 |  |  |  |  |
 |
 |
 |
 |
 |
|
|
|
|
|
|
B
F
A
R
A client’s death triggers opportunities for tax planning that should not be ignored. The purpose of this month’s
newsletter will be to explore, in general, some of the areas where tax planning can be particularly critical. This
discussion is based on our current estate and income tax rules. These may all be changed, as you know if
you have been reading the newspapers. However, with current law, some of the areas which demand
professional assistance are discussed below.
Fiscal Year. There can be significant income tax savings by adopting a different fiscal year for an estate or
revocable trust, other than the usual calendar year. Without getting into technicalities, election of a different
fiscal year can permit deferral of income for trust beneficiaries. For example, assume an estate or trust with a
single beneficiary and $100,000 per year in dividend and interest income. Income after death is distributed. If
a decedent dies on February 1, all trust income after the date of death can be deferred an extra taxable year by
electing a fiscal year of January 31. A beneficiary is deemed to receive trust income in the taxable year in
which the estate or trust’s taxable year ends. Therefore, death on February 1, 2005 would result in deferral of
all income in the hands of the beneficiary until the beneficiary’s 2006 taxable year (tax payable April 15, 2007).
This deferral potential offers many opportunities for tax planning on the beneficiary’s level, matching up
losses against income, or simply using or investing the deferred taxes. CPA’s who are doing the income tax
returns for the beneficiary and the estate or trust, would be particularly knowledgeable and skillful in using
this tax planning opportunity.
Disclaimers. Sometimes significant wealth preservation and family tax planning can be achieved by skillful
use of disclaimers to enable property to pass to other members of the family, with no or little added transfer
taxes (gift or estate tax). For example, a widow may disclaim all or part of her husband’s trust in order to
expedite the transfer of assets to children or grandchildren. We have also found disclaimers helpful in
avoiding onerous GST taxes. We don’t usually recommend basing one’s estate plan on the assumption that
a beneficiary will disclaim. After the death of a spouse, for example, the survivor may feel particularly
vulnerable and not be willing to disclaim at all. However, after the fact, the possibilities of disclaimers and a
description of the benefits is the obligation of professional counsel working to minimize taxes and maximize
preservation of family wealth. Disclaimers may also be important in planning for IRA or Qualified Plan
Benefits, as discussed below. Where disclaimers are concerned, it is important to keep in mind that a
"Qualified Disclaimer" for federal transfer tax purpose must be done within the nine month window after death
and a disclaiming beneficiary cannot have enjoyed the benefits of the asset being disclaimed. This usually
means that extreme care needs to be taken in larger estates with distributions to a surviving spouse, or other
principal beneficiary. Living expenses should best come from direct payments such as life insurance benefits
or specific assets, in some case. Advisors don’t want to face problems of receipt and enjoyment six or seven
months after death, when trying to arrange a tax efficient disclaimer plan.
Qualified Plans. IRA’s or other Qualified Plans such as 401K’s offer other possibilities and requirements to
avoid bad results. A spousal disclaimer of all or part of an IRA benefit can be beneficial in transferring
retirement plan accounts to lower bracket family members, who not only pay less income tax, but may be able
to put the funds to good use. Review of IRA beneficiary designations is also important if there is a charitable
beneficiary named who can be paid in full before the designation date, which is September 30 of the year
after the year of participant’s death. Timing of this Designation Date to September 30 means that there can be
considerably less time for planning in the case of a person dying in November or December than would be
the case when there is a death early in a calendar year. In the case of such early death, IRA planning for a
charity can be deferred beyond the normal critical planning time of nine months after date of death. However,
we generally recommend that comprehensive planning take place within the nine month window because of
a possible tie-in with estate tax consequences.
Asset Allocations. Asset allocations between different trusts created by a decedent should be given attention
within six months after death, in our opinion. In a typical A-B Trust situation, the trustee/personal
representative and her advisors need to consider the optimum allocation of particular assets to a particular
trust considering income tax, estate tax, appreciation potential, and cash flow. Very often, for example, the
marital residence would be allocated to the family trust (part of the decedent’s estate tax exclusion) because
of appreciation potential and cost basis. With the increased estate tax exclusions, the income tax and cost
basis implications of post death planning are taking on more importance. For example, juggling the stepped
up basis of a deceased husband’s property with the widow’s tax free gain potential on the sale of a personal
residence can save critical dollars down the road.
Loss Carry Overs. Careful attention should be given to the carry overs of excess losses by an estate or trust
upon termination. These will include a net operating capital loss carry over and possible deductions in
excess of gross income for the year in which an estate or trust terminates. These losses may be incurred
directly or they may be incurred by the estate or trust’s interest in a partnership or LLC. The popularity of family
limited partnerships or family LLC’s for investment management and discount purposes will make this an
area of concern in coming years.
Conclusion. This newsletter does not purport to be a comprehensive guide on post-death estate and tax
planning. This letter only highlights some of the complexities that need to be addressed by a personal
representative or trustee, in wealth preservation planning after death. Obviously, any decision made at the
estate or trust level will impact the estate and tax planning of the surviving beneficiaries. If you are involved
with the estate or trust of a decedent and can benefit for experienced counsel please contact Jim Modrall or
Dave Appleford at 231 941-9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
newsletter will be to explore, in general, some of the areas where tax planning can be particularly critical. This
discussion is based on our current estate and income tax rules. These may all be changed, as you know if
you have been reading the newspapers. However, with current law, some of the areas which demand
professional assistance are discussed below.
Fiscal Year. There can be significant income tax savings by adopting a different fiscal year for an estate or
revocable trust, other than the usual calendar year. Without getting into technicalities, election of a different
fiscal year can permit deferral of income for trust beneficiaries. For example, assume an estate or trust with a
single beneficiary and $100,000 per year in dividend and interest income. Income after death is distributed. If
a decedent dies on February 1, all trust income after the date of death can be deferred an extra taxable year by
electing a fiscal year of January 31. A beneficiary is deemed to receive trust income in the taxable year in
which the estate or trust’s taxable year ends. Therefore, death on February 1, 2005 would result in deferral of
all income in the hands of the beneficiary until the beneficiary’s 2006 taxable year (tax payable April 15, 2007).
This deferral potential offers many opportunities for tax planning on the beneficiary’s level, matching up
losses against income, or simply using or investing the deferred taxes. CPA’s who are doing the income tax
returns for the beneficiary and the estate or trust, would be particularly knowledgeable and skillful in using
this tax planning opportunity.
Disclaimers. Sometimes significant wealth preservation and family tax planning can be achieved by skillful
use of disclaimers to enable property to pass to other members of the family, with no or little added transfer
taxes (gift or estate tax). For example, a widow may disclaim all or part of her husband’s trust in order to
expedite the transfer of assets to children or grandchildren. We have also found disclaimers helpful in
avoiding onerous GST taxes. We don’t usually recommend basing one’s estate plan on the assumption that
a beneficiary will disclaim. After the death of a spouse, for example, the survivor may feel particularly
vulnerable and not be willing to disclaim at all. However, after the fact, the possibilities of disclaimers and a
description of the benefits is the obligation of professional counsel working to minimize taxes and maximize
preservation of family wealth. Disclaimers may also be important in planning for IRA or Qualified Plan
Benefits, as discussed below. Where disclaimers are concerned, it is important to keep in mind that a
"Qualified Disclaimer" for federal transfer tax purpose must be done within the nine month window after death
and a disclaiming beneficiary cannot have enjoyed the benefits of the asset being disclaimed. This usually
means that extreme care needs to be taken in larger estates with distributions to a surviving spouse, or other
principal beneficiary. Living expenses should best come from direct payments such as life insurance benefits
or specific assets, in some case. Advisors don’t want to face problems of receipt and enjoyment six or seven
months after death, when trying to arrange a tax efficient disclaimer plan.
Qualified Plans. IRA’s or other Qualified Plans such as 401K’s offer other possibilities and requirements to
avoid bad results. A spousal disclaimer of all or part of an IRA benefit can be beneficial in transferring
retirement plan accounts to lower bracket family members, who not only pay less income tax, but may be able
to put the funds to good use. Review of IRA beneficiary designations is also important if there is a charitable
beneficiary named who can be paid in full before the designation date, which is September 30 of the year
after the year of participant’s death. Timing of this Designation Date to September 30 means that there can be
considerably less time for planning in the case of a person dying in November or December than would be
the case when there is a death early in a calendar year. In the case of such early death, IRA planning for a
charity can be deferred beyond the normal critical planning time of nine months after date of death. However,
we generally recommend that comprehensive planning take place within the nine month window because of
a possible tie-in with estate tax consequences.
Asset Allocations. Asset allocations between different trusts created by a decedent should be given attention
within six months after death, in our opinion. In a typical A-B Trust situation, the trustee/personal
representative and her advisors need to consider the optimum allocation of particular assets to a particular
trust considering income tax, estate tax, appreciation potential, and cash flow. Very often, for example, the
marital residence would be allocated to the family trust (part of the decedent’s estate tax exclusion) because
of appreciation potential and cost basis. With the increased estate tax exclusions, the income tax and cost
basis implications of post death planning are taking on more importance. For example, juggling the stepped
up basis of a deceased husband’s property with the widow’s tax free gain potential on the sale of a personal
residence can save critical dollars down the road.
Loss Carry Overs. Careful attention should be given to the carry overs of excess losses by an estate or trust
upon termination. These will include a net operating capital loss carry over and possible deductions in
excess of gross income for the year in which an estate or trust terminates. These losses may be incurred
directly or they may be incurred by the estate or trust’s interest in a partnership or LLC. The popularity of family
limited partnerships or family LLC’s for investment management and discount purposes will make this an
area of concern in coming years.
Conclusion. This newsletter does not purport to be a comprehensive guide on post-death estate and tax
planning. This letter only highlights some of the complexities that need to be addressed by a personal
representative or trustee, in wealth preservation planning after death. Obviously, any decision made at the
estate or trust level will impact the estate and tax planning of the surviving beneficiaries. If you are involved
with the estate or trust of a decedent and can benefit for experienced counsel please contact Jim Modrall or
Dave Appleford at 231 941-9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |
| October 2005 TAX PLANNING AFTER DEATH by James R. Modrall III, J.D., C.P.A., David R. Appleford, J.D., L.L.M. (Taxation) |