February 4, 2011
Posted by Chris Manes

Electing 2011 Estate Tax Treatment For 2010 Estates

Intuitively, you would think the IRS would require an affirmative election for a fiduciary to obtain 2011 estate tax treatment for 2010 estates. But the IRS is neither intuitive nor a fool. The Service realized that there would be hundreds of thousands of estates that would want 2011 tax treatment, while only a handful (literally) that would prefer 2010 rules (namely those estates over the $5,000,000 threshold). Putting the affirmative burden on "normal" estates would result in hundreds of thousands of forms for the IRS to process. So the IRS did the prudent thing and made 2011 treatment the default.

Thus, if a fiduciary of a 2010 estate wishes to operate under the 2010 law, with no estate tax and (largely) no basis step-up, he must complete a new form, Form 8939, and file it with the IRS. For the rest of us, the vast majority of estates of decedents who died in 2010 but who wish to operate under the 2011 rules, the fiduciary doesn't need to make an affirmative election on the Form 1041. The IRS will treat those estates by default under 2011 rules.

February 4, 2011
Posted by Chris Manes

What Happened To My Stepped Up Basis? How The New Estate Tax Rules Work

By now, most practitioners know of the significant changes to the estate tax provided in the 2010 Tax Relief Act. We know now that for decedent's dying in 2010, the decedent's estate must choose from one of two options. Option (1) allows an executor to operate under the 2010 law, which provides for no estate tax but also provides for no step-up in basis (although a fiduciary is permitted to assign a limited amount of basis to specific assets). Option (2) allows a fiduciary to operate under the 2011 law, which reinstates the estate tax (and the basis step-up), but only taxes estates valued above $5,000,000. For fiduciaries of decedents dying in 2010 with estates valued below $5,000,000, there appears little reason not to simply operate under the 2011 law (i.e., no estate tax since the estate is less than $5,000,000 plus a full basis step-up). For the Steinbrenners of the world, it's a different matter, and more thought will have to be put into it.

But how does the fiduciary in a normal (i.e., non-George Steinbrenner) estate plan elect to operate under the 2011 rules? Are the deadlines for the election? Do you have to file a Form 706 even in a small estate to get the stepped up basis using 2010 rules?

More about that shortly.

January 28, 2011
Posted by Chris Manes

"Your Account Is Wrong"

This is the last thing any attorney who represents executors, trustees and conservators wants to hear. And yet after more than a quarter century of experience scrutinizing fiduciary accounts, our firm has concluded that virtually every high-net-worth fiduciary account filed with the court has fundamental flaws. This has resulted from the complex rules of California's Principal and Income Act, and in particular the rules for allocating assets and expenses among subtrusts.

Here's why.

Attorneys and CPAs Speak Different Languages. Even accounts prepared by qualified CPAs familiar with fiduciary tax issues almost never meet the standards of the Principal and Income Act. CPAs know how to apply accounting concepts, not legal rules; attorneys are trained in legal rules, not accounting concepts. So, like two people who speak different languages, the attorneys and CPAs involved in preparing fiduciary accounts predictably misunderstand each other.

This blog focuses on bridging that gap when it comes to fiduciary accountings.