1. Postmortem Tax Planning
Raymond T. Rowe, J.D., C.P.A.
Troy, Michigan
(248) Rowelawfirm.com

2. Your Client Died – Your Tax Planning Did Not
There are a number of choices to be made
Final Personal Income Tax Return
Income Tax Returns for Estate and/or Trust
Estate tax return issues
Dealing with pass-through entities
I.R.S. Audits

3. AICPA 360 Degrees of Financial Literacy
Available at both AICPA and MICPA website
What is a post-mortem election?
Estate planning technique that can help minimize federal transfer tax or income tax liabilities
Usually made by personal representative
Must be timely made in the required fashion
QTIP election allows treatment of all of part of qualifying assets to pass to spouse free to tax under marital deduction
Selection of tax year allows personal representative to divide income into as many taxable years as possible to prevent bunching of income

4. Income Tax Returns in General
Executor or administrator estate or other person in control of property must file an income tax return for the tax year that ends on date of death. Reg. Sec (b)(1)
Executor or administrator must file tax return for estate from date of death until estate is liquidated for each tax year in which gross income is $ or more or beneficiary is nonresident alien. Secs. 6012(a)(3),(5).
Trustee of trust must file tax return for each nonexempt trust where gross income is $ or more, there is any taxable income or beneficiary is nonresident alien Secs. 6012(a)(4),(5).

5. Opportunities on Final Income Tax Return
Accrued interest on U.S. Savings Bonds
Most taxpayers are on a cash basis for reporting this income
Taxpayer at any time can elect to change to accrual basis for this interest
For year of switch all accrued and untaxed interest is taxable in year of change.
There is no step up in basis for Savings Bond interest. If no change in method beneficiaries are taxable on interest when bonds are cashed in
Elderly clients may be in lower tax bracket than beneficiaries
Taxpayer may have high itemized deductions
Medical expenses
Carryover of excess charitable contributions
Foreign tax credits carryovers (need foreign income to use)
Investment interest carryover

6. Opportunities on Final Income Tax Return
Decedent’s net operating loss deduction
Rev Rul , C.B. 52
Decedent’s capital and net operating loss sustained in final tax year are deductible only on the final tax return and are available to estate or heirs. See Secs. 165 and 172
Can carryback losses

7. Opportunities on Final Income Tax Return
Capital loss carryovers
No benefit to sell unrecognized capital gain assets in final year since these assets will receive step up in basis upon death
Capital assets with unrecognized loss
Step up in basis rule also affects unrecognized loss assets.
The basis in these assets is stepped down to current FMV
If final year has taxable income taxpayer could sell loss assets before death to lower tax (use $3,000 of loss)

8. Opportunities on Final Income Tax Return
Installment sales during year of death
The election to treat a sale as an installment sale is an election to be made on a sale by sale basis
Installment sale income is income in respect of a decedent and there is no step up in basis. 100% of gain would be reported by the recipient
Compare tax rates of decedent and beneficiaries and taxable income of decedent to determine whether or not to elect installment sale income recognition

9. Opportunities on Final Income Tax Return
Income from partnership and S corporation returns
Income from pass through entities are allocated
For partnerships to whoever was partner at year end
For S corporations to owners on either pro rata basis based on dates of ownership or by interim closing of books
Election to close tax year is made at entity level
Personal representative should work with entities to plan income allocation to final decedent's return
Sec. 754 Election in Partnership
Upon death partner’s outside basis is increased
Partnership can make 754 Election to increase inside basis of partnership assets attributable to deceased partner is increased as to the inherited partnership interest
Other partners do not benefit from basis increase

10. Opportunities on Final Income Tax Return
Sec. 754 Election continued
Election is made on partnership return for year partner died
Return must be filed by extended due date or within 12 months thereafter
Can be revoked only with IRS approval
754 election can also be made if there is a sale of the partnership interest
Election to file joint return
Personal Representative and spouse have the right but not the obligation to file a joint return for the year of death
Include only income through date of death on Form1040
If no Personal Representative is appointed spouse has sole right to decide to file a joint return

11. Estate or Trust - Form 1041 Estate and Trust are two separate entities
Estate Decedent's Probate Estate
Exemption $600.00
Can choose any fiscal year ending on end of month not more than 12 months after decedent’s death
Trust
Exemption of $ for simple trust and $ for complex trust
Must use calendar year unless it qualifies for natural business year
Can elect to treat trust income on tax return for estate
Make election on Form 8855
Effective for two years beyond date of decedent’s death

12. Estate or Trust - Form 1041 Taxation of Estate
Administration expenses can be significant
Expenses can be deducted in year paid
Unless Estate elects to report income on accrual basis
Often expenses are paid just before closing of estate thus it may make sense to choose accrual basis
No loss carry forward for excess expenses
Income can carryout to beneficiaries if there are distributions
Excess expenses do not carry out to beneficiaries

13. Estate or Trust - Form 1041 Taxation of Trust
Expenses can reduce taxable income
Consider using accrual method
For simple trusts all income is taxed to beneficiaries
For complex trusts distributions carry out taxable income
Can elect to treat distributions made within 65 days of year end as if they were distributed during prior tax year
Excess expenses
Do not carry forward
In year of trust termination excess expenses carryout to beneficiaries as itemized deduction

14. Estimated Tax In Final Year
On final year for a Form 1041 all income including capital gains is passed out to and taxed to beneficiaries
By filing Form 1041-T Allocation of Estimated Tax Payments to Beneficiaries any estimated tax can be allocated to the beneficiaries
Must file this form within 65 days of end of tax year
Does not apply to withheld taxes such as taxes withheld on retirement plan distributions

15. Estate or Trust - Form 1041 Distributions in kind
Generally estate or trust does not recognize tax on a distribution
Exception is a distribution of capital asset in satisfaction of a pecuniary (money) bequest.
Beneficiary has carryover basis from estate or trust when estate or trust does not recognize income on distribution
643€(3) election estate or trust treats distribution as a sale at fair market value
Beneficiary’s basis is increased by gain recognized
Election is annual election and applies to all property distributed
Benefits of election: Income recognized by estate or trust could offset excess deductions or capital losses
Detriment: If beneficiary is in a lower tax bracket

16. Expenses – Form 706 or Form1041
Form 706 no longer as much of an issue since exemption is $5,450,000.00
Deductions that are allowable on Form 706 as administration expenses under Sec. 2053(a)(2) or losses under Sec are not deductible on Form unless
Election is made waiving right to deduct these items on Form 706
Copy of election is attached to Form 1041

17. Expenses – Form 706 or Form1041
Double deductions for Deductions in Respect of a Decedent Sec. 691(b)
Claims against decedent’s estate accruing prior to date of death that are paid after date of death
Deductible as expenses on Form 1041
Deductible on Form 706 as debts
Examples are interest and property taxes accrued but unpaid at date of death

18. Expenses on Form 706
If there is an estate tax liability a number of expenses are deductible on 706 and as noted above there is generally no double deductions
Requirements for expenses
Must be enforceable
Related party claims & expenses must be bona fide
Underlying transaction must be in ordinary course of business, negotiated at arms length and free from donative intent
Nature of claim or expense must be unrelated to expectation or claim of inheritance
Must originate under agreement between decedent & family, related party or beneficiary & substantiated with contemporaneous evidence (for example family member who provided care prior to death is deemed to have done so for love and affection if there was no written agreement)

19. Expenses on Form 706
Related party expense requirements
Performance by claimant is under terms of agreement and performance can be substantiated
All amounts paid are reported by each party and properly taxed to claimant
If claimant is a beneficiary weigh taxability of payment to tax savings to decedent
Not all payments must be made by due date of Form 706
Reasonably ascertainable claims and expenses
Executor commissions, attorney & CPA fees
Claim or counterclaim that existed as of date of death
Claims not exceeding $500,000 existing at date of death even if contested if there is a qualified appraisal of claim
Recurring payments that are enforceable & non-contingent
Similar claims

20. Other Form 706 Elections
Alternate valuation – elect to use value of property 6 months after date of death rather than date of death
Must lower tax due
If asset sold prior to 6 months use sale date value
Special use valuation Sec. 2032A
For certain real estate used in farm or trade or business
Decedent must have been U. S. citizen or resident
Property transfers to a qualified heir
Used by decedent or family member in qualified use
Percentage tests
Adjusted value must be 50% of gross estate
25% of Adjusted value must have material participation in 5 of last 8 years prior to retirement, death or disability

21. Other Form 706 Elections Q-Tip Election
Property must pass to surviving spouse who must have a qualifying interest for life in the property
All trust accounting income must be payable spouse and no one else annually during spouse’s lifetime
No one, including spouse may have power to distribute or appoint assets during spouse’s life
Spouse must have right to require property be productive
Executor must make election on 706 by extended due date to treat property as a marital deduction
Q-Dot election spouse is not a U.S. citizen
Can elect to treat trust as qualifying for marital deduction if certain requirements are met

22. Other Form 706 Elections Generation Skipping Trust Exemption
Can elect how to allocate exemption among GST transfers
Without election there is an automatic allocation on pro rata basis
Deferral of estate tax payment Sec. 6166
Tax must relate to closely held business
Value must exceed 35% of adjusted gross estate
14 year deferral with 5 years interest only
Interest at 2% for first $1,000,000 in FMV and 45% of Sec interest rate for excess

23. Other Form 706 Elections Portability of unused estate tax exemption
Estate tax exemption is currently $5,450,000.00
Use portability to double in survivor’s estate
Cannot transfer unused GST exemption
Surviving spouse entitled to use the unused portion of the estate tax exemption for first spouse to die
Must elect portability on timely filed 706 for surviving spouse to use balance of estate tax exclusion. See Reg T(a)
Can be elected by Personal Representative if appointed or if none by person actually or constructively in possession of property
If 706 being filed for this reason Personal Representative not required to value Marital deduction or charitable deduction assets

24. Other Form 706 Elections Disclaimers
Filed by beneficiary receiving assets
Requirements
In writing
Made within 9 months of transfer
Cannot direct who is to receive assets
Person making cannot have beneficial interest in assets

25. Election related to S Corporations
A non-Grantor trust is not a qualified S corporation shareholder
An estate can hold S Corp stock for as long as necessary for reasonable administration
If no 706 is filed estate can only qualify for 2 years.
Distribution can be made to qualifying individual beneficiary, a Qualified Subchapter S Trust or and Electing Small Business Trust
Either trust must make an affirmative election under Sec. 645

26. IRS Audits Just because the client died doesn’t mean the audit is over
Things you must do
File Form 56 – Notice Concerning Fiduciary Relationship
Filed by the fiduciary, Personal representative, Trustee, guardian, conservator
Terminating entity such as trust or estate can only file when it is still in existence
Needed to be able to represent the fiduciary estate
Often these are not filed

27. IRS Audits Things to Do New Form 2848
CPA previously represented taxpayer who is now dead
CPA now needs to represent the fiduciary

28. References
Post-Mortem Tax and Estate Planning Elections; David L. Johnson, Montana Law Review, September 1981, Article 2
The Power of Post-Mortem Estate Planning (selected issues for 2010 and 2011); Carol A. Cantrell, University of Miami, 45th Annual Heckerling Institute on Estate Planning, January 2011
The 10 most powerful postmortem planning pointers for trusts and estates; Karen S. Cohen, CPA, Journal of Accountancy, May 2012

29. Powers of Attorney Issues
Presenter at Small Practioners’ Conference said powers of attorney should include reaffirmation provision since some banks or IRA sponsors are not accepting powers of attorney over 3 years old
ICLE site in topic on medical powers of attorney mentions reaffirmation
Reaffirmation is signing an existing power of attorney an additional time

30. Signing Requirements for Durable Financial Power of Attorney
Must be signed, dated and must be witnessed by two witnesses
Helpful if witnesses print names below signatures
Signature must be notarized
Notary can be a witness
Notary cannot be family member
Agent must sign an acknowledgement agreeing to follow statutory rules
Signer must be competent when signing

31. Signing Requirements for Durable Medical Power of Attorney
Must be signed, dated and must be witnessed by two witnesses
Helpful if witnesses print names below signatures
Witnesses cannot be
Specified family members
Medical, nursing home, assisted living employees
Employee of company selling medical insurance
Signature does not need to be notarized
Agent must sign an acknowledgement agreeing to follow statutory rules
Signer must be competent when signing

32. Medical Powers of Attorney
Not valid if individual can still make own medical decisions
Without HIPPA release agent may not have information to show person cannot make own decisions
Should obtain a separate HIPPA release

33. Problems with Reaffirmation
Individual must be competent when signing reaffirmation
What if they are not? How can you then sign?
At time of reaffirmation you must fulfill witness requirements since witnesses are stating that person is competent
If document contains reaffirmation provisions and individual is no longer competent or fails to reaffirm that could be evidence that document is no longer valid