Estate Planning 101 provides you with an overview of a basic estate plan. It also explains what estate planning documents are typically included in such a plan and what those documents are intended to accomplish.
Generally, Washington DC residents who die owning assets worth more than $1 million must file a DC estate tax return, Form D-76.
The instructions to Form D-76 state that “(a) DC Estate Tax Return (Form D-76 or Form D-76 EZ) must be filed when the gross estate is $1,000,000 or more, even if the Federal Estate Tax Return (IRS Form 706, for individuals dying in 2002 and thereafter) is not required to be filed.”
But what should you do if you are serving as personal representative (“PR”) and the estate’s assets are close to but less than $1 million. For example, what should you do if your estate has assets that equal $995,000?
Many estate lawyers, including our firm, recommend that in such cases, PRs should consider filing a Form D-76 even though the estate’s assets are below $1 million. The reasons are as follows.
First, sometimes estates discover assets after the estate tax return has been filed, which cause the estate’s assets to exceed $1 million and triggers a DC estate tax return filing requirement. If a D-76 has been filed, it can be amended and the estate will have avoided a failure to file penalty. If a D-76 has not been filed, a failure to file penalty may be incured by the estate.
The failure to file penalty equals “(a) penalty of 5% per month or any fraction of a month up to a maximum of 25% of the unpaid portion of the tax due.”
Second and similarly, if the valuation of estate assets were to be challenged successfully, by filing the PR would avoid failure to file penalties if the value is increased on audit.
Practice Pointer. Sometimes PRs, for purposes of determining whether their estates have exceeded the $1 million D-76 filing threshold, subtract selling expenses from the fair market value of all estate assets to arrive at a “gross estate” amount. That is an incorrect analysis. The D-76 instructions state that a D-76 must be filed when the gross estate (i.e., the fair market value of the estate’s assets before taking into account any deductions) exceeds $1 million. Therefore, if the gross estate exceeds $1 million, the PR must file a DC estate tax return.
Practice Pointer. When the decedent was married, the PR should always consider filing federal estate tax return in order to make a portability election.
BNA Bloomberg’s Daily Tax Report quoted Lewis J. Saret regarding the likelihood of estate tax repeal during 2015, in an article, captioned Potential for Estate Tax Repeal Grows Despite New Obama Capital Gains Proposal. The full article may be read by clicking DTR.2015.01.26.
Excerpts taken from article:
Lewis J. Saret, of the Law Office of Lewis J. Saret in Washington, pegged the probability of repeal at less than 50 percent for 2015. But the probability has increased substantially given the new congressional leadership, he said Jan. 20.
He agreed that Obama may be positioning himself for possible estate tax repeal negotiations. ‘‘I could possibly see a compromise where the proposal is enacted and the estate tax is eliminated,’’ Saret said.
The president’s proposal to tax capital gains at death bears a resemblance to the Canadian tax system, Saret said, with one major difference. Obama didn’t propose eliminating the current estate tax.
‘‘If the proposal were enacted as proposed, there would be both an estate tax and the proposed capital gains tax at death—almost certainly something that Republicans, with their consistent stance against any tax increases, would not agree to,’’ he said.
Unexpected Proposal. Until now, fighting a relaxation of the estate tax hasn’t been a priority for Obama, so the capital gains proposal came as somewhat of a surprise.
‘‘Obama has given up at least twice, in 2010 and 2012,’’ Saret said. ‘‘So clearly, prior to this, it wasn’t all that important to him.’’
In 2010, the estate tax exemption was going to go back to $1 million, and there was talk of it being fixed at $3.5 million, Saret said, but at the last minute it got bumped up to $5 million, indexed for inflation, for two years. Obama didn’t fight it.
In 2012, Republicans threw in permanently fixing the estate tax at $5 million, and Obama didn’t oppose that, he said.
If repeal happens in the near term, it is more likely to happen in 2015 than 2016, he said, when the presidential election will keep legislators from tackling controversial issues.
Reproduced with permission from Daily Tax Report 16 DTR S-12 (Jan. 26, 2015). Copyright 2015 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com.
Lewis Saret authored the following column, published in CCH Taxes – The Tax Magazine, The Estate Planner: Code Sec. 1411 Material Participation by Trusts – Part 2.
This column, the second of a two-part column, concludes a series of interrelated columns dealing with the Code Sec. 1411, 3.8-percent net investment income tax (NIIT). It discusses material participation of trusts and estates, analyzing several factors that may be relevant to the determination of material participation by trusts and estates.
The full column may be downloaded by clicking the following link: Material Participation by Trusts Part 2.
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On March 27, 2014, the U.S. Tax Court issued its decision for the case of Frank Aragona Trust et al. v. Commissioner, 142 T.C. No. 9, No. 15392-11 (2014). The Court held that the Frank Aragona Trust (“the Trust”) qualified for the Internal Revenue Code (“IRC”) Sec. 469(c)(7) passive activity exception. The Tax Court found that a trust is capable of performing personal services through its individual trustees and that the Trust materially participated in real property trades or business. It concluded that the Trust’s rental activities were consequently not passive.
In light of the recent imposition of the 3.8 % Net Investment Income Tax (NIIT), this ruling is especially important because any income derived from trade or activities in which a trust or estate materially participates would not be subject the NIIT. Continue reading “Income Tax Alert: Tax Court Rules That Trust Qualifies For Passive Activity Exception”
Some Things Change.
On May 15, 2014, Governor Martin O’Malley signed H.B. 739, which provides for the gradual increase of Maryland’s state estate tax exemption. The House passed the bill on March 7 with the Senate passing the measure on March 20. Continue reading “Estate Tax Alert: Maryland and D.C. To Raise Estate Tax Exemption”
Almost all estate plans include a trust of some kind, and most clients want to know what limits are placed on how much of the trust’s assets a beneficiary can have access to. Often, their questions revolve around knowing how much and when can a trustee distribute trust assets to a beneficiary. More often than not, these decisions are based on criteria called ascertainable standards. Continue reading “Ascertainable Standards And Trust Distributions: What You Should Know”
What is Probate?
The first few months after a loved one, family member or friend passes away can often be bewildering and confusing for those who are left behind. Besides the emotional aspect of the death, many practical questions arise at this time, such as who pays for the funeral expenses, what happens to the decedent’s assets and who handles any of the legal matters that invariably occur at this time. Many of the answers to these and other questions work themselves out through the process most commonly known as probate or estate administration.
At its simplest, the probate process is the legal process that takes place after someone’s death. During the process, the decedent’s assets are located, his/her debts paid, and his/her remaining property distributed to its new owners. This process takes a minimum of eight months, but typically lasts for a year or longer. The person who is in charge of handling these issues is called the personal representative. The articles in this series are intended to assist a personal representative of a decedent’s estate (i.e., the decedent’s assets) subject to probate in the District of Columbia Superior Court. Continue reading “DC Probate Administration: An Introduction”
Lewis Saret authored the following column, published in CCH Taxes – The Tax Magazine, The Estate Planner: Code Sec. 1411 Material Participation by Trusts & Estates (Part 1) – Current Status and Plannning.
“This column, the first of a two-part column, concludes a series of interrelated columns dealing with the Code Sec. 1411, 3.8-percent net investment income tax (NIIT). This column deals with material participation of trusts and estates and recaps various planning suggestions that have been made to mitigate the NIIT.”
The full column may be downloaded by clicking the following link: Material Participation of Trusts & Estates Part 1 Continue reading “Code Sec. 1411 Material Participation by Trusts & Estates (Part 1) – Current Status and Planning”