonus depreciation will again apply in 2012; then bonus depreciation is scheduled to go away.
And to answer the inevitable question: the maximum deduction for a new car will be limited to $11,060, as the bill doesn’t change the maximum deduction for “luxury autos.” Any remaining cost will be recovered under the usual limits of Code Sec. 280F in subsequent years.
– The bill has a $125,000 (inflation-adjusted) Section 179 deduction for otherwise-depreciable assets placed in service in 2012. Current law would reduce Section 179 to $25,000 in 2012; the limit is $500,000 for 2010 and 2011. Unlike bonus depreciation, the Sec. 179 deduction is also available for used assets.
The bill reimposes the estate tax with a 35% rate and a $5 million lifetime exclusion, retroactive to January 1 2010. The bill re-enacts the rule that resets the basis of inherited assets at their date-of-death value. It lets estates of 2010 decedents elect to use the rules that had been in place in 2010, with no estate tax but a limited step up in the basis of inherited assets.
The $5 million lifetime exclusion also applies now to gift tax, at least for 2011 and 2012. For a number of years, the gift tax lifetime exclusion was lower. It remains $1 million for 2010 gifts.
The $5 million estate tax exemption is also “portable.” That means if a spouse dies after 2010 without using all of the $5 million exemption, the unused portion is added to the lifetime exemption of the surviving spouse. This would greatly simplify many estate plans, except all of these estate and gift tax rules are enacted only through 2012.
UPDATE: Estate planning attorney Wayne Reames e-mails:

As we think about it, portability is going to create more work, not less. First, portability only applies if the first-to-die files an estate tax return. Thus, we


2010 100% bonus depreciation, Extenders, $5 million portable gift-estate tax exemption in ‘Framework’ text

Friday, December 10th, 2010 by Joe Kristan

The Senate yesterday released legislative language for the ‘Framework’ to extend the 2010 tax rates for two years, answering some questions that have lingered since the deal was announced. As it turns out, the “Framework” is a great big grab bag solving just about all of the unanswered tax legislation problems that have been outstanding.
Some of the answers:
The bill makes clear that the “100% expensing” of business depreciable assets in the bill uses the existing “bonus depreciation” rules, so it only applies to new property — not used machinery. In a surprise, the 100% bonus depreciation applies to new assets acquired and placed in service starting September 9, 2010 through 2011. 50% bonus depreciation will again apply in 2012.
– The bill has a $125,000 (inflation-adjusted) Section 179 deduction for otherwise-depreciable assets returns in 2012. Current law would reduce Section 179 to $25,000 in 2012; the limit is $500,000 for 2010 and 2011. Unlike bonus depreciation, the Sec. 179 deduction is also available for used assets.
The bill has some surprising estate tax provisions:
– The estate tax proposal allows estates of 2010 decedents to choose whether to use the rules that were in place for 2010 — no estate tax, but only a limited step-up in asset basis — or the 35% tax with the $5 million exemption that applies in 2011 and 2012, with full fair market value basis for inherited assets.
The $5 million lifetime exemption for the bill will apply not only to estates but also for gift tax purposes. The $5 million exemption becomes available for gifts starting next year. Pre-2010 law allowed a $3.5 million lifetime exemption for estates, but only $1 million for gifts.
– The estate tax exemption will be portable; if one spouse dies with less than $5 million in assets, the unused exemption will be available to the estate of the surviving spouse.
– Estate tax returns for which taxpayers elect to be subject to the estate tax in 2010 will be due 9 months after the bill is enacted.
The 2-percentage point reduction in the employee FICA tax for 2011 will also apply to self-employment tax.
An “AMT Patch” in the bill increases the AMT exemption amount through 2011. The 2010 exemption will e $47,450 for individuals and $72,450 for joint filers.
The bill solves the “expiring provisions” problem by extending them mostly through the end of 2011. Provisions extended include the ethanol subsidy (and the protective 54-cent tariff) and the biodiesel subsidies. A few of the other extended items:
– R&D Credit
– 15 year depreciation for qualified leasehold improvements, restaurant improvements and retail improvements.
– Increased deduction limits for conservation easements.
– Work opportunity tax credits
– The economically-indispensable seven-year depreciation period for motorsports entertainment complexes.
The full list of extenders is here.
This is a surprisingly sweeping bill. It’s not a done deal, as House Democrats are unhappy with it — especially the estate tax provisions. Given the choice of humiliating a president of their own party and swallowing the bill, though, they are likely to swallow.
The TaxProf has more.
Related: The tax compromise: what do we know?
UPDATE, 3/31/2011: IRS release solves ‘second year zero’ problem for auto depreciation