Tax break may be boon to lawyers
Married couples can give away $10.2 million tax-free. But getting that tax break requires filling out a complex form within 9 months of the first death.
This post is by Deborah L. Jacobs for Forbes.com.
Here’s what I mean: Until the end of this year -- and longer than that if Congress makes the current law permanent -- we can each transfer up to $5.1 million tax-free, during life or at death. That figure is called the basic exclusion amount.
Starting in 2011, widows and widowers can add any unused exclusion of the spouse who died to their own. This dramatic change enables them together to transfer up to $10.2 million tax-free.
Still, portability, as tax geeks call it, is not automatic. The executor handling the estate of the spouse who died will need to transfer the unused exclusion to the survivor, who can then use it to make lifetime gifts or pass assets through his or her estate. The prerequisite is filing Form 706 -- the federal estate tax return -- when the first spouse dies, even if no tax is owed.
This return is due nine months after death with a six-month extension allowed. If the executor doesn’t file the return or misses the deadline, the spouse loses the right to portability. Spouses should file it even if they’re not wealthy today, because who knows what the future holds? (Post continues below video.)
It would be nice if the Internal Revenue Service developed a short form for the purpose, but there’s no sign of that happening. As a result, poor widows filing an estate tax return just in case they win the lottery someday must use the same 28-page form as billionaire widows.
Nor will the cost of preparing that form bear any relationship to the net worth of a surviving spouse, according to lawyers at the recent Heckerling Institute on Estate Planning.
Professor Jeffrey N. Pennell, a professor at Emory University School Of Law, said he recently polled a group of Georgia CPAs who told him it would cost $3,000, but he has heard estimates as high as $10,000. Carol A. Harrington, who is with McDermott, Will & Emery, a large law firm based in Chicago, said that based on that firm’s hourly billing charges, preparing Form 706 for small estates, "would not be cost-effective."
Another speaker, Dennis I. Belcher, a lawyer with McGuireWoods in Richmond, Va., said that legal fees would depend "not on the size of the assets, but on the nature of the assets." For example, each security a person owned must be listed on Form 706 with its value on the date of the individual’s death -- you can’t just say "account at Merrill Lynch with total assets of $100,000." So preparing a return for someone with a relatively modest net worth but many different investments could cost more than doing one for a very wealthy person whose major holding was stock in a family-owned business.
Patrick J. Felix III, a lawyer with Patenaude & Felix in Pittsburgh, noted that there are several steps consumers can take to reduce the cost of preparing Form 706.
Do it yourself. Professionals use software to complete the form (there isn’t a consumer-oriented version). If you don’t want to make this costly expenditure, you can download Form 706 as a fillable .pdf, along with the 43 pages of instructions that go with it, from the IRS website.
Note that there’s no box to check for electing portability -- the IRS has indicated that it will consider the election automatic if the Form 706 is filed.
Retain a CPA, rather than a lawyer. Traditionally, doing estate tax returns has been the province of lawyers who specialize in the subject. But now that it’s necessary to file Form 706 to elect portability, many more returns are likely to be submitted and CPAs may branch out into this area. Their hourly fees tend to be less than those of lawyers.
Just be sure the CPA is not so new to the subject that he is learning on your dime. "How many of these returns have you done during the past year?" is a reasonable question to ask. The answer should be at least six, Felix says.
Consolidate your investments. People often confuse diversification with consolidation, but they are two different things, Felix adds. It’s possible to diversify investments within two or three different financial institutions. That will greatly simplify matters while you are alive, and make things much easier on your heirs.
Deborah L. Jacobs, a lawyer and journalist, is the author of "Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide."
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