Avoid these common mistakes when preparing a federal estate tax return

Attention to detail will keep your clients from paying more taxes than they should.

keyword image, estate taxes, estate planning, tax returnsAs a CPA, you may be asked to prepare or review the federal estate tax return, Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. This form, which is due nine months after a client’s death, provides a snapshot of the assets included in the decedent’s taxable estate. The assets are valued as of the date of the client’s death and this value (for most assets) restarts the income tax basis for the assets included in the decedent’s gross estate. However, unlike on the income tax return, the client’s estate planning documents and how the assets are titled may determine how certain assets are characterized and whether certain elections should be made. Therefore, in my experience, it’s best if you and your client’s estate planning attorney both work on preparing Form 706, especially if it’s not a form that you prepare regularly. That way, you can work together to avoid costly errors such as the following:

      
  1. Missing the filing deadline. The estate tax return must be filed nine months after the date of death. Not doing so can jeopardize elections and cause interest and penalties to be due. If it will not be possible or practical to file the return on time, then you should file Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes in a timely fashion. Keep in mind, however, that while filing Form 4768 provides an automatic six-month extension to file Form 706, it does not automatically extend the time allotted to pay the tax. If your client needs more time to pay, you must request an extension to do so (on Part III of Form 4768), but it’s up to the IRS whether to grant the extension.
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  3. Not electing portability on the federal estate tax return of the first spouse to die. Sec. 2010(c) allows any unused federal estate tax exemption to be “portable” and therefore available to be used at the surviving spouse’s death—but only if the portability election is made on the federal estate tax return of the first spouse to die. Even if you do not think the surviving spouse will need to use the exemption, elect portability anyway, because his or her financial circumstances may change.
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  5. Not including prior gift tax returns with the federal estate tax return. If you’re not a client’s first adviser, be sure to check whether his or her previous adviser prepared and filed any gift tax returns for him or her. Clients sometimes do not remember these details, so, after a client dies, have the named fiduciary write to the IRS Service Center and request copies of any prior gift tax returns. This is an important step to take, as prior gift tax returns will affect the amount of available estate and generation-skipping tax exemptions, which, in turn, affect the amount of any tax due on the federal estate tax return.
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  7. Not including a tax allocation clause in a will and trust. Every will and trust should incorporate what is known as a tax allocation clause that allocates the taxes among the beneficiaries or against the residue of the estate. If there is no such clause in the document, then the law of the state in which the client is domiciled controls the allocation, and tax may be allocated to assets that would otherwise qualify for the marital or charitable deductions.
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  9. Not providing adequate documentation for the assets that are valued on the return. Assets such as real estate, tangible personal property, and the interests in any closely held businesses can be hard to value. When adequate documentation is not obtained, the risk of an audit dramatically increases. Should taxes be assessed, penalties may also apply. Have appraisals (not opinions of value) made that show the fair market value at the date of death for these assets, and submit them with the tax return. These appraisals should be thorough and show comparable sales. If a discount from value is taken on the return, the appraisal should explain why that discount is the right one. The discount should also be a specific figure and not a range.

Patricia Annino is a sought after speaker and nationally recognized authority on women and estate planning. She educates and empowers women to value themselves and their contributions in order to ACCOMPLISH GREAT THINGS in the world – and in so doing PROTECT THEMSELVES, those they love, and the organizations they care about. Annino recently released her new book, “It’s More Than Money, Protect Your Legacy” available at Amazon.com. To download Annino’s FREE eBook, Estate Planning 101 visit, http://www.patriciaannino.com.

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