Modern Estate Administration – Issues Arising After Death
- Jan 9, 2024
Steve R. Akers, a renowned estate attorney with more than 46 years of experience in estate planning and probate law matters, spoke at the 58th Annual Heckerling Institute on Estate Planning and covered “Modern Estate Administration – New (As Well as Old) Issues Arising After Death.”
His presentation focused on some of the hot topics surrounding the administration of a decedent’s estate and included statutory, regulatory, financial, and case law interpretations in estate administration.
Stay tuned for an upcoming EisnerAmper webinar covering even more Heckerling highlights.
Ultimate Distribution of Assets
The ultimate distribution of assets from an estate can have income tax implications that need to be considered. An estate reaches the top income tax bracket of 37% once it has taxable income of $15,200 (as of 2024.) Generally, when there is a distribution from an estate to a beneficiary, net income earned by an estate, referred to as distributable net income (“DNI”), will pass through to the beneficiary. The estate receives an income tax deduction for amounts paid to the beneficiary and the beneficiary must report the distribution on their income tax return to the extent their distribution includes net income from the estate. The overall income tax could be saved if distributions are made from an estate to beneficiaries who are not in the top tax brackets since individuals have much higher thresholds to reach the maximum brackets.
Beneficiaries are not subject to the additional 3.8% net investment income tax until their adjusted gross income (“AGI”) exceeds $250,000 for a married couple or $200,000 for individual tax filings. Although tax implications are important to consider when making estate distributions, the executor must follow the standards for distributions laid out in the Last Will and Testament or trust agreement and there could be other nontax reasons for withholding distributions until a later time.
Current Legislation Surrounding Consistent Tax Basis Reporting of Assets
Within 30 days after the filing of the Estate Tax Return (“Form 706”), an executor is required to report the tax basis on a Form 8971 and provide each beneficiary with a schedule showing the tax basis of the asset they are inheriting from an estate.
Temporary and proposed regulations were issued in March 2016 and provide some additional guidance to these reporting rules. For estates distributing assets with non-recourse debt, the good news is that this property should be reported at the gross value of the property for tax basis purposes and not the “net value” as it would be reported on the estate tax return (gross asset net of non-recourse debt) leading to a higher tax basis. The bad news, as discussed by Mr. Akers, is that if an asset is discovered after the Form 706 has been filed, and there is no supplemental Form 706 filed to add this asset to the estate to report it to the IRS and the statute of limitations has closed, the tax basis for this newly discovered asset will be zero. There is “zero” legislative authority. Finally, the Form 8971 is due 30 days after the Form 706 is filed, and many times the assets have not been identified yet as to who will receive which assets.
If this is the case, the executor must report every asset each beneficiary could potentially receive on their list which could provide information to a beneficiary that the executor would have preferred not to share with all beneficiaries. Also, subsequent transfers by a beneficiary to other transferees by gift are also required to be reported on an updated Form 8971 and there is no guidance on how long this reporting must go on.
The Deductibility of Administrative Expenses Incurred by An Estate
IRC Section 2503 covers the deductibility for estate or income tax purposes of administrative expenses incurred by an estate. Most administrative expenses can be deducted for income or estate tax purposes, but not both. Proposed regulations to Section 2053 were released on June 24, 2022.
One topic in the proposed regulations focused on the concept of using a present value calculation to determine the amount of an administration expense that is paid, or to be paid, beyond three years after the date of death. Those payments made beyond three years after the date of death, should be present valued as of the date of death if they are deducted on the Form 706 or supplemental Form 706. The proposed regulations also discussed the deductibility of interest on loan obligations of an estate. This topic has been litigated often, with varying results.
Marital Deduction Planning
Marital deduction planning is important in estate administration with a surviving spouse, and it’s important to understand the rules for aggregation of assets for valuation purposes when there is a surviving spouse with a Qualified Terminal Interest Property (“QTIP”) trust. If a QTIP trust owns part of an asset that a surviving spouse also has partial ownership in, the asset does not need to be aggregated for valuation purposes. This allows for the use of potential discounts for minority interest ownership. However, keep in mind that control premiums must also be considered in valuing assets. Discounts might need to be taken upon funding and upon final distribution if certain assets are divided and such division results in lower values on funding than as reported on the Form 706. If charities are involved, this could result in having a lower value on funding than the amount of the original charitable deduction. Discounts required to be considered on funding could result in the over/under funding of certain bequests. One strategy suggested was using Promissory Notes for funding rather than deal with fractionalizing assets. For example, overfunding one trust with an asset that should be split and using a Promissory Note to/from another trust could prevent a large asset from being split and subject to discounts on funding.
Executors, Trustees, and Beneficiaries Facing Liability for Taxes
Mr. Akers discussed how executors, trustees, and/or beneficiaries could be personally liability for taxes. U.S. v. Paulson, 131 AFTR 2d 2023-1743 (9th Cir. May 17, 2023), is the first case to extend this personal liability to successor trustees and trust beneficiaries who are appointed or receive property well after a decedent’s death.
Under Paulson, the personal liability of the successor trustee is capped at the value of the property at the time they received it as trustee and the personal liability of trust beneficiaries’ is capped at the value of such property as of the decedent’s date of death. This could be burdensome to a beneficiary receiving retirement assets which have a much larger value at date of death but are also subject to both estate tax and income tax.
The Heckerling Institute offers practical guidance on today’s most important tax and non-tax planning issues, including planning challenges and opportunities. We’ve aggregated blog posts from highlight sessions here, to share our insights with you.
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