Tax Collection

Tax Collection
IRS Collection Procedures
Robert McKenzie, Contributor 
The IRS Collection Division attempts to collect delinquent taxes as inexpensively and rapidly as possible. To accomplish this task the IRS makes extensive use of computers. Only when automated methods have failed to collect a tax is the matter assigned to an individual for collection.

Four-Level System

To effectuate this policy the IRS utilizes a four-level system of collection. It begins its collection efforts on each account by generating computer notices from a Regional Compliance Center. If the efforts of the Compliance Center do not secure payment, the account is then assigned to the Automated Collection System (ACS). The Automated Collection System attempts to collect the tax liability by initiating telephone calls to the taxpayer and others. During the time that an account is assigned to Compliance Center and ACS, accounts may also be resolved by Collection Support Staff assigned to handle “walk-ins” in local IRS offices. If none of these levels of the system are successful in collecting the account, it is eventually assigned to a Revenue Officer for a field investigation. Obviously, it is much less expensive for the IRS to collect a tax by mailing a notice or placing a telephone call than it is to visit the taxpayer personally. For the taxpayer, however, personal negotiation is much more effective than dealing with an automated system.

Compliance Center
The IRS has ten Regional Compliance Centers which process all tax returns filed with the IRS. Compliance Centers are extensively automated. The information on each tax return filed is encoded into the IRS computer at a Compliance Center. That IRS computer system will determine if computational errors are contained on the return and issue notices regarding errors. The Compliance Center is also responsible for initiating notices to taxpayers to collect balances due on tax returns.

1040 Notice Procedure
Upon receipt of a tax return or other document showing a balance due, the following process takes place in the Internal Revenue Compliance Center. Within several weeks after receipt of the document, the information is placed on the computer system. That system will then initiate a series of notices. The first notice issued is a document titled “Request for Payment,” which informs the taxpayer that there is a balance due on the return, states the amount of tax, interest and penalties due, and requests payment within ten days. This is the notice statutorily required for the creation of a valid Federal Tax Lien. If the liability is for individual income taxes, and the liability is relatively small, the taxpayer will normally receive four subsequent notices before the IRS proceeds to take any administrative collection measures. If the liability is not paid after the initial notice, the taxpayer will receive a second notice, “Reminder,” Notice 501. The IRS will issue Notice 503, “Urgent, Immediate action is required “, five weeks after the first notice. The taxpayer will receive Notice 504, “Urgent, We intend to levy on certain assets. Please respond NOW,” in the mail five weeks after issuance of Notice 503 if payment is not made after that notice. Notice 504 is the nastiest of the IRS letters. If the taxpayer fails to pay after Notice 504 the matter will be referred for collection by the Automated Collection System (ACS). If ACS is unsuccessful in collecting or resolving the matter the IRS will then issue Letter 1058, “FINAL NOTICE, NOTICE OF INTENT TO LEVY AND NOTICE OF YOUR RIGHT TO A HEARING. PLEASE RESPOND IMMEDIATELY.” If the taxpayer exercises her appeal rights, collection will be held. If the taxpayer fails to appeal the IRS will levy after expiration of 30 days from the notice. One unusual convention of the IRS is that each notice will bear a date which falls on Monday.

Business Taxpayers
In the case of business taxes (either corporate income or withholding taxes), the IRS will send three notices prior to initiating enforcement measures. The total time from first notice to enforcement action is normally at least 16 weeks. The taxpayer will receive a first notice and a Notice 504 five weeks subsequent to the first notice. The account will then be referred to ACS or a Revenue Officer for issuance of Letter 1058 if the taxpayer fails to resolve the liability.

Notice of Levy

ACS has computerized sources of income or assets of the taxpayer, such as wages, bank accounts, certificates of deposit or accounts receivable, all of which can be seized administratively from the taxpayer, it will issue a Notice of Levy against the taxpayer’s assets approximately six weeks after the Letter 1058. If the ACS does not have sources of income or other assets to levy upon, it will either research other sources or issue a Balance Due (Bal Due) to a local area office for collection, several weeks subsequent to the final notice.

Correspondence With Compliance Center
Normally, it is ineffective to write to a Compliance Center. It may take some Compliance Center six weeks or more to process correspondence. For example, if your client receives a Notice 504 even though he paid the tax upon receipt of the Notice 503, a letter to the IRS will not stop assignment to ACS. The IRS will not process your letter for six weeks, yet the computer continues to automatically refer the matter to ACS on a set cycle.

Streamline Installment Agreements
A taxpayer may be able to secure a 60-month payment plan for 1040 liabilities of less than $25,000. The IRS Restructuring and Reform Act of 1998 requires the IRS to grant a payment plan to individual taxpayers who owe less than $10 thousand. A taxpayer may set up a streamlined online at the IRS website.

Telephone Collection Efforts
If an account cannot be collected by a Returns Processing Center by using the matter will then be transferred to a ACS for enforced collection measures or telephone collection efforts. Each ACS, including the Return Processing Center, has a computerized telephone collection system and is authorized to levy on bank accounts, wages and accounts receivable.

IRAs

ROTH or Traditional; Making the Smart IRA Choice
Planning for and individual retirement account (IRA) can be quite complicated. Taxpayers have several types of IRAs to choose from, all with different eligibility requirements and tax treatments to consider. In choosing the IRA that will produce the best tax and financial results for you, you should start by reviewing some IRA basics

Review traditional IRAs
Deductible: With a traditional deductible IRA, you take a tax deduction for the year that you make your contribution. Contributions and earnings grow tax-free until withdrawn, at which time they are subject to regular income tax.

Withdrawals must begin after you reach age 70 1/2, and withdrawals before age 59 1/2 are generally subject to a penalty.

If you have a company retirement plan at work and your income exceeds certain levels, you may not be eligible for a traditional deductible IRA.

Nondeductible: Contributions to a traditional nondeductible IRA do not generate a tax deduction. But once a contribution is made, nondeductible IRAs are treated much like deductible IRAs. Because contributions were not deductible, they are not taxed when eligible for withdrawal. Earnings in a nondeductible IRA grow tax free until withdrawn, and withdrawals must begin after you reach age 70 1/2.

Spousal: Nonworking spouses are allowed to contribute up to $3,000 a year to a spousal IRA. A joint return must be filed, and total IRA contributions for both spouses cannot exceed their combined earnings.

Roth IRA
With a Roth IRA, contributions are not deductible, but there is an important, offsetting benefit: principal and earnings in a Roth IRA are never again subject to tax if you meet certain requirements.

Example: You contribute $2,000 annually to a Roth IRA. Although you receive no tax deduction, this IRA can grow to any amount and it will never again be subject to tax. And for the rest of your life, withdrawals may be as large or small as desired, provided the IRA has been in existence for at least five years and you are at least 59 1/2 years old.

A Roth IRA is not subject to mandatory distribution requirements. Also, spousal Roth IRAs are permitted. Eligibility for a Roth IRA is phased out at income levels of $95,000 to $110,000 for singles and at $150,000 to $160,000 for couples.

Deductible, nondeductible, or Roth?
If you are eligible to contribute to all three types of IRAs -- deductible, nondeductible, and Roth -- you can safely ignore the nondeductible IRA, since it is clearly less attractive than the other two. But deciding between a deductible IRA and a Roth IRA can be very difficult.

If you expect your tax bracket to increase during retirement, or stay the same as it is now, a Roth IRA is probably a better choice than a deductible IRA.

But if you expect your tax bracket to be lower during retirement, or you simply do not know, you might want to opt for a deductible IRA.

When making the IRA decision, you also may need to consider other factors, such as length of time until retirement, expected rate of return on investments, and the relative amount of your IRA and non-IRA assets.

Comparison of Traditional and Roth IRAs
Assume you have decided to put $2,000 away every year for the next 20 years. You expect the account will earn an annual average rate of return of 10%, and your tax rate will be 28% before and after retirement.

Comparison: Traditional & Roth IRA's

Description                                            Traditional    Roth

Total Contribution to IRA	40,000	40,000
Accumulation in IRA ($40,000 plus 10% earnings) before taxes	126,005	126,005
Tax on IRA withdrawals	(35,281)	- 0 -
Value of IRA account  after tax	90,724	126,005
Future Value of Tax Savings Invested  [$560/year = ($2,000 x 28% tax rate) @ 7.2% yield after tax rate {10% x (1 - .28)}]	+25,155	- 0 -
Value at retirement	115,879	126,005

Conclusion: A Roth IRA may be worth $10,126 ($126,005 - $115,879)
more than a Traditional IRA.

How was this calculated?
Step 1: First we found the value of a Roth IRA if you contributed $2,000 per year for 20 years earning an assumed 10.00% per year. This equaled $126,005. Since withdrawals from a Roth IRA are not taxed, the total value remains $126,005.

Step 2: We then computed the totals for a Traditional IRA. Again we determined the value of $2,000 per year for 20 years earning an assumed 10.00% per year. This is the same amount as the Roth IRA total, $126,005. However, tax deductible contributions and all earnings in a Traditional IRA are taxable when they are withdrawn. After taxes, the value of your Traditional IRA account would be $90,724. The Roth Account value at retirement assumes you take a qualified distribution from your account. This account distribution, including any investment earnings, may be tax-free if you meet the following criteria: you are at least 59 ½ , deceased or disabled; and your first contribution to the Roth account was made at least five tax years earlier than the date of the distribution.

Step 3: Finally, if you had any tax deductible Traditional IRA contributions we need to determine the value of investing this tax savings and add this amount to the Traditional IRA total. If we forget this step, our comparison will not be equal (we would in effect be contributing more to our Roth IRA than the Traditional IRA). If your tax savings was invested for 20 years at an assumed rate of 7.2% after tax rate, this returns a total of $25,155 after taxes.

Estate Tax on Income In Respect of a Decedent

This sounds complicated, but it can save you a lot of money if you inherited an IRA from someone whose estate was big enough to be subject to the federal estate tax. Basically, you get an income-tax deduction for the amount of estate tax paid on the IRA assets you received. Let's say you inherited a $100,000 IRA, and the fact that the money was included in your benefactor's estate added $45,000 to the estate-tax bill.

You get to deduct that $45,000 on your tax returns as you withdraw the money from the IRA. If you withdraw $50,000 in one year, for example, you get to claim a $22,500 itemized deduction on Schedule A. That would save you $6,300 in the 28% bracket.

Individual Return Key Filing Date

Individual Return Key Filing Dates for Federal Income Taxes are:

January 15th	4th Quarter Estimated Tax Due
April 15th	Individual Tax Returns due
April 15th	1st Quarter Estimated Tax due
June 15th	2nd Quarter Estimated Tax due
August 15th	Extension Filing due (1st Extension)
September 15th	3rd Quarter Estimated Tax due

Please note: If the 15th falls on a weekend, the filing date moves to the
following Monday.

How Long do You Need to Keep Your Records?

How Long do You Need to Keep Your Records?
The IRS has 3 years from the date you filed your return to assess any additional taxes you owe. If you did not report all of your income and it is more than 25% of the gross income you reported on your return, the IRS has 6 years from the filing date of the return to assess additional taxes. If you failed to file a return or filed a fraudulent return, there is no statute of limitations preventing the assessment of additional taxes. (ergo, ipso facto - the IRS can go back as far as they want if they detect fraud. An example in law is money laundering: the act is ipso facto illegal because it is done as a cover for something else, so the act puts the actions of an individual in question).

► You have 3 years from the date you filed your return or 2 years from the date you paid the tax, whichever is later, to file a claim for credit or refund. If you filed your return prior to the due date, it is considered filed on the due date.
► The following are some general rules for determining how long to maintain your important personal tax records:

► Maintain records on investment property you currently own and keep these records as long as you own the property. When you sell an investment, records will be used to determine whether you have a gain or loss and if the gain/loss is short term or long term. Maintain the records related to the sale of an investment with the tax return on which the sale was reported.
► Maintain nondeductible IRA contributions records indefinitely. They will be needed to determine the non-taxable portion of your required IRA distributions.
► Maintain records for depreciable property showing the purchase date, cost of the property, the date and cost of any improvements to the property, and a depreciation schedule showing the method used and the depreciation taken for all the years that you owned the property. Keep these records until you sell or dispose of the property with the tax return on which you report the sale.
► Maintain birth certificates, marriage licenses, divorce agreements, wills, copies of estate and gift tax returns, etc. in a permanent file. These are important documents that may be needed to verify information on a tax return.

Please contact this office for details and assistance with any or all of the above. We can guide you and relieve the tedious attention to detail so you can do what you do best.

How do YOU file LLC Taxes?

How do YOU file LLC Taxes?
Understanding how to file LLC taxes, S Corporation taxes and taxes for other business entities can be one of the biggest headaches of owning your own business. Filing taxes for a business entity like an LLC can be especially confusing because of the multitude of options the IRS allows for Limited Liability Companies. The IRS does not recognize Limited Liability Companies as a tax classification. Therefore, for tax purposes, you must select an IRS-recognized business tax classification.

1. One of the first steps to file LLC taxes is to determine how you plan to handle income. How many members are involved in the LLC? Do the members draw a salary from the company, or simply share revenue? If there is only one member of an LLC, does that member want to claim company income on their personal taxes, or file taxes for the company separately? Answering these questions determines what forms and tax classifications are necessary.

2. File a Form 8832 to elect tax classification. Form 8832 notifies the IRS which business entity or tax status you plan to employ for filing tax returns for the LLC. A sole member can opt to either disregard LLC status for tax purposes (thus claiming income on their personal return) or opt to file taxes as a corporation. A multi-member LLC can opt to select S Corporation classification and pass income to each member on a pro rata basis, file taxes as a partnership or opt to file corporate taxes as a separate entity.

3. Forms 1040, 1120 and 1065 are all options for filing LLC taxes. Which form you use is determined by the tax classification chosen on Form 8832. If you’re a sole member and opted to disregard LLC status for tax purposes, you would use a standard Form 1040 for personal income, with appropriate schedules for profit or loss from a business. If you elected to file LLC taxes as any form of corporation (regardless of membership size), you would use Form 1120. S Corporations file tax returns using Form 1120S to report pro rata shares paid to LLC members.

The IRS recommends that two-member LLCs file taxes as a partnership and use Form 1065. The IRS offers extensive information to aid in tax filing for individuals, as well as businesses. They even offer an entire section devoted to tax filing for a Limited Liability Company.

A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.

Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.

In summary, actually, LLC taxes are fairly simple. It depends on how many members there are and the choice made by the membership. Do the members elect to be treated as a corporation? If so, then the corporate taxation rules apply including the possibility of S Corp treatment. If not, then two or more members are treated as a partnership. A single member LLC is a sole proprietor for income tax purposes.
Source: Electronic Return Originators, IRS e-file

Home Office Expenses of a One-Person Corporation

Home Office Expenses of a One-Person Corporation
In order for an area to qualify as a home office for any business, the space MUST be used REGULARLY on a continuous, ongoing or recurring basis and EXCLUSIVELY for your trade or business. There should be NO personal use. Additionally, the space must be your principal place of business or a place where you physically meet with patients, clients or customers on a regular basis.

If you are a Sole Proprietor, you can deduct a qualifying home office expense on Schedule C as long as it is an ordinary and necessary expense. However, if you are an Employee of your own one person Corporation, whether it is a C Corporation or a Sub Chapter S Corporation, you have three options when deducting a qualifying home office.
You can deduct the costs as an unreimbursed “employee businessexpense” under “Job Expenses and Other Miscellaneous Deductions” on Schedule A. The downside to this option is that your deduction is limited to the extent that the total home office deduction exceeds 2% of your adjusted gross income. If your income is high, this may not be the most advantageous option for you.
The corporation can pay you rental expense for the home office deduction. While the corporation can deduct the rent paid to you, you on the other hand, MUST report the rent as income on Schedule E.
The corporation can pay you the costs of the home office deduction under an “Accountable” plan for the employee business expense reimbursement. This by far is the best option because it provides the greatest tax savings. It is also an excellent way to get monies out of your corporation tax free. The corporation gets to deduct the amount of the reimbursement, and you the employee DO NOT have to report the payment as income.

Finally, keep in mind that as an employee of the corporation, the home office must be for the convenience of the employer. In other words, the home office is required as a condition of your employment.

For a more detailed discussion on taking the home office deduction, call or email me. To read more on home office deduction, read Publication 587.

Gift Tax

Gift Tax
The federal gift tax applies to gifts of property or money while the donor is living. The federal estate tax, on the other hand, applies to property conveyed to others (with the exception of a spouse) after a person’s death.

The gift tax applies only to the donor. The recipient is under no obligation to pay the gift tax, although other taxes, such as income tax, may apply. The federal estate tax affects the estate of the deceased and can reduce the amount available to heirs.

In theory, any gift is taxable, but there are several notable exceptions. For example, gifts of tuition or medical expenses that you pay directly to a medical or educational institution for someone else are not considered taxable. Gifts to a spouse who is a U.S. citizen, gifts to a qualified charitable organization, and gifts to a political organization are also not subject to the gift tax.

You are not required to file a gift tax return unless any single gift exceeds the annual exclusion amount for that calendar year. The exclusion amount ($13,000 in 2011), is indexed annually for inflation. A separate exclusion is applied for each recipient. In addition, gifts from spouses are treated separately; so together, each spouse can gift an amount up to the annual exclusion amount to the same person.

Gift taxes are determined by calculating the tax on all gifts made within the tax year that are above the annual exclusion amount, and then adding that amount to all the gift taxes from gifts above the exclusion limit from previous years. This number is then applied toward an individual’s lifetime applicable exclusion amount. If the cumulative sum exceeds the lifetime exclusion, you may owe gift taxes.

The 2010 Tax Relief Act reunified the estate and gift tax with a $5 million exclusion and 35 percent tax rate in 2011 and 2012. This enables individuals to make lifetime gifts up to $5 million (up from $1 million in 2010) before the gift tax is imposed. These changes are only in effect through 2012.

Fact Sheet - State of New Hampshire (ver. 1)

Registration of Business Name

1. If doing business under own name, registration is not required, but it is desirable.
2. If trading under any name, even your own, registration of this trade name may be accomplished by contacting:

Office of Secretary of State
State of New Hampshire
25 Capital St, 3rd Floor
Concord, NH 03301
(603) 271-3244 (603) 271-3246
NH Corporate Division

• Click on "Forms & Laws" then "Tradenames"
• You get a 5-year registration with a $50 fee.

NH Business Profits & Enterprise Taxes

• Anyone in business whose gross income exceeds $50,000 must file. File with:

State of New Hampshire

Department of Revenue
61 South Main St, PO Box 637
Concord, NH 03301
(603) 271-2186
NH Dept of Revenue

Taxes

1. Federal Income Taxes - A copy of Pub 334, "Tax Guide for Small Business" and Pub 583 "Starting a Business and Keeping Records" IRS Forms & Pubs IRS Pubs
2. Federal Employment Taxes - Every employer is required to apply for an "Employer Identification Number" on Form SS-4 to cover federal income tax withholding, social security payments and Unemployment Insurance. A free copy of Circular E, Pub 15 "Employer's Tax Guide" is available from the Internal Revenue Service. To obtain your Employer Identification Number (EIN) Online
3. Small Business Tax Workshops - The Internal Revenue Service recommends that you attend a Small Business Workshop because it provides an introduction to business taxes. Typically a workshop includes discussion of the following topics:
• Tax advantages and disadvantages of sole proprietorships, partnerships, corporations.
• The basics of preparing your business tax returns.
• How to withhold and make deposits of Federal taxes.
• How the IRS works: services, tax audits, your appeal rights, penalties a business may incur.
• What records you will need to keep and how good records benefit your business.
• To register for a Small Business Tax Workshop Small Business Tax Workshops and Webinars

1. Licenses - State and municipal ordinances require licenses of various kinds for a number of businesses. A restaurant, for instance, may require clearance from the local Fire Dept., Sanitation Dept., Health Dept., Board of Alcoholic Beverage Control, etc. State licenses are required for such things as outdoor advertising, liquor handling, real estate brokering, electrical contracting, automobile dealerships and junk yards, lumber sales, etc. It is recommended that the prospective businessperson make thorough inquiries to the appropriate municipal and state authorities.
2. Choosing Your Form of Business Organization - There are many advantages and disadvantages to the four (4) major forms of business organization -- Sole Proprietorship, Partnership, Corporation, Limited Liability Company (LLC). You would be wise to consult an attorney for legal advice. For the name of an attorney call:

NH Bar Association

112 Pleasant St
Concord, NH 03301-2947
(603) 224-6942
Fax: (603) 224-2910
NH Bar Association


Complaints
Consumer complaints may be filed with:
NH Consumer Protection & AntiTrust Bureau

33 Capitol St
Concord, NH 03301-6397
(603) 271-3641
NH Consumer Protection & AntiTrust

The Federal Trade Commission is a federal agency which deals with consumer protection matters on a national level or when interstate commerce is involved.
Federal Trade Commission
600 Pennsylvania Ave, NW, Washington, DC 20580-0002
1-877-FTC-HELP or 1-877-382-4357 (toll-free)
TDD: 1-202-326-2502
Federal Trade Commission

Estate Taxes

Estate Taxes

♦ You cannot take it with you, but failing to plan for your estate can mean that the government, rather than your heirs, may get the major portion of your hard-earned money. Why? Because the top estate tax rate is a whopping 40% (2013).

♦ Most people are aware of the exclusion of a certain amount of assets from state taxes. For years, this amount has been $600,000; that figure will now increase gradually until it reaches $3,500,000 in 2009, $5,000,000 in 2011, $5,150,000 Iin 2012  and $5,250,000 in 2013.  This seems like a significant amount. Yet, when you consider the value of retirement benefits, life insurance, the value of your home and other assets, you may be surprised at how much you are worth.

♦ It is not effective estate planning to simply put everything you own in joint title or to draw up a will leaving everything to your spouse. You need to review your total financial position and estimate what estate taxes you would pay if you changed nothing. Then consider options available to cut estate taxes while still accomplishing your wishes concerning the disposition of your assets.

♦ Good estate planning may result in savings of at least 37% and perhaps as much as 40% (2013) depending on the size of your estate.

♦ Even if you have no concern for reducing estate taxes, you may want to consider some estate planning techniques that can be used to reduce your current income taxes.

Some possibilities
♦ Give away property that you do not use. Current tax law allows you to give away up to $14,000 (2013) per year (indexed for inflation), per recipient, free of gift taxes.

♦ Making annual gifts over several years can remove substantial amounts from your estate. If you give away more than the amount covered by the annual gift tax exclusion, you may not owe taxes for the gift, but you can start to tap into your "unified tax credit."

♦ The "unified tax credit" allows you to transfer a certain amount of assets tax-free. If the credit is fully used for gifts you make during your lifetime, you will have no credit left to reduce your estate taxes.

♦ The tax-free transfer allowed by the unified tax credit is in addition to the tax-free gifting of $14,000 (2013) per year (adjusted for inflation), per recipient.

♦ When undertaking a gifting program, consider the tax effect of various gifts. If you give away stock, which generates dividend income, you will shift income to the donee (often your children), thereby reducing your current income tax bill. You will also reduce your estate by the value of the gifted property, and any future appreciation of the property will escape taxation in your estate.

♦ Gifts of tuition and medical bills If paid directly to the school or doctor, are also tax-free.

♦ Make charitable gifts. If you are charitable inclined, you can reduce both your current income tax bill and your estate tax by making gifts to qualified charitable or educational organizations. Gifts to charities are tax-free.

♦ Property can be transferred to a spouse, either during your life or upon your death, tax-free. However, if you leave everything to your spouse, your estate could lose out on the; unified tax credit. If your combined estates are large, the second estate could pay thousands more in tax than necessary. Consider estate planning that allows both you and your spouse to use your exemptions.

♦ Protect your life insurance from taxes in your estate by having your policy owned by someone else. The owner will have to pay the premiums. You forfeit the right to change beneficiaries or borrow against the policy.

♦ Trusts can be an effective way to remove assets from your estate. There are many kinds of trusts; each designed to accomplish certain objectives. Trusts vary considerably in complexity, and they are under no circumstances a do-it-yourself affair. Seek professional advice.

Living Trusts: The Pros and Cons
♦ Living trusts have become a popular way to reduce the probate and administrative costs in an estate, though they do not necessarily change the estate taxes that might be due on your estate.

♦ A living trust is one you create while you are alive as opposed to a testamentary trust created by your will and taking effect upon your death.

♦ A living trust can be either revocable or irrevocable. If you create a revocable trust, you can change it or revoke it at any time. If you create an irrevocable trust, you give up control of the assets transferred to the trust, and you cannot change the provisions of the trust.

♦ Advantages. A major advantage of using a living trust is that you eliminate probate on the assets in the trust when you die. You specify in the trust document how your assets are to be managed, and if the trust is to end at your death, how the assets are to be distributed. Terms of the trust are usually private whereas probate proceedings are a matter of public record. Generally, a living trust is less easily contested than a will.

♦ Disadvantages. One of the disadvantages to a living trust is that you must actually transfer the titles of your assets to the trust, with whatever resulting complication of our affairs this might entail. A living trust does not completely eliminate the need for a will because the trust will not take care of the distribution of any property not included in it.

♦ Your will can direct that any assets inadvertently left out of the trust "pour over" into the trust. Though these assets will be subject to probate, the trust provisions will govern how they are to be distributed.

♦ Certain property automatically bypasses probate without having to put it in a trust. This generally includes property held in joint tenancy with right of survivorship, IRA and pension benefits with named beneficiaries, and insurance proceeds payable to specific beneficiaries.

Estate Tax Return Checklist

Estate Tax Return Checklist - Things to Do in Preparation
1. Check decedent's estate planning files for notes regarding assets.

2. Obtain copies of decedent's most recent income tax returns to look for clues to assets. ("Acting as a detective").

3. Give a questionnaire which mirrors information needed on 706 and State-706 to family (or other knowledgeable person) to complete. ("Don't be a loner". Getting the client involved will help them be more respectful of your job).

4. Obtain Forms 712 from life insurance companies with respect to all life insurance on decedent's life. (Distribution of policy proceeds).

5. Obtain appraisals of tangible personal property and real estate. (Require expert guidance where necessary).

6. If decedent had a partnership interest, write to the partnership to obtain information regarding date of death valuation.

7. If decedent was receiving book royalties, write to the publisher to obtain information regarding date of death valuation. (Other intangibles, patents, copyrights, songs, books, assignable rights).

8. Obtain copies of all gift tax returns filed by decedent. (Put together in assembling the gross taxable estate).

9. Obtain copies of deeds to all real estate in which the decedent had an interest. (Tenancy-in-common v, Joint interests, title examinations, verification etc).

10. If decedent was receiving a pension or annuity, write to the decedent's employer and/or the issuer of the annuity contract to obtain the information regarding contributions and survivor benefits necessary to complete the estate tax returns. (Elective options: installments/annuities).

11. Obtain copies of all trusts in which decedent had an interest as Donor, beneficiary or trustee. (Trustee instructions; know difference -- Revocable, irrevocable trust).

12. If the decedent was a party to a corporate buy-sell agreement, obtain a copy of the agreement. (Closely held business).

13. Value securities and check for dividends of record and ex-dividends.

14. Check with the Attorney with whom you are working to ascertain the following:

• a) Will any disclaimers be prepared and filed? (Date of Death, the period is vesting -- 9 month rule). 
• b) Will a generation-skipping election be required? (Give consideration to grandchildren).
• c) Will administration expenses be claimed for estate tax purposes or for fiduciary income tax purposes?
• d) Will surviving spouse take under will or elect statutory share?
• e) Will estate tax returns go on extension?
• f ) If estate value is under State filing requirement, will we file a State-706 anyway in order to get a closing letter needed to have probate account(s) closed?
• g) Will the executor be claiming fees, if fees are claimed on 706? If so, amount of fees?
• h) What are our estimated legal fees, if fees are claimed on 706?
• i ) Will any of the jointly-owned property be excluded by contribution affidavit from the gross estate?

15. Review will and trust for dispositive provisions.

16. If decedent received an inheritance within 10 years of death, obtain copy of 706 for prior estate.

17. Prepare alternate valuation.

18. Have decedent's final individual income tax returns prepared and any necessary gift tax returns prepared.

19. Obtain contribution affidavit(s) from surviving joint owner(s) for any jointly-owned property to be excluded.

20. Check all "charitable" beneficiaries to make sure they have tax-exempt status with IRS. Carried out as well as set-up. IRC §501(c)(3).

21. Prepare summary of assets, liabilities and estimated estate taxes to make sure of sufficient liquidity for payment of estate taxes. (Start here if you wish to check on liquidity for payment of taxes).

Proceed based upon the facts.

Source: ©1993, Massachusetts Continuing Legal Education, Inc.