IRS Announces Another Extension for Estate Tax Filing Deadline

Just a few weeks ago the IRS announced the November 15, 2011 estate tax filing deadline for large estates of decedents who passed away in 2010; but some executors might be relieved to know that the IRS recently extended the deadline to January 17, 2012.

This extension gives executors of large estates more time to determine whether or not its in the best interests of the heirs to take advantage of the 2010 estate tax repeal. The decision facing executors of the 2010 estates is this:

* Choose not to pay estate taxes, but subject the assets of the estate to carryover basis rules (meaning heirs will pay capital gains taxes based on the price of an asset when it was initially acquired by the decedent); or

* Pay estate taxes under the 2011 rules, with a $5 million per-person exemption and a 35 percent top rate, but with a stepped-up income tax basis (meaning heirs will pay capital gains taxes on the price of an asset when it was inherited.)

For any executors who haven’t already made the decision, they can now take more time to weigh the pros and cons, and maybe even enlist the advice of an estate planner, tax planner, or probate attorney to help walk them through any possible unexpected consequences. If you are an executor or an heir faced with this particular and time-sensetive issue, please don’t hesitate to contact our office for assistance.

Should Beneficiaries Also Serve as Executor or Trustee?

When someone creates a will or a trust of course they want to choose a dependable and trustworthy person as executor or trustee. For most people this means someone close to them—a family member or friend, or often the most responsible of their adult children. However, this often means that the person they’ve chosen as executor or trustee is also a beneficiary. The question that occurs is this: Is it a conflict of interest to be both executor/trustee and beneficiary?

As executor or trustee a person has a legal duty to manage the property in the decedent’s estate for the benefit of the trust or estate beneficiaries. This means that while the executor/trustee should be compassionate, he or she must act in an equal and unemotional manner toward ALL the beneficiaries.

A beneficiary, on the other hand, is often by definition emotional. Even those beneficiaries who are not concerned with the monetary aspect of their inheritance (and let’s be honest, many heirs are more concerned with the dollar amount than they might let on) will likely be emotionally invested in the heirlooms of the estate. Many family feuds are sparked when siblings can’t agree on who gets the family silver or great grandma’s engagement ring. And the potential for conflict only increases when real estate is involved.

If you are creating your will or trust, the best way to avoid this conflict is to be as specific as possible in your instructions to your executor and beneficiaries. Spelling out in no uncertain terms who gets the family silver will decrease the chances that the executor will be tempted to take advantage of his or her position. You may also want to consider naming a disinterested party as a trust advisor or co-executor to provide checks and balances throughout the administration process.

If you are a beneficiary who is also serving as executor/trustee there are a few things you can do to ensure you keep your executor and beneficiary roles separate:

* You may want to consider contacting a probate or estate planning attorney to mediate or oversee the process.

* Rely on random but fair methods (such as flipping a coin, drawing straws, or organizing a round robin) to distribute unassigned personal property with emotional value.

* Be sure to involve an impartial appraiser if real property is involved.

* If all else fails, an executor or trustee is always permitted to step down and hand the role over to a qualified and disinterested party.

Executors of 2010 Estates Have Until Nov. 15 to Make Estate Tax Decisions

Everyone will remember the “wonderful boon” that was the 2010 estate tax repeal, which (in theory) allowed decedents to pass on their assets free of any estate taxes. However, the situation was complicated in December of 2010 when, as this article in Bloomberg puts it, “Congress extended the tax retroactively [giving] executors of estates of people who died that year a choice. They could decide to skip the estate tax or pay the tax with a $5 million per-person exemption and a 35 percent top rate, the same as in 2011.”

Executors have had almost a year to consider their options, but now it is just about time to make the decision, because “the Internal Revenue Service is giving executors of estates of people who died in 2010 until Nov. 15 to opt out of the estate tax.” According to the IRS the forms and instructions for 2010 estate tax returns will be made available early this fall.

But executors don’t have to wait until the forms are available to consider which tax option might be the most profitable one. Many financial planners and estate planning attorneys have already done their research, and they’ve found that opting not to pay estate taxes may end up costing you more in the long run. This article in Forbes explains: “Opting out of the estate tax regime means opting out of stepped-up basis (for income tax purposes)… and opting into the modified carryover basis rule… One of the main plusses about estate tax is that it is paired with a stepped-up income tax basis. You should not be paying both estate tax and income tax on the same assets.”

Of course, each estate will be different depending on a number of factors, including the size of the estate, the nature of the assets, the preferences of the beneficiaries, and any previous planning the decedent may have done. Executors should consider their options carefully, and consult with an experienced estate planning attorney before deciding whether opting out of the estate tax is really in their best interest.

Retirement Assets May Be Unpleasant Surprise for Heirs

You’ll often read news articles or blog posts about saving for retirement—when to start, how much to save, what savings or investment plan is best—but there’s an important retirement topic which often goes underreported: How these retirement accounts impact your heirs.

As noted by this article in the Wall Street Journal, “The new, higher threshold for the federal estate tax has many heirs happily thinking they won’t have to surrender a big piece of their inheritance.” But these heirs “may need to think again if they’re in line to receive a lot of money from tax-protected retirement accounts like 401(k)s and IRAs.”

Many (if not most) retirement assets these days are IRD assets, this is “income in respect of a decedent,” and it means that the assets are income earned by a person, but not taxed or received before that person passed away. These IRD assets can be wonderfully beneficial to the investor… but they can be an unpleasant surprise for heirs, who will end up paying the taxes on these assets.

“Heirs who receive retirement accounts often pay far more tax on IRD than they have to, collecting payments from the plan but failing to take an annual deduction that is available to beneficiaries. Sometimes that’s because the tax attorney who planned the estate knew about the deduction, but the accountant who prepares the heir’s taxes doesn’t.”

Some of the solutions suggested in the article are to take advantage of a recent rule change which allows many IRD savings accounts to be converted to Roth 401(k)s. Taking advantage of this and converting the money to a Roth allows the owner to pay any applicable taxes now, so that heirs won’t be liable. Another option is to move money from the IRD retirement account into an irrevocable life insurance trust, thus removing it from the taxable estate.

“People need to refocus their thinking on what heirs are truly inheriting.” Our office can help you do just that. A little bit of thought and action now can save your heirs a lot of taxes and confusion down the line, and this is especially true if you are lucky enough to have a significant amount of savings that you anticipate passing on to your children or grandchildren.

Joint Ownership A Dangerous Way to Avoid Probate

When asking about how to avoid probate, many clients have asked about the wisdom of adding family members as joint owners to bank accounts. While joint ownership will achieve the goal of avoiding probate, there are many dangers and drawbacks to adding family members—even trusted family members—as joint owners on bank accounts:

Vulnerability to creditors: Your only goal in adding a family member as a joint owner may be to avoid probate, but in the eyes of creditors that bank account is suddenly fair game, and may be used to pay off the debts of your co-owner.

Vulnerability to lawsuits: In the same way that joint accounts are vulnerable to the creditors of both owners, they are also vulnerable to potential lawsuits against both owners.

Gift tax assessment: If a new owner is added to an account as a joint owner, but doesn’t contribute any funds to the account, the IRS may see the move as a monetary gift. If the “gift” exceeds the annual gift tax exclusion amount the IRS will require it be reported on a gift tax return.

Joint ownership can adversely affect Medicaid planning: Even if an account is jointly owned by two people, the state considers ALL the funds in the account to be at the disposal of the owner applying for Medicaid. Furthermore, if your co-owner chooses to remove assets from the account Medicaid could consider this an improper transfer of assets and you could be rendered ineligible for Medicaid for a certain period of time.

And of course, the number one danger of joint ownership for probate avoidance purposes is that your co-owner may act unethically or irresponsibly.

For more reliable—and more effective—estate planning strategies to protect your assets and avoid probate, please contact our office.

Frequently Asked Questions About Probate

What is probate?

Probate is defined as “the legal process of administering the estate of a deceased person by resolving all claims and distributing the deceased person’s property under the valid will. A probate interprets the instructions of the deceased, decides the executor as the personal representative of the estate, and adjudicates the interests of heirs and other parties who may have claims against the estate.”

The definition doesn’t sound too bad, but probate can be a very trying process. Even in the best of circumstances there are procedures that must be followed to the letter, and the actual process (depending on the size of the estate and the laws of the state in which the property is being probated) can take anywhere from 6 months to a few years.

Do I need a lawyer to help probate an estate?

As a rule it is not necessary to have a lawyer help you probate an estate. However, if you have been named as executor, probate can often become an overwhelming maze of deadlines, notifications and potential liabilities. This is why many executors do choose to hire a probate lawyer to help them through the process.

You may want to think about hiring an attorney if you are serving as an executor under any of the following circumstances:

  • There are a number of beneficiaries who are not on friendly terms, or are receiving varying sizes of inheritance.
  • The decedent had large estate with many different assets, especially if the assets are not commonly held.
  • The decedent was a resident in a different state than your own home state.
  • A large number of creditors are making claims on the estate.
  • There is a disagreement about the will, or if more than one will was found.
  • The will is challenged or contested.

Do Life Insurance or Retirement Benefits Have to Go Through Probate?

The answer to the question above is generally “no”; life insurance and retirement benefits do not have to go through probate if the account has a named beneficiary. Benefits from life insurance accounts can be paid directly to the named beneficiary, and money from IRAs, Keoghs, and 401(k) accounts transfer automatically to the named beneficiaries of those accounts as well. The persons named as beneficiary, however, will most likely want to consult with a financial advisor to determine what needs to be done with the proceeds from these accounts. Another type of account that may not be subject to probate is a pay on death (or POD) account, the money from which can pass directly to the named beneficiary upon the death of the owner.

Probate is a subject most people don’t want to spend much time considering, not only because the rules and requirements can be convoluted and confusing, but also because of the close association between probate and death. If you have any questions at all about the probate process please don’t hesitate to contact our office—or your own local attorney who specializes in probate—for more information.

How to Protect and Pass On Artwork, Antiques, and Other Valuable Assets

Some assets—such as real property, stocks and savings—are fairly straightforward when it comes to bequeathal to heirs; other assets—such as valuable artwork or antiques—are not so easy. How do you will an asset to a loved one when there is no deed of ownership? And just as importantly, how do these paperless assets figure into the size and administration of your “taxable estate”?

According to this article by Bonnie Kraham, how you dispose of these assets can be extremely important to the administration and taxation of your estate. One particularly dangerous method is referred to as “the empty hook” method, wherein “When the collector dies, the beneficiaries simply remove the artwork (from the hooks) in accordance with name tags on the items for the intended recipients. Thus, the estate is left with “empty hooks” of what may be part of a sizable taxable estate for estate tax purposes.”

The problem that arises with the “empty hook” method is that wealthy families who collect artwork or antiques as investments often have records of their purchases and sales, as well as a list of valuable items for insurance purposes. Any of these documents and records would be reviewed during probate or administration of the estate. “If you don’t fully disclose the value of your art collection, or don’t properly plan to gift art in compliance with estate tax rules and regulations, you can pass on tax fraud, instead of art, to your beneficiaries.”

Perhaps the best way to hold and legally dispose of your art or antiques collection upon your death is to transfer ownership of these valuable assets into a trust. “Transferring your art collection to a trust may be the most effective, efficient and transparent way to administer your estate after death . . . Trusts are private documents and, although the tax reporting remains the same for trust assets, trusts protect the privacy of an art collector or artist, which can be an emotional protection for the beneficiaries.” Additionally, keeping valuable artwork in trust provides an extra layer of protection from divorce or frivolous lawsuits during your lifetime.

Contact our office, or your own local estate planning attorney, for more information.

One Simple Step Now Can Save Time and Money Later

Being named as the executor of the estate of a deceased loved one comes with many challenges, including dealing with the probate system, and refereeing unhappy family members; but one of the most difficult (and least discussed) challenges is sorting through the plethora of paper and information that people collect over the course of a lifetime.

You can save your executor (and your family) time and money later by organizing your important documents and finances right now. If you’re not sure where to begin, or what information an executor would need to know, we’ve assembled a list of information and documents an executor might need quick and easy access to if anything were to happen to you:

  • Instructions and letter to trustee: Contact information for your EP attorney and trustees, instructions on how to begin the process.
  • Minor children: Information about your minor children, nearby guardians or relatives, medical and health insurance information.
  • Personal Information: Birth and marriage certificates, passports, family, friends and contact people.
  • Estate Planning Documents: Trust, wills, any amendments, personal property memorandum.
  • Employment/Business Information: Contact information for supervisors, client information if you are a small business owner.
  • Health Care: Advanced Health Care Directive, HIPAA, emergency contact information, phone numbers for doctors, health insurance particulars.
  • Financial Powers of Attorney
  • Real Estate and Tangible Property: Deed to your home, mortgage information, homeowners and fire insurance, vehicle records, artwork and antiques.
  • Bank Accounts and Investments: Account numbers and locations, contact information.
  • Monthly Expenses and Bills: A copy of one monthly statement for each.
  • Information about recent Taxes
  • Retirement Accounts/Government Benefits: Account numbers, beneficiary information.
  • Life Insurance: Account numbers, beneficiary information
  • Memorial and Burial/Cremation: Preferences, pre-paid arrangements, phone numbers.
  • Memberships/Secured Accounts/Passwords

Once you are organized, keep your information in an accessible place and make your executor aware of the location. This simple act of organization will not only benefit you right now, it will save your family and your executor much time, money and frustration later on.

Who Owns Credit Card Debt After the Death of a Parent?

Administering the estate of a deceased loved one can be complicated and emotional under the best of circumstances, but executors who take on this overwhelming task may find themselves facing more than just the demands of relatives and heirs—they may also find themselves facing the illegitimate demands of creditors. This article on the New York Times’ New Old Age Blog warns readers to “Be wary of collection agencies that try to convince you that you are responsible for payment on a card owned solely by a deceased parent.”

After the death of a parent, children and heirs often receive calls from debt collectors looking for someone—anyone!—to pay off the debts of the deceased, even if the heirs have no obligation to do so. In most situations relatives are not required to pay the debts of the deceased from their own assets. “Spouses, children or other loved ones don’t ‘inherit’ credit card debt unless they co-signed the card… When someone dies, credit card companies have to wait near the back of the line to receive payment. If what’s left over after settling the estate isn’t enough to pay the bill, credit card debt is written off.”

Probate or administration of an estate is a process which follows established steps; heirs and credit card companies alike must wait their turn in line. “Administrative fees (like executors’ fees, filing fees, appraisals of property and tax-preparer fees), mortgages, reverse mortgages, taxes and even funeral expenses have to be paid off before heirs can inherit anything from the estate.” Unfortunately, most bereaved relatives aren’t aware of the laws on this subject, and debt collectors take advantage of that ignorance.

The best way to avoid this painful interaction is to have a proper estate plan. “Most of the headache can be avoided with a will… If you make it well known who owns what, both in terms of assets as well as liabilities, you can prevent a lot of this from taking place outside of your control.” The article also recommends taking preemptive action. “After the death of a parent, send a letter or call the banks and credit card companies to cancel cards and let them know that the cardholder has died.”

Tough Decisions Await Executors of 2010 Estates

If you are the executor of the estate of a decedent who died in 2010 you may think you’re in the clear. After all, there was no estate tax in 2010 right? Making distributions should be a piece of cake. Wrong. Because of the estate tax election available on the estates of 2010 decedents, administering those estates will actually be more work than you may think.

The repeal of the estate tax in 2010 also brought with it a repeal of the “step up in basis,” meaning that heirs selling inherited assets were taxed based on the original acquisition cost of the assets, not on their value as of the date of the taxpayer’s death. This generally resulted in a higher tax paid on assets than the normal estate tax rate—not good for taxpayers. But 2010 estates don’t have to go by these rules. The legislation passed in December of 2010 gave 2010 estates the opportunity to elect whether they wanted to use the 2010 estate tax laws, or the new laws for 2011. This article in Forbes explains what this means:

“The 2010 Tax Relief Act restored the estate tax for individuals dying in 2010 with a $5 million per person exemption and a maximum rate of 35%. It also repealed the modified carryover basis rules for property acquired from a decedent who died in 2010. However, estates of individuals dying in 2010 can elect zero estate tax and the modified carryover basis rules that would have applied before they were repealed. That means the basis of assets acquired from the decedent would be the lesser of the decedent’s adjusted basis (carryover basis) or the fair market value of the property on the date of the decedent’s death.”

In general this tax election is a good thing, it allows executors to choose which tax formula will cost the beneficiaries the least in taxes; but it does mean a lot more paperwork and a lot more attention to detail. If you are the executor of an estate of a decedent who died in 2010, don’t hesitate to call us. We can answer your questions and help you explore your options.