Estate Tax Issues & Concepts at the Death of an IndividualINDIVIDUAL INCOME TAX RETURN(S) OF DECEDENT
• The death of an individual taxpayer does not terminate the responsibility for filing income tax returns for the decedent. The personal representative of the estate will have this responsibility. The personal representative is the executor (if appointed by the Will) or the administrator (if appointed by state law).
• The general rule is that the reportable income and expenses of a decedent, assuming a calendar year taxpayer, run from January 01st through midnight on the date of death (DOD). Any income or expenses that occur on behalf of a cash basis taxpayer after the date of death are to be reported by the estate.
• If the individual died early in a taxable year, it may be necessary for the personal representative to file two income tax returns for the decedent. The first return would be for the previous entire year; the second return would be for the portion of the year of death that the decedent was alive.
○ EXAMPLE: Joe Taxpayer died April 04, 2012. He had not yet filed his 2011 income tax return. It is therefore necessary for his personal representative to file federal and state individual income tax returns for the entire year of 2011. In addition, the personal representative may have to file individual tax returns (federal and state) for the portion of the year from January 01st through April 04th, 2012, if the filing requirements are met or if other reasons for filing exist.
ESTATE INCOME TAX RETURN(S)
• If the income of the estate exceeds $600, the personal representative must also file federal and state income tax returns for the estate (US Form 1041 -- Fiduciary Income Tax Return). However, do not let the $600 filing limit mislead you into not filing Form 1041. There are many situations where a fiduciary income tax return should be filed even thought the $600 income filing requirement is not met. For example, there are many elections which may be made only on an estate income tax return which can prove to be very beneficial to the estate and/or the beneficiaries. These elections will be discussed in detail in later sections.
FEDERAL ESTATE TAX RETURN
• It may may also be necessary for the personal representative to file a Federal Estate Tax Return (US Form 706). A Federal Estate Tax Return is required if the value of the assets at the date of death plus taxable gifts made after 1976 by the decedent exceeds $5,120,000 (2012). The value of assets owned at death is to be measured using the fair market value (FMV) at the date of death of the decedent.
• For many assets, FMV is easy to establish. For example, bank accounts, certificates of deposits and stocks and bonds that are publicly traded are relatively easy to value. By contrast, assets such as an interest in a closely-held business or in real estate can be very difficult to value. Typically, the value of these types of assets is established by an appraisal as to fair market value at date of death. In such instances, fair market value is the gross fair market value and it is not to be reduced by expenses of sale (such as the relatively high expenses of selling real estate or of liquidating a business).
• A very commonly-held misconception is that jointly-held property is not subject to death taxes at either the federal level (estate tax) or at the state level (inheritance tax). This is absolutely false as to federal estate taxes. Additionally, this misconception is generally not true for state inheritance taxes. Perhaps this misconception is prevalent because, in many states, jointly-held property is not subject to probate procedures and probate fees (the various filing fees when an estate is opened and closed at the court probate office).
• Two assets that are reportable on a Federal Estate Tax Return that are generally not reportable on state inheritance tax returns are life insurance on the life of the deceased and taxable gifts the deceased made after 1976:
Life Insurance. If the deceased owned the incidents of ownership of a life insurance policy on his own life, then, for federal purposes, the value payable at death is an asset of his estate. Incidents of ownership include such items as:
1. the ability to change beneficiaries
2. the right to take a policy loan
3. the right to cancel the policy
4. the right to assign the policy
5. the obligation to pay the premiums
Taxable Gifts. Taxable gifts made after 1976 result from substantial changes in the federal estate and gift tax laws that were passed in 1976 and became effective, for the most part, on January 01, 1977. In essence, these legislative changes combined the federal estate and gift taxes so that the federal government would tax an individual on total gratuitous transfers made after 1976, whether these transfers were made due to death or were made as lifetime gifts in amounts in excess of an annual exclusion of $13,000 (2012), hereinafter called taxable gifts. If an individual made taxable gifts after 1976, then, at his death, his estate tax computation includes the value of all taxable gifts.
○ EXAMPLE: In 2011, Joe taxpayer, made a gift of $103,000 to his son. The first $13,000 of this gift is excludable because of the annual exclusion amount. The remaining $90,000 is considered a taxable gift. Hence, at his death, Joe Taxpayer's executor must add this $90,000 to the value of any assets that Joe owned at his death to determine the total gross estate.
• A very commonly-held misconception is that jointly-held property is not subject to death taxes at either the federal level (estate tax) or at the state level (inheritance tax). This is absolutely false as to federal estate taxes. Additionally, this misconception is generally not true for state inheritance taxes. Perhaps this misconception is prevalent because, in many states, jointly-held property is not subject to probate procedures and probate fees (the various filing fees when an estate is opened and closed at the court probate office).
• Two assets that are reportable on a Federal Estate Tax Return that are generally not reportable on state inheritance tax returns are life insurance on the life of the deceased and taxable gifts the deceased made after 1976:
Life Insurance. If the deceased owned the incidents of ownership of a life insurance policy on his own life, then, for federal purposes, the value payable at death is an asset of his estate. Incidents of ownership include such items as:
1. the ability to change beneficiaries
2. the right to take a policy loan
3. the right to cancel the policy
4. the right to assign the policy
5. the obligation to pay the premiums
Taxable Gifts. Taxable gifts made after 1976 result from substantial changes in the federal estate and gift tax laws that were passed in 1976 and became effective, for the most part, on January 01, 1977. In essence, these legislative changes combined the federal estate and gift taxes so that the federal government would tax an individual on total gratuitous transfers made after 1976, whether these transfers were made due to death or were made as lifetime gifts in amounts in excess of an annual exclusion of $13,000 (2012), hereinafter called taxable gifts. If an individual made taxable gifts after 1976, then, at his death, his estate tax computation includes the value of all taxable gifts.
○ EXAMPLE: In 2011, Joe taxpayer, made a gift of $103,000 to his son. The first $13,000 of this gift is excludable because of the annual exclusion amount. The remaining $90,000 is considered a taxable gift. Hence, at his death, Joe Taxpayer's executor must add this $90,000 to the value of any assets that Joe owned at his death to determine the total gross estate.
• It is not an uncommon occurrence for an estate, as measured for federal purposes, to exceed $5,120,000 (2012) when the value of life insurance, business interests, real estate, other assets and taxable gifts are totaled.
• The federal estate return is due nine (9) months after date of death. It is possible to obtain a 6-month extension of time to file and to pay and to obtain an additional 6-month extension of time to file, but each extension must be specifically requested with valid reasons given for the request(s) for extension. Failure to file the federal estate tax return on time and to pay the tax due generates a penalty for failure to file of 5% per month or part thereof, plus a failure to pay penalty that is computed like interest.
• Be careful in your practice of running into an unexpected Form 706 filing requirement for a given estate. Try to get involved in the estate administration process early because you, as accountants, probably understand valuation of assets as well (if not better) than the other professionals involved in this area of practice. You can really generate allot of goodwill for your practice if you can prevent (or have abated) penalties that would have otherwise been due because of late filing and/or late payment of federal estate taxes.
EXPLANATION FOR FILING RETURN LATE OR PAYING TAX LATE - FORM 4571
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
PRACTICE TIP
• The federal estate return is due nine (9) months after date of death. It is possible to obtain a 6-month extension of time to file and to pay and to obtain an additional 6-month extension of time to file, but each extension must be specifically requested with valid reasons given for the request(s) for extension. Failure to file the federal estate tax return on time and to pay the tax due generates a penalty for failure to file of 5% per month or part thereof, plus a failure to pay penalty that is computed like interest.
• Be careful in your practice of running into an unexpected Form 706 filing requirement for a given estate. Try to get involved in the estate administration process early because you, as accountants, probably understand valuation of assets as well (if not better) than the other professionals involved in this area of practice. You can really generate allot of goodwill for your practice if you can prevent (or have abated) penalties that would have otherwise been due because of late filing and/or late payment of federal estate taxes.
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
PRACTICE TIP
• In your practice, if you run across a situation where a Federal Estate Tax Return should have been filed but has not and is now delinquent, it may be worth filing along with the return a Form 4571 which is entitled "Explanation for Filing Return Late or Paying Tax Late." There are no related instructions for this form.
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
No comments:
Post a Comment