Estate PlanningLiquidity NeedsLiquidity Sources and Implications (1 of 4)Liquidity Sources and Implications (2 of 4)Liquidity Sources and Implications (3 of 4)Liquidity Sources and Implications (4 of 4)Joint or Separate Final Return (1 of 2)Slide 8Passive and Capital LossesExpense ElectionsIncome Tax Issues Regarding the Estate (1041)Selection of Tax YearSlide 13Waiver of Executor’s FeesUS Savings BondsGift Tax IssuesBasic Estate Planning Issues (Post Mortem)Installment Payments of Estate Tax (6166, 6161) (1 of 3)Installment Payments of Estate Tax (6166, 6161) (2 of 3)Installment Payments of Estate Tax (6166, 6161) (3 of 3)Special Use Valuation (2032A) (1 of 4)Special Use Valuation (2032A) (2 of 4)Special Use Valuation (2032A) (3 of 4)Special Use Valuation (2032A) (4 of 4)Disclaimers (1 of 2)Disclaimers (2 of 2)© 2004 ME™ (Your Money Education Resource™)1Estate PlanningChapter 12:Special Elections and Post Mortem Planning2© 2004 ME™ (Your Money Education Resource™)2Liquidity NeedsLast medical costsAdequate health insuranceFuneral costsPrepay funeral during life reduces needTransition or adjustment period costsAssets going through or outside of probateOutside reduces transition costsAdministrative costsAttorney, CPAs, appraisers, executorIncome, estate and generation skipping transfer taxesNine months to pay3© 2004 ME™ (Your Money Education Resource™)3Liquidity Sources and Implications (1 of 4)Sale of assetsMay not find willing buyer for what it is worthParticularly if must be done quicklyLife insuranceDon’t forget the ILITCan make loansBuy assetsBut not require to pay estate taxes4© 2004 ME™ (Your Money Education Resource™)4Liquidity Sources and Implications (2 of 4)Tax advantaged accounts – qualified plans, IRAsIRD – if you defer income during life then it is taxable as IRD to the heirsIf executor takes distributions from the Qualified Plan or Traditional IRA then the estate has to pay income tax on the distributions from the planLeave these to charityLarge amount of tax to liquidate to pay estate taxes5© 2004 ME™ (Your Money Education Resource™)5Liquidity Sources and Implications (3 of 4)Corporate redemption from closely held businessesNormally dividend ordinary incomeCurrently capital gains tax rateIRC Sec 303 allows shareholder to redeem enough shares to cover tax and expenses and qualify for capital gains35% of the AGE must be the closely held businessMultiple businesses can be combined, but one needs to be 20% of AGEGenerally no income tax due on redemption of stock due to step up in basis6© 2004 ME™ (Your Money Education Resource™)6Liquidity Sources and Implications (4 of 4)Distribution of assetsAssets in lieu of cashSale of asset by heirGovernment wants CASH!Estate recognizes any gain from date valued in estateLoans for payments of taxes and other costsMay borrow to cover costsEstate can deduct interest if they had to borrow.7© 2004 ME™ (Your Money Education Resource™)7Joint or Separate Final Return (1 of 2)Final income tax return may be filed as married filing separately or married filing jointlyMarried filing jointly due to the more favorable tax8© 2004 ME™ (Your Money Education Resource™)8Joint or Separate Final Return (1 of 2)Surviving spouse may file as qualified widow(er) for two years following death, and enjoy the lower tax rates applicable provided that:1. Surviving spouse is not remarried2. Surviving spouse maintaining home for one or more dependent children9© 2004 ME™ (Your Money Education Resource™)9Passive and Capital LossesIf the decedent had losses from prior tax yearsPassive losses carried over can be claimed on the decedent’s final income tax returnCapital losses can’t10© 2004 ME™ (Your Money Education Resource™)10Expense ElectionsIf the decedent’s estate is not subject to estate tax the expenses should be deducted from the decedent’s final income tax returnIf the decedent’s estate is subject to estate tax then it is usually more advantageous to deduct the medical expenses from the estate tax return11© 2004 ME™ (Your Money Education Resource™)11Income Tax Issues Regarding the Estate (1041)Selection of tax yearExpense electionsWaiver of executor’s feesUS Savings BondsDistribution and tax bracket analysis12© 2004 ME™ (Your Money Education Resource™)12Selection of Tax YearExecutor can elect to have the estate’s tax year end on the last day of any month during the yearJanuary 31 preferred to November 3013© 2004 ME™ (Your Money Education Resource™)13Expense ElectionsIf the estate is subject to federal estate taxes then it is better to deduct the expenses on the estate tax returnIf the estate is not subject to federal estate taxes then an income tax deduction should be claimed on the estate income tax return14© 2004 ME™ (Your Money Education Resource™)14Waiver of Executor’s FeesFees can be deducted on either (but not both) the estate income tax return or on the estate tax returnGenerally estate tax return more beneficialGenerally the executor is also beneficiary and if the beneficiary receives distribution from the estate, there is no income tax consequenceAn executor who is also a beneficiary of the estate should consider whether or not he would like to waive the executor’s commissionFor small estates – a waiver of the executor’s fee will usually make good financial senseEssentially making gift to other heirs15© 2004 ME™ (Your Money Education Resource™)15US Savings BondsUS Savings Bonds are IRD assetsDo not receive a step to FMV in basis at the owner’s deathThe estate will have to pay tax on the incomeDistribute the income to the beneficiaries and allow them to pay the income taxCharitable bequests – use Savings Bonds16© 2004 ME™ (Your Money Education Resource™)16Gift Tax IssuesElection to Split Gifts for Year of DeathCode allows a surviving spouse to elect to split the gifts made by the decedent in the decedent’s final tax year17© 2004 ME™ (Your Money Education Resource™)17Basic Estate Planning Issues (Post Mortem)Valuation of assetsFair market valueAssets usually require an appraisalUnless publicly tradedSelection of valuation dateAlternate valuation dateCan only be used if it reduces estate taxesNot to