Thursday, September 23, 2010

To File or Not to File: Is it Necessary to File a Federal Estate Tax Return This Year?

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

Monday, September 20, 2010

October 2010 AFRs Announced

Lower...yet again...for the month of October 2010 the Applicable Federal Rates (AFRs) are as follows:

For this same period, the Section 7520 Rate will be 2.0%. To go directly to the IRS' publication, please visit the following website: http://www.irs.gov/pub/irs-drop/rr-10-24.pdf.

Tuesday, September 14, 2010

The Value of Retaining an Experienced Tax Professional

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.


Thursday, September 9, 2010

Grant Named to List of "Legal Elite"

The Nevada Business Magazine named Attorney David M. Grant its list of the 2010 Legal Elite. The “Legal Elite” represent the top attorney’s in Nevada as selected by their peers. Out of the 10,360 licensed attorneys in Nevada, 125 are honored as this year’s top attorneys. Through the same balloting process David was also named as one of the “20 Best Up & Coming Attorneys” in Nevada. To see the full article and list please visit http://www.nbj.com/issue/0910/1/2287.

Mr. Grant is a Partner as well as the Director of Legal Services at Jeffrey Burr, LTD. In addition to handling the estate planning needs for some of Nevada’s wealthiest families, Mr. Grant also regularly speaks and writes on the topics of trusts and estates, federal tax law, and asset preservation. He graduated from Southern Utah University (B.S., Accounting, Magna Cum Laude), the University of Utah (Master of Accountancy), and the University of Houston (J.D.). Before attending law school, he worked for the international accounting firm of Deloitte & Touche. Mr. Grant serves as Chairman of the Roundtable Committee for the State Bar of Nevada Probate & Trust Section and sits on the boards of the Southpac Offshore Planning Institute, the Nevada State College Foundation, the Southern Utah University School of Business National Advisory Council, the Henderson Community Foundation, the Vegas PBS Planned Giving Council, and the Gift Planning Advisors.

Congratulations, David, on this honor!

- The Jeffrey Burr Blog Team

Thursday, September 2, 2010

Danger to Trustee: Potential Challenge to Validity of Trust

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.

 - Attorney John Mugan