When I take on a new estate-planning client, I have them complete a client organizer that, among other things, asks him or her to rate concerns from high to low. Estate taxes commonly rate high, even when the client’s assets are nowhere near the federal estate tax threshold.

Why is that? Do people assume that they are going to become that wealthy or do they not really understand estate taxes? My personal hunch is that it is the latter.

The income tax is a tax on the receipts that someone earns or receives over the course of the year. Rental income, dividends, interest, and earnings all constitute income. An estate tax, in contrast, is a tax on the value of the decedent’s holdings—a tax on his balance sheet if you will.

A federal estate tax return is required only when the estate’s value (plus gifts that the decedent made during his lifetime that exceed “annual exclusion gifts”—those annual gifts to any one beneficiary that exceed $14,000 under 2017 law) exceeds the exemption amount—$5.49 million in 2017, as stated above.

Consequently, most estates won’t have to file an estate tax return. On some occasions, the estate will want to file a return, even when the estate value is less than the exemption amount. This is due to a concept called “portability” which means that any unused exemption can be transferred to a surviving spouse. But in order to transfer the exemption, one needs to file the estate tax return, even if no estate tax will be due.

So if it’s possible that the surviving spouse’s taxable estate might exceed whatever the exemption amount might be, then it might make sense to file the return on the first decedent spouse’s estate.

Allow me to illustrate by example. Assume that Roger died with a taxable estate of $4 million in a year when the federal exemption was $5.49 million. Roger made no taxable gift transfers during his lifetime. Assume that Roger’s surviving spouse Susan has assets that exceed $7 million.  Here, Susan will want to file Roger’s estate tax return so that the unused portion of his estate tax exemption ($5.49-$4 = $1.49 million) would be added to her exemption ($5.49 + $1.49 = $6.98 million), thereby minimizing her federal estate tax when she dies.

Just because an estate is not taxable does not mean that the CPA will have nothing to do. There are a myriad of other tax issues, most of them related to income.

When a loved one passes away, the CPA will need a variety of forms and information, depending upon the circumstances of each file. If a federal estate tax return is going to be filed for any reason, then the CPA will need all asset information, including date of death values. She will also need appraisals of any real estate owned or partially owned by the decedent, as well as what is known as a Form 712 on any life insurance proceeds that pay out on the decedent’s life. You will want to give your CPA copies of any gift tax returns filed by the decedent and/or his spouse (Federal Form 709). If the decedent was the surviving spouse in the marriage, and if the first decedent spouse’s estate filed a federal estate tax return (Form 706), then you should supply the CPA with that form.

The CPA will need a copy of any trust created by the decedent, as well as any trust that the decedent was a beneficiary. He may need an inventory of the assets of those trusts. The CPA will also want a copy of the decedent’s will.

If the decedent owned any IRA, 401(k), or similar retirement accounts, the CPA will need to know the date of death balances of those, and who the beneficiary of each account might be.

It will be important to let the CPA know about any safe deposit box, the inventory of any tangible personal property that has any value, and a copy of any riders to a homeowner’s insurance policy that insured valuable assets such as jewelry.

The CPA will need an inventory of automobiles and other vehicles such as boats and ATVs.

If a federal estate tax return is not necessary, then the CPA will need most everything that she would otherwise need to file the necessary income tax returns, but will also need a few other odds and ends that are not ordinary, including funeral expenses, attorney and trustee professional fees (as those are all deductible), and IRA required minimum distribution (RMD) information, to ensure that the proper RMDs have been made to avoid the excise penalty tax.

The date of death value of the decedent’s assets will also be important to adjust the tax cost basis of those assets. The beneficiaries of those assets will want to know how much to report as capital gains if and when they sell those assets, and because following the decedent’s death the new tax cost basis will be the date of death value, this information is necessary. That usually means that real estate will have to be appraised as well.

If there are ongoing testamentary trusts benefitting the surviving spouse or other beneficiaries, then the CPA will be filing Form 1041s, which are Fiduciary Income Tax Returns.

If there are any ongoing trade or business assets, including S Corporation stock, certain elections need to be made and/or certain distributions need to be made within definite time deadlines. Failure to make the election or distributions could result in the loss of S status and the imposition of a corporate layer of income tax. To avoid this adverse result, it will be important to advise the CPA of any and all business holdings and to discuss the various options that the personal representative/trustee may have to minimize adverse tax consequences.

In most cases, the decedent had a CPA or other tax return preparer that he or she used and relied upon over the years. Especially in the case of decedents who filed their own tax returns or who have used discount storefront tax return preparers (H&R Block, Jackson-Hewitt, and Liberty Tax are common examples), it’s usually a good idea to engage the services of a knowledgeable CPA. As you might surmise from this blog, not filing the proper returns or not making timely tax elections where necessary can lead to significant tax liability and losses.

No one wants to pay more taxes than they have to. Paying a good CPA usually results in overall savings.

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