The CPA is uniquely suited to participate in the estate planning and administration of his or her clients, and should always be included as a valuable member of a client’s estate planning team.
1. ESTATE PLANNING
1.1 Reasons for Involvement. There are numerous reasons as to why the accountant is a very logical participant in his or her client’s estate planning process.
1.1.1 Relationship. Individuals see attorneys infrequently during their life-times, mostly for discrete, finite projects; accountants, however, normally see their clients at a minimum annually, often at least quarter-annually. Accountants are the best source of information regarding a client’s current and prospective net worth, asset mix, present and future cash flow needs and family concerns (both financial and nonfinancial), all of which data is essential for proper estate planning. In addition, clients are comfortable and familiar with the quantitative instruction of their accountants, which often is the most persuasive evidence supporting sound gift and estate planning. Finally, accountants regularly have access to a client’s personal information to determine whether estate plans already put into force are being respected and whether the client is or is not taking action inconsistent with the estate plan. For example, an accountant regularly sees a client’s property tax statements for newly-acquired real property and Forms 1099 for securities and bank accounts, and can readily ascertain whether the client, who has a current revocable living trust, has taken title to recently acquired property and/or accounts in the trust or individually.
1.1.2 Qualifications. Accountants specialize in tax law, and even though many accountants do not focus initially on expertise in wealth transfer taxes (including gift, estate and generation-skipping transfer taxes), such expertise is often acquired as needed. The CPA is also as capable (if not more capable) as any other professional of making fair market value determinations and appraisals (essential for understanding wealth transfer taxes, which are based upon fair market value at date of transfer) of a wide range of asset types, and of calculating income tax planning calculations.
1.1.3 Continuing Involvement.
126.96.36.199 It makes good sense for the accountant to understand a client’s basic estate plan, since the accountant’s ongoing advice may be the only input into the estate plan (after an attorney’s initial drafting of documents) before a client dies or becomes seriously ill. Nowhere is this more prominent than in the case of a closely-held business which is intended to pass to a new generation, and if the accountant wishes to preserve his or her involvement in the business affairs of the surviving business owners, he or she must understand how the business will be run after the client’s death.
188.8.131.52 Some of the most widely used estate planning techniques involve the use of irrevocable trusts. Only with the watchful eye of the accountant can these trusts be respected, with segregated assets, and separate bookkeeping and tax return filing, in order to preserve the tax savings promised by the use of these trusts, and only the CPA has the opportunity to focus such vigilance..
1.2 Areas of Accountant Involvement.
1.2.1 Gift-giving Program. The accountant can determine the estate and gift tax savings which can result from gifting options. In addition, the accountant is best qualified to evaluate income tax basis and income shifting considerations in selecting the assets for a gift program.
1.2.2 Trust Administration.
184.108.40.206 Inter vivos irrevocable trusts require a watchful eye, since too often clients neglect to respect the formalistic requirements of such a separate legal, taxable entity. Segregation of assets and records, protecting trust assets from the client/trustor’s access, and sending annual Crummey notice letters to beneficiaries are just some of these requirements often neglected by an inexperienced or unsophisticated Trustee. The accountant who prepares accountings and tax returns for the trust, having the long-term relationship with the client and his or her family and a strong business and quantitative background, is often the logical choice to serve as Trustee of such a trust.
220.127.116.11 While virtually all clients seek to be the initial Trustee of their revocable trusts, the accountant is frequently an appropriate successor Trustee, even if the client is living but incapable of handling the totality of his or her wealth. Even without being the Trustee, the accountant can continue to monitor whether this effective probate-avoidance technique is being administered correctly by the client. Even though while the client lives and serves as Trustee no separate tax return may required for the trust, the accountant is the only party with data sufficient to maintain a vigil as to whether the client is keeping title to his or her assets in the name of the trust, so as to avoid probate.
1.2.3 Life Insurance Planning. The accountant is aware of the lifestyle and saving practices of the client, and may be uniquely suited to understand the life and disability insurance needs of the client, considering (1) the cash flow drop which will result from lost income of a disabled or deceased spouse and (2) the liquidity needs to pay estate tax. Accordingly, the accountant should always be involved as an objective participant in the life insurance decision-making of his or her client. Of course, it goes without saying that the CPA can provide valuable insight into the cash flow implications of annual premium payments.
1.2.4 Closely-held Businesses. Often a business can only survive the death of a major shareholder/employee with careful advance planning. The CPA is well suited to observe the “family business” and evaluate the client’s needs for buy-sell or redemption arrangements (another place where life insurance may be appropriate) and business continuation contingency plans. Even more important, the accountant is aware of the relative management skills of potential recipients of interests in the business, and can probably help advise the client as to the succession issues which attend any such arrangements.
2. ESTATE ADMINISTRATION
2.1 Relationship. It comes as no surprise that, with the current senior generation, often one spouse (most frequently, the husband) may have intimate details of a couples financial circumstances while the other spouse declines such involvement. Even more common, the surviving spouse (or in the case of the death of a surviving spouse, the heirs) is often too consumed by grief to focus clearly on the immediate financial decisions necessary after a death. It has been the writer’s experience that, without the help of the CPA after a client’s death, assets are left out of administration and estate tax returns and, overall, the entire estate administration process is encumbered with inefficiencies.
2.2 Areas of Involvement. After the client’s death, the involvement of the accountant is crucial to the effectiveness of the estate plan.
2.2.1 Preparation of Estate Tax Return. The estate tax returns of a decedent require fair market value information for all of the decedent’s assets, and, aside from some clients and their survivors, the accountant has the greatest access to this information. Further, even though the accountant may not have had significant experience in estate tax return preparation, some very competent computer preparation programs now exist which can be extremely helpful in developing this expertise.
2.2.2 Liquidity Planning. If assets need to be sold in order to develop the cash necessary to retire any estate tax liability, the CPA should be involved in assessing which assets are the most appropriate to sell, taking into account cash flow, debt reduction goals, reinvestment opportunities, etc.
2.2.3 Bypass Trust. In estate plans of spouses using a Bypass Trust [often referred to as “A-B Trust”), the selection of assets to fund the Bypass Trust should be a carefully conducted action and not a “plug” calculation on the estate tax return. The accountant can be the best judge of which assets have the greatest upside potential for appreciation, which is optimal information for maximizing the estate tax savings for the Bypass Trust.
2.2.4 Probate. The accountant should be involved in formal estate administration (if he or she has not previously convinced his or her client to avoid it by pre-death planning), as these proceedings often require court-approved accountings for the estate and because the probate estate may be a separate taxable entity for which significant income tax savings can be accomplished with careful planning.
3. ACCOUNTANT MALPRACTICE AREAS.
3.1 Filing Requirements and Deadlines. The most common errors of CPA’s in the field of estate planning and administration are (1) failure to file timely gift tax returns and (2) late filing of estate tax returns.
3.1.1 Gift Tax Returns. Gifts which exceed the annual exclusion, i.e. taxable gifts, require that the donor file a U.S. Gift Tax Return, Form 709, on or before April 15 of the year following the gift. Obviously, with the rush of income tax season, it is not uncommon to omit the filing of gift tax returns, and the accountant should, on his or her income tax client’s annual questionnaire, include an inquiry as to whether gifts were made during the year to children and other relatives.
3.1.2 Estate Tax Returns. U.S. Estate Tax Returns (Form 706) are due nine months after date of death, and may be extended for up to six months more by filing a Form 4768 prior to the original nine-month due date. Some of the more prevalent omissions, and suggested procedures to avoid them, are listed below:
18.104.22.168 It is not difficult to misjudge the preparation lead time of an estate tax return; normally clients do not run to their accountant’s offices to file estate tax returns after the death of a loved one, and they often do not have on hand the information on assets necessary to file a return. Accordingly, leaving the estate tax return to the last month can be very risky. A smart way to avoid this problem is to prepare your calendar or tickler on the estate when you learn that a client or a client’s loved one died, then call the client and schedule an appointment to discuss tax planning within two months of the date of death. The true purpose of this meeting is for the accountant to ascertain the other investigative and appraisal work which must be commenced to provide timely information necessary to prepare the return, such as contacting general partners of partnerships in which the decedent held an interest, contacting brokers for date-of-death statements, etc. Remember: an estate which is close to the $600,000 gross estate (before reduction for debts!) filing threshold will probably require such a filing, when all of the information about assets is finally determined, so don’t guess that the filing will be unnecessary.
22.214.171.124 Another easy trap to fall into is waiting until the due date of the Form 706 to file for an extension. The Service may, in fact, deny the Request for Extension if it is received after the filing date! A good solution is to prepare a Form 4768 in advance of the first meeting with the client, have it signed at the meeting and placed in the file or, in the alternative, filing the Form 4768 as soon as possible for all Forms 706 to be filed; there is no requirement that a return with an approved extension must be filed after the original due date.
3.2 Early Filing. Even more amazing, a CPA could even commit malpractice for filing a Form 706 too early! The problem is that most estate plans written by attorneys today call for the use of the unlimited marital deduction to defer all estate tax liability until the death of the surviving spouse. But observe the result of the following example: H & W have combined wealth of 5,000,000, have a two-trust (A-B trust) division in their estate plan and have never made any taxable gifts. At H’s death in January, 2000, W, whom the CPA knows is also in failing health, has her CPA prepare the estate tax returns for H’s estate, which the CPA accomplishes in record time and the returns are filed in August, 2000, seven months after H dies. W dies unexpectedly in September of 2000. Here is the computation of the estate taxes of H and W, as filed:
H’s return W’s return
Gross Estate $2,500,000 $4,325,000
Less: Marital deduction (1,900,000)
Taxable Estate $ 675,000 $4,325,000
Tentative Tax $ 220,550 $2,019,550
Less: Unified Credit ( 220,550) ( 220,550)
Estate Tax $ 0 $1,799,000
What appears to be the desired result, i.e. no tax at the first death, makes the heirs of H & W see red. Had the CPA waited not only the full nine months but also the six-month extension period prior to filing H’s estate tax return, he would have known that W would be dead, and could have suggested to W, or even W’s executor or Trustee, to disclaim the marital deduction bequest from H’s estate. Had this been done within nine months of H’s death, the two estate tax returns would have looked like this:
H’s return W’s return
Gross Estate $2,500,000 $2,500,000
Less: Marital deduction 0 0
Taxable Estate $2,500,000 $2,500,000
Tentative Tax $1,025,800 $1,025,800
Less: Unified Credit ( 220,550) ( 220,550)
Estate Tax $ 805,250 $ 805,250
The total tax in this latter filing scheme is, of course, $1,610,500, $188,500 below the actual liability as filed. The difference is that, instead of loading all of the taxable estate of H into the upper brackets of taxation in W’s taxable estate, the disclaimer approach has given both estates the benefit of the graduated brackets of estate tax. Further, whereas this disclaimer technique will only work if the disclaimer is completed within the first nine months after the first spouse dies, it is often not available unless one can predict during that period that the surviving spouse is terminal (such that the payment of estate tax in the first death will not create a financial burden upon the surviving spouse). Had the estate plan included a QTIP (qualified terminable interest property) trust marital deduction structure, the estate of H could have waited even longer to file (the full extension period of 15 months) and merely elected against the QTIP marital deduction, in order to accomplish the same estate-splitting result, such that the surviving spouse would still have access to all of the income from the deceased spouse’s share.. The solution: try not to file any estate tax return “before its time”.
3.3 Valuation Risks. In connection with the preparation of an estate tax return where the most valuable assets are ones for which valuation is not easily determined (i.e. without an established market), unless the CPA feels extremely comfortable in the appraisal area, he or she should consider refraining from this operation and encourage the client to obtain the written report of a professional appraiser. More than 20% of estate tax returns filed are audited (the auditors are all attorneys), and if any valuation issue appears on the return, the odds increase that an audit will occur and that the IRS will have its appraisal unit (called “valuation engineers”) on the task, or they may sometimes hire outside appraisers (including the ones you might recommend). The problem with the CPA performing the appraisal doesn’t arise until the audit, when it becomes apparent that, on the witness stand, the CPA will have to testify as to the small amount of time he or she spends in his work doing such appraisals (thereby losing some of the estate tax return’s credibility). A written appraisal is like an audit insurance policy; evidence of value is hard to come by three years later when the return might be audited, and having a report from an established appraiser (who can be present at audit conferences to defend his or her position against that of the IRS appraiser) can be a very dear commodity at that time. Too often, usually in haste, the CPA uses a realtor’s letter as a basis for valuation of real property, and this evidence must stand up against the comprehensive, calculated determinations (with comparable properties) of the IRS. And, of course, because a good appraisal takes time and research, one cannot expect to get the best results when the appraisal process commences a few days before the return must be filed.
3.4 Basis Risks. Because of the “step-up” in basis upon the death of the first spouse to die there is a tendency upon estate tax preparers to err on the high side when valuing capital assets on the no-tax estate tax return of that first deceased spouse. The problem with this approach is that, when the surviving spouse dies close in time after the pre-deceased spouse, and the surviving spouse’s estate tax return, where the values will actually generate an estate tax liability, is filed, the IRS auditor may use the high values of the first spouse’s return as a starting point for valuing the assets in the taxable estate of the surviving spouse, forcing the preparer of the latter return to justify the values taken. The solution is to be fair in appraisals on both returns and, preferably, get professional help for both returns.
Every CPA should make an effort to ensure that his or her clients do not die without proper estate planning, and by doing so, he or she may bring in much more opportunities to service the needs of that client and the client’s family, because the accountant is an indispensable member of the estate planning team.
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Reeve E. Chudd is a senior partner in the Taxation Law and Estate Planning, Probate and Trusts Department, where his areas of practice include estate planning, individual income tax, probate and trust administration.
This article contains excerpts from a publication previously written entitled “The CPA’s Role in Estate Planning” – The Practical CPA, published by the American Institute of Certified Public Accountants, 1994.
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