Wills, Trusts, and Estate Taxes

Every year a rich client passes away and we do an estate tax return. Here is a refresher course on this complex [that means get professional advice on the real event] area of taxation. The new threshold for paying estate taxes is just over five million dollars but if the estate is in the millions a return is required to show that taxes are not owed. It is always good news afterward to receive the letter in the mail that it is accepted as filed. That is because all estate 760 returns filed are audited on receipt.

California is now exempt from estate return filings. That is a relief because under the old system the FTB would wait for the Federal audit approval before accepting the returns. They do not audit any returns, except by computer, so we used to send the approval letter with the returns.

The deadline for federal estate returns is nine-months from the date of death. The executor must file for a Federal ID number for the return. A copy of the death certificate, will, and or the living trust go with the returns. The estate taxes are very high so a big check might go out with some returns. Filing late is subject to huge penalties, which we found out were bigger than the rich statutory fees that lawyers get to administer the estate, as a lawyer filing late discovered once upon a very bad time.

If the administrator in the will is not an attorney a bond will be required of this person [who is always a close relative]. Sometimes a problem occurs when the relative obtaining access to the estate goes on a spending binge, which also shorts out the other heirs. We became involved once to do a forensic audit on the checking accounts of a doctor’s estate in litigation. The Lawyer handling the estate paid us to reconstruct all the banking activity of the heir-executrix who had absconded with most of the funds. The lawyer had attempted o get reimbursed by the bonding company and they told him to get lost or to file a suit to prove the losses. Accordingly, we had to schedule all income and disbursements from various checking accounts belonging to the estate. With this information the lawyer was able to collect for the other heirs on the suit.

An estate without a will or living trust is intestate and could escheat to the state unless there are heirs.

If there is a surviving spouse the estate will roll over [in a community property state such as California] to the surviving spouse unless the will or living trust specifies otherwise. If there is no surviving spouse a Fiduciary ID number is obtained and a separate Fiduciary return is also required. This fiduciary accounts for the income and sale of estate properties and is called the Estate Income Tax return.

A living trust is a grantor trust and acts in the interest of the grantee or creator. This trust exists in form only until the principal event, such as the death of the holder grantee, occurs. It complements the will, if there is one, or acts as a will if there is none. Certain attributes are favorable such as the mark-up [basis] on real estate values in California [if it is titled properly in the name of this quasi trust document, the remaining spousal half property is also marked up to market because it would be impossible to sell or distribute half a house-for example]. This can be important if property is later sold by the remaining spouse. A living trust also defines heirs and can operate without the court administering the state as with a will. A medical Do Not Resuscitate clause can also be inserted.

An estate or will can also create an irrevocable trust [set aside money or property to be administered professionally and file fiduciary tax returns each year]. This can have a specific purpose, usually charitable, but is subject to lawsuits by heirs known as estate contests. A will or living trust can also designate setting aside property into a separate grantor by-pass trust to benefit heirs and separates this property from the surviving spouse. This avoids double taxation of the property adding to the estate of the surviving spouse. This grantor trust is controlled by the surviving heir and files fiduciary returns each year. All taxes on the contents of this fiduciary are taxed to the grantee.

There has been much fraud in the area of people creating living trusts by re-designating them as “business” trusts. The promoters would then create fictitious business assets of home and auto for big tax refunds. One of these promoters in Riverside, California even created his own mutual funds complete with phony statements to go along with his scheme while working out of a Savings and Loan institution. I met with him and his lawyer in Texas before he went back to prison the second time. He was very clever and most convincing. He missed the Cayman Islands Holiday Inn hotel, a lot.

All estate property, investments, and other assets are appraised to determine fair market value on the Date of Death. This is the gross estate. Recently we had to amend an estate return because the realtor who appraised the properties for the Lawyer in charge thought he was doing them a favor by favoring very low appraisals. When the heirs began selling the many properties they found that they were owing huge amounts of taxes due to the difference between the estate evaluation and the selling price [true market]. Accordingly, a re-appraisal was ordered and the returns amended [with an appropriate statement from the lawyer].

A gift of up to $13,000 annually is allowed by an individual or members of his family without diluting the estate before death. Amounts of over that must be reported on the Gift Tax Return which ties in the future estate, reducing the exempt limit. An example would be for Jack and Jill to give their grandson Josh a million and $13,000 dollars each to go to college. They have reduced the five million exclusion by two million dollars so if a parent died the next year the limit available for exclusion would be only four million each. The amount reducing the threshold accumulates so if Jack and Jill send two more big checks when Josh goes to grad school, the exclusion amount would diminish to only three million each. If they gave more than the exempt ten million dollar double exemption they would pay estate taxes through the gift tax return.

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