How to Leave All Your Accounts to Someone Else When You Die

The Gizmodo Field Guide has a great summary post addressing your options available to give control to your digital life at death. There are many interesting idea here to consider. Some, such as the Facebook option that I tweeted about previously, are quick and easy, so go ahead and take care of that one!

How to Leave All Your Accounts to Someone Else When You Die

California Transfer Tax – Your Purchase Price Will Be Public

It is getting harder and harder for buyers to maintain privacy concerning the purchase price for real property in California. As of January 1, 2015, the time for privacy for new buyers will come to an end.

The change will not impact most of the transfers necessary for your fundamental estate planning. Funding your revocable trust with your existing real property is not considered a change of ownership for reassessment purposes, nor is it impacted by any city or county transfer taxes under Cal. Rev. & Tax Code Section 11930. Nonetheless, it is important to be aware that newly acquired property will be subject to the new disclosure rules beginning in 2015.

As reported here:

Effective January 1, 2015, every document that is submitted for recordation must show on the face of the document the amount of documentary transfer tax due.  AB 1888 prohibits the recorder from recording any deed, instrument or writing subject to the documentary transfer tax unless a signed declaration of the amount of tax due appears on the face of the document for all to see.

Tax Tip – Identifying Gross Income

TaxesInternal Revenue Code section 61 defines gross income as “all income from whatever source derived.” This definition reaches your worldwide income, so it is important to understand exactly what “income” means. There are a couple of approaches to the definition of income.

One approach is the Haig-Simons approach which indicates that income is the sum of the market value of rights exercised in consumption, plus the change in the value of the store of property rights between the beginning and end of the period in question. This approach leans toward the theoretical and you may not find it very helpful.

In steps the more practical economic benefit approach which says that income is the value of any economic benefit received by the taxpayer regardless of the form of the benefit. Thus, income can come from the receipt of tangible items including receipt of cash or other property that generates income, even if it comes from an unusual source, such as finding a chunk of money inside an old piano.

The economic benefit approach also includes intangible benefits as gross income. If one taxpayer satisfies another taxpayer’s legal obligation, the later has income in the amount of the satisfaction. For example, I have a legal obligation to pay my income taxes each year. If you pay my taxes for me, I’ve received an intangible benefit. The value of that benefit is included in the calculation of my gross income.

As you can see, section 61 casts the widest net possible. The definitions above would act to capture almost every type of receipt from any source imaginable. Take heart, later code sections refine the idea of “income” by specifically including certain items and specifically excluding others.

Here is a brief list of specific items included in gross income:

  1. Compensation income
  2. Gross income from business
  3. Gains derived from dealings in property
  4. Investment income, including imputed interest and annuities
  5. Alimony
  6. Discharge of indebtedness
  7. Prizes and awards
  8. Helpful payments including certain moving expense reimbursements, unemployment compensation, possibly a portion of social security benefits
  9. Embezzled funds

Here is a brief list of specific items excluded from gross income

  1. Death benefits under a life insurance policy
  2. Gifts
  3. Certain compensation for physical injury or sickness
  4. Certain types of discharge of indebtedness income, generally conditioned on the taxpayer giving up certain tax benefits
  5. Qualified scholarships
  6. exclusion for gain on principal residence
  7. Certain employment related exclusions
  8. Certain education incentives
  9. Child support (distinguished from alimony)

Beware Phony IRS Phone Calls

We continue to receive calls from our clients reporting calls from these scammers. The IRS issued the following bulletin to help you protect your personal information and to report the abuse. If you are not sure whether such a call may be legitimate, contact your tax professional or legal counsel before disclosing any information.

Scam Phone Calls Continue; IRS Identifies Five Easy Ways to Spot   Suspicious Calls

WASHINGTON — The Internal Revenue Service issued a consumer alert today providing taxpayers with additional tips to protect themselves from telephone scam artists calling and pretending to be with the IRS.

These callers may demand money or may say you have a refund due and try to trick you into sharing private information. These con artists can sound convincing when they call. They may know a lot about you, and they usually alter the caller ID to make it look like the IRS is calling. They use fake names and bogus IRS identification badge numbers. If you don’t answer, they often leave an “urgent” callback request.

“These telephone scams are being seen in every part of the country, and we urge people not to be deceived by these threatening phone calls,” IRS Commissioner John Koskinen said. “We have formal processes in place for people with tax issues. The IRS respects taxpayer rights, and these angry, shake-down calls are not how we do business.”

The IRS reminds people that they can know pretty easily when a supposed IRS caller is a fake. Here are five things the scammers often do but the IRS will not do. Any one of these five things is a tell-tale sign of a scam. The IRS will never:

1. Call you about taxes you owe without first mailing you an official notice.
2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.
4. Ask for credit or debit card numbers over the phone.
5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money, here’s what you should do:

  • If you know you owe taxes or think you might owe, call the IRS at 1.800.829.1040. The IRS workers can help you with a payment issue.
  • If you know you don’t owe taxes or have no reason to believe that you do, report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 1.800.366.4484 or at
  • If you’ve been targeted by this scam, also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at Please add “IRS Telephone Scam” to the comments of your complaint.

Remember, too, the IRS does not use email, text messages or any social media to discuss your personal tax issue. For more information on reporting tax scams, go to and type “scam” in the search box.

Additional information about tax scams are available on IRS social media sites, including YouTube and Tumblr where people can search “scam” to find all the scam-related posts.

California Probate: How Much Does It Cost?

Basic Court Fees

Let’s get the boring things out of the way first. For the most straight forward probate, there largest filing fees are incurred at the beginning and end of the process. The 2014 fee charged to file a probate petition is $450. There will be a $435 filing fee to file the petition for final distribution of the estate assets. Of course, there will be miscellaneous fees for items such as publication of the probate notice, fees associated with the probate referee, and fees for certified copies of court documents.

How Much Will the Executor and Attorney Be Paid?

I expect this will be the more interesting topic for most people. Small California estates with assets worth $150,000 or less may be settled without formal probate proceedings, using relatively simple transfer procedures. However if you’re here, you have probably already been to the bank and have been told you need “Letters Testamentary” or a “Court Order” to gain access to your deceased spouse’s checking account or you’ve been named executor of your rich uncle’s estate and you’d like to decide whether to put the down payment down on that cabin in Tahoe. For everyone’s sake (except your late uncle), I hope the latter scenario is what led you here. Sadly, dealing with financial institutions following the death of a loved one is the more likely scenario. In any case, budgeting for probate has been simplified due to California’s decision to define statutory fees for compensation of both the personal representative of the estate and the attorney representing the estate.

California Probate Code § 10810 sets the maximum fees that attorneys and personal representatives (i.e. executors, administrators, etc.) can charge for a probate. Higher fees can be ordered by a court in special circumstances and for more complicated cases. As of 2014, the fees are four percent of the first $100,000 of the estate, three percent of the next $100,000, two percent of the next $800,000, one percent of the next $9,000,000, and one-half percent of the next $15,000,000. For an estate larger than $25,000,000, the court will determine the fee for the amount that is greater than $25,000,000.

For your reference, the fees chart below is a quick breakdown of California statutory compensation for attorneys and personal representatives in probate cases for different sizes of estates. It is important to stress that both the attorney AND the personal representative are paid under this statute. Thus, if both the attorney and the executor elect to receive a fee, the amount paid will be double that shown below. This can be an important point with regard to budgeting.

Value of Estate Compensation to Attorney/Personal Representative
$100,000 $4,000
$200,000 $7,000
$300,000 $9,000
$400,000 $11,000
$500,000 $13,000
$600,000 $15,000
$700,000 $17,000
$800,000 $19,000
$900,000 $21,000
$1,000,000 $23,000
$1,500,000 $28,000
$2,000,000 $33,000
$3,000,000 $43,000
$4,000,000 $53,000
$5,000,000 $63,000
$6,000,000 $73,000
$7,000,000 $83,000
$8,000,000 $93,000
$9,000,000 $103,000
$10,000,000 $113,000
$15,000,000 $138,000
$20,000,000 $163,000


Do I Accept the Fees or Should I Waive Them?

Often the personal representative will be a spouse and will elect to forego the compensation. Let’s take a quick look at why this might be. Let’s say Mary survives her husband John and is the sole beneficiary of his $500,000 probate estate. If Mary accepts compensation in the amount of $13,000 as the executor of John’s estate, in general, Mary just incurred $13,000 of taxable income. However, if Mary foregoes compensation as executor, she will receive the entire inheritance from her husband income tax free.

The decision whether to accept compensation can become much more complicated when there are more beneficiaries. For example, let’s say Jennifer leaves her $500,000 probate estate to her two sons, Jerome and Liam in her Will. Jerome is named executor and spends a great deal of time working with his trusted attorney to take the estate through probate. Meanwhile, Liam just sits back watching A-Team reruns and waits for his inheritance to roll in. When it comes down to it, Jerome may feel he really earned the additional $13,000 and that he should get paid before distributing the remaining estate 50/50 with Liam. However, Jerome will need to sit down and examine whether the negative income tax impact will outweigh the gratification of being paid to do the job. Jerome should sit down with a tax professional to crunch the numbers and figure out which options make the most fiscal sense.

How Much Is in The Probate Estate?

All of the above is all well and good, but in order to determine the probate fees I need to know what is in the probate estate; how do I figure that out? In general, the value of the estate is determined by performing an inventory of the estate assets. It is a little easier to describe the probate estate in the negative – the probate estate will be comprised of assets that are not distributed by other means. Items that should avoid probate include assets held in a revocable or irrevocable trust, an IRA or life insurance policies (with properly executed beneficiary designations), or real property held either as community property with right of survivorship or as joint tenants. These assets pass by operation of law without the need for a court to oversee the transfer. Commonly, the probate estate will be comprised of assets such as real property, bank or brokerage accounts that were never transferred into a trust, or of death beneficiary proceeds that did not have a properly designated beneficiary.

If an accounting of the estate has been waived, the total value of the estate for attorney’s fees purposes is the inventory, plus gains on sales, minus losses on sales. This is important – debts are not included in determining attorney’s fees. Thus, if a house has a fair market value of $1,000,000, for example, and it has a mortgage of $800,000, it is considered an asset with a value of $1,000,000 for the purpose of calculating executor and attorney’s fees. Thus, it is quite possible that your spouse or your children could be forced to liquidate or borrow against the family farm to satisfy the probate fees.

A Little Estate Planning Can Help You Avoid These Fees

You can see that a little estate planning during life, including the use of a revocable “living” trust, could save your family a great deal money and stress down the line. When you think about it, it doesn’t take much to have an estate worth a great deal more than $500,000, especially in the San Francisco Bay area. It takes little more than a house with a mortgage and a checking account and you’re probably there. As attorneys, we love probate. We know the procedure and we are happy to guide you through the process and collect our statutory fee at the end. But for anyone with assets nearing or above the $150,000 mark, do your family a favor and give us a call or send me an email to sort this all out during life.

That being said, promise that, if your absurdly rich uncle dies naming you executor and you need to take his estate through probate, you’ll give me a call! Seriously, 415-781-4000.

IRS Modifies OVDP Program Adds 50% Penalty

On June 18, 2014, the IRS made the following modifications to the Offshore Voluntary Disclosure Program. I find two of the requirements particularly interesting.

The first is that the taxpayers are required to pay the offshore penalty at the time of the OVDP application. As I recall, this was an existing requirement, but my sense was that it was not rigorously enforced. Adding it here as a new “modification” makes me wonder if this will be more strictly monitored. Compliance can many times be onerous or impossible. A 27.5% penalty on a $400,000 balance from 2009 can be assessed, but the balance of the account in 2014 may be nil for any number of reasons. Strict enforcement of pre-payment may force more taxpayers into hiding, which is the opposite of the goal of the program.

Additionally, forcing pre-payment would force the taxpayer to pay funds to the service that may not ever be imposed. Say a taxpayer were to receive the closing letter and opt out of the program, later obtaining a much better result with civil audit. It is not very often that I come across clients who are excited by the idea of having the IRS hold a substantial sum of their money while the process works itself out. It will be interesting to see whether the modification results in any discernible change in the IRS’s acceptance of taxpayers into the program.

The second item of interest is the new possible 50% penalty that will be imposed if the OVDP pre-clearance does not occur before a public announcement that a financial institution is under investigation. This should be a big motivator for taxpayers to reevaluate their decision to keep their fingers crossed that they will never be discovered.

If you are wondering whether you might end up in the cross-hairs of the IRS, there’s no better time to contact a tax professional.;-Revisions-Ease-Burden-and-Help-More-Taxpayers-Come-into-Compliance

Offshore Voluntary Disclosure Program (OVDP) Modified

The changes announced today also make important modifications to the OVDP. The changes include:

  • Requiring additional information from taxpayers applying to the program;
  • Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;
  • Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application;
  • Enabling taxpayers to submit voluminous records electronically rather than on paper;
  • Increasing the offshore penalty percentage (from 27.5% to 50%) if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice.

New Streamlined Offshore Account Disclosure Procedure for Domestic Taxpayers

The IRS released a new procedure available for domestic taxpayers looking to disclose their foreign accounts and to come into compliance with the FBAR requirements. Before today, the Streamlined program was only available to non-resident taxpayers. This is generally good news and it brings the possibility of facing a 5% penalty rather than a 27.5% penalty. However, but the news  is somewhat tempered by how it will be administered by the Service.

The fourth eligibility requirement is that the noncompliance was non-willful. The Internal Revenue Manual states that, for application of the civil FBAR willfulness penalty, “the test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.” The manual further explains that willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements. The only thing that a person need know is that he or she has an FBAR reporting requirement. If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR.

How the OVDP program chooses to define “willful” will be critical. The recent district court cases of Williams and McBride seem to indicate that the Service can include a finding of willful blindness as evidence of intent to violate a known legal duty in the context of FBAR violations. What is more troubling is that the court in McBride indicates in dicta that, by checking the box on the 1040 Schedule B that the taxpayer does not have a foreign account to report, and then signing the return, may act to demonstrate a willful violation of the FBAR rules. Application of this standard in the new Streamlined procedure would bring a harsh outcome for taxpayers who truly had no idea they were non-compliant, let alone intent to evade. We will learn more in the coming weeks.

If you have been putting off a disclosure, it is important that you speak with a tax professional about your options as soon as possible. Treasure is increasing the 27.5% offshore penalty to 50% “if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice.” This increase could be devastating.

U.S. Taxpayers Residing in the United States

The following streamlined procedures are referred to as the Streamlined Domestic Offshore procedures.

Eligibility for the Streamlined Domestic Offshore Procedures

In addition to having to meet the general eligibility criteria described above, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Domestic Offshore Procedures described in this section must:  (1) fail to meet the applicable non-residency requirement described in section 2.A. above (for joint return filers, one or both of the spouses must fail to meet the applicable non-residency requirement described in 2.A. above); (2) have previously filed a U.S. tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed; (3) have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) and/or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) with respect to the foreign financial asset, and (4) such failures resulted from non-willful conduct.  Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

For information on the meaning of foreign financial asset, see the instructions for FinCEN Form 114and the instructions for Form 8938.

Description of Scope and Effect of Procedures

U.S. taxpayers (U.S. citizens, lawful permanent residents, and those meeting the substantial presence test of IRC section 7701(b)(3)) eligible to use the Streamlined Domestic Offshore Procedures must (1) for each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed (the “covered tax return period”), file amended tax returns, together with all required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621), (2) for each of the most recent 6 years for which the FBAR due date has passed (the “covered FBAR period”), file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1), and (3) pay a Title 26 miscellaneous offshore penalty. The full amount of the tax, interest, and miscellaneous offshore penalty due in connection with these filings should be remitted with the amended tax returns.

The Title 26 miscellaneous offshore penalty is equal to 5 percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period. For this purpose, the highest aggregate balance/value is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the years in the covered tax return period and the covered FBAR period and selecting the highest aggregate balance/value from among those years.

A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered FBAR period if the asset should have been, but was not, reported on an FBAR (FinCEN Form 114) for that year. A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset should have been, but was not, reported on a Form 8938 for that year. A foreign financial asset is also subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset was properly reported for that year, but gross income in respect of the asset was not reported in that year.

For information on the meaning of foreign financial asset, see the instructions for FinCEN Form 114and the instructions for Form 8938. For example, foreign financial assets may include:

  1. Financial accounts held at foreign financial institutions;

  2. Financial accounts held at a foreign branch of a U.S. financial institution;

  3. Foreign stock or securities not held in a financial account;

  4. Foreign mutual funds; and
  5. Foreign hedge funds and foreign private equity funds.

A taxpayer who is eligible to use these Streamlined Domestic Offshore Procedures and who complies with all of the instructions below will be subject only to the Title 26 miscellaneous offshore penalty and will not be subject to accuracy-related penalties, information return penalties, or FBAR penalties.  Even if returns properly filed under these procedures are subsequently selected for audit under existing audit selection processes, the taxpayer will not be subject to accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original return was fraudulent and/or that the FBAR violation was willful.  Any previously assessed penalties with respect to those years, however, will not be abated.  Further, as with any U.S. tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency.

For returns filed under these procedures, retroactive relief will be provided for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by the applicable treaty. The proper deferral elections with respect to such plans must be made with the submission.  See the instructions below for the information required to be submitted with such requests.

Specific Instructions for the Streamlined Domestic Offshore Procedures

Failure to follow these instructions or to submit the items described below will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.

  1. For each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed, submit a complete and accurate amended tax return using Form 1040X, Amended U.S. Individual Income Tax Return, together with any required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) even if these information returns would normally not be submitted with the Form 1040 had the taxpayer filed a complete and accurate original return.  You may not file delinquent income tax returns (including Form 1040, U.S. Individual Income Tax Return) using these procedures.

  2. Include at the top of the first page of each amended tax return “Streamlined Domestic Offshore” written in red to indicate that the returns are being submitted under these procedures. This is critical to ensure that your returns are processed through these special procedures.

  3. Complete and sign a statement on the Certification by U.S. Person Residing in the U.S. certifying:  (1) that you are eligible for the Streamlined Domestic Offshore Procedures; (2) that all required FBARs have now been filed (see instruction 9 below); (3) that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct; and (4) that the miscellaneous offshore penalty amount is accurate (see instruction 5 below).  You must maintain your foreign financial asset information supporting the self-certified miscellaneous offshore penalty computation and be prepared to provide it upon request.  You must submit an original signed statement and attach copies of the statement to each tax return and information return being submitted through these procedures.  You should not attach copies of the statement to FBARs.  Failure to submit this statement, or submission of an incomplete or otherwise deficient statement, will result in returns being processed in the normal course without the benefit of the favorable terms of these procedures.

  4. Submit payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts.  Your taxpayer identification number must be included on your check.  Click here to get help with the interest calculation.  You may receive a balance due notice or a refund if the tax or interest is not calculated correctly.

  5. Submit payment of the Title 26 miscellaneous offshore penalty as defined above.

  6. If you seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by an applicable treaty, submit:

    • a statement requesting an extension of time to make an election to defer income tax and identifying the applicable treaty provision;

    • a dated statement signed by you under penalties of perjury describing:

      • the events that led to the failure to make the election,

      • the events that led to the discovery of the failure, and

      • if you relied on a professional advisor, the nature of the advisor’s engagement and responsibilities; and

    • for relevant Canadian plans, a Form 8891 for each tax year and each plan and a description of the type of plan covered by the submission.

  7. The documents listed above, together with the payments described above, must be sent in paper form (electronic submissions will not be accepted) to:

    Internal Revenue Service
    3651 South I-H 35Stop 6063 AUSC
    Attn:  Streamlined Domestic Offshore
    Austin, TX 78741

    This address may only be used for returns filed under these procedures.  For all future filings, you must file according to regular filing procedures.  

  8. For each of the most recent 6 years for which the FBAR due date has passed, file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures.  You are required to file these delinquent FBARs electronically at FinCen.  On the cover page of the electronic form, select “Other” as the reason for filing late.  An explanation box will appear.  In the explanation box, enter “Streamlined Filing Compliance Procedures.”  If you are unable to file electronically, you may contact FinCEN’s Regulatory Helpline at 1-800-949-2732 or 1-703-905-3975 (if calling from outside the United States) to determine possible alternatives to electronic filing.

Page Last Reviewed or Updated: 18-Jun-2014

Extended Time to Make Estate Tax Portability Election

We have encountered a few situations where clients believe to have missed their opportunity to take advantage of the surviving spouse’s “portability” election to transfer a deceased spouse’s unused estate tax exclusion to the surviving spouse. The IRS is simplifying the process to remedy the situation. Note that this development can be especially advantageous to surviving same-sex spouses whose marriages were not recognized for federal tax purposes until the Supreme Court’s recent decision in United States v. Windsor.

Simplified method offered for requesting extended time to make portability election

JANUARY 27, 2014
The IRS on Monday offered certain executors a simplified way to request an extension of time to make the “portability” election to transfer a deceased spouse’s unused estate tax exclusion to the surviving spouse (Rev. Proc. 2014-18). Executors of estates of spouses who died in 2011, 2012, or 2013 and that did not timely file an estate tax return to make the portability election will have until Dec. 31, 2014, to make the election on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, rather than having to go through the process of making a letter ruling request to get an extension of time to make the election.
Temporary regulations issued in 2012 require executors to file Form 706 to make the election to transfer the deceased spousal unused exclusion (DSUE) to the surviving spouse. To make the election, executors must file Form 706, computing the DSUE amount, even if the estate would not otherwise be required to file an estate tax return. Unfortunately, because they are not otherwise required to file Form 706, some executors have failed to make the election.
And while the due date for filing Form 706 is prescribed by statute for estates that are required to file an estate tax return, the requirement to file Form 706 just to make the election is prescribed by the regulations, not by statute, so it is the IRS’s position that executors may seek an extension of time under Regs. Sec. 301.9100-3 to elect portability. This so-called Sec. 9100 relief will be granted if the taxpayer establishes to the IRS’s satisfaction that the taxpayer acted reasonably and in good faith and that granting relief will not prejudice the government’s interests.
Until now, the IRS has been granting such relief in private letter rulings, but with Monday’s revenue procedure it is providing a simplified method for taxpayers who meet certain requirements.
The simplified method applies to the executor of the estate of a decedent who died after Dec. 31, 2010, and on or before Dec. 31, 2013, who has a surviving spouse, and who is a U.S. citizen or resident of the United States on the date of death. The estate must not be required to file an estate tax return under Sec. 6018(a), and the executor must not have filed an estate tax return during the time period required to elect portability.
To qualify for relief under the revenue procedure, the executor must file a complete and properly prepared Form 706 for the estate on or before Dec. 31, 2014, and must write “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A)” at the top.
If the executor meets these requirements, he or she will be deemed to have satisfied the conditions for relief under Regs. Sec. 301.9100-3, and relief will automatically be granted to extend the time to elect portability.
The simplified method does not apply to estates that timely filed an estate tax return under the temporary regulations to elect portability.
Executors of estates that do not meet the requirements of the revenue procedure, including those that died after Dec. 31, 2013, may request an extension by making a letter ruling request under Regs. Sec. 301.9100-3.
Claims for credit or refund by surviving spouse
If a surviving spouse wants to obtain a credit or refund of a tax overpayment as a result of a portability election made under Monday’s revenue procedure, the surviving spouse must file a claim for credit or refund before the expiration of the Sec. 6511(a) limitation period (generally, three years from the date a return was filed or two years from the day of tax payment, whichever expires later).

Pending letter ruling requests

Executors with letter ruling requests pending on Jan. 27, 2014, seeking an extension of time to make the portability election, may, if the estate is within the scope of the revenue procedure, withdraw the letter ruling request and receive a refund of the user fee it paid. Such withdrawals must be made by the earlier of March 10, 2014, or the date the letter ruling is issued.

Effect of the Windsor decision

The IRS notes that some decedents who died during the 2011–2013 period may have been spouses in same-sex marriages, whose marriages were not recognized for federal tax purposes until the Supreme Court’s decision in Windsor, 133 S. Ct. 2675 (U.S. 2013), and subsequent IRS guidance in Rev. Rul. 2013-17. Executors of the estates of such decedents would not have been eligible to make the portability election and may have therefore missed the Form 706 filing deadline. They may now be eligible under Monday’s revenue procedure to make the election and get Sec. 9100 relief.

Alistair M. Nevius ( is the JofA’s editor-in-chief, tax.

U.S. Appeals Court Quashes IRS Tax-Return Preparer Crackdown

This articles reflects an interesting case of the interaction of federal vs. states rights. The IRS has a vested interest in promoting good behavior and service by tax-return preparers; the more accurate the return, the higher the probability that the Service will collect the tax due. However, the Service’s powers are limited by our federal system. It appears that the court found the executive branch to be stepping the the state’s collective toes with recent efforts to police US tax-return preparers.

Read the article here:

For an interesting look into the ongoing struggles faced by our federal system and state’s rights, here is a podcast that I recently enjoyed. Constitutional law issues make much more sense in the context of duck hunting, attempted murder, and an adulterous interlude. For those of you new to this area of constitutional law, the article above may make more sense after listening to this program.

California Probate: What’s the Purpose?

California ProbateWhat’s the Purpose?

Probate.  You’ve heard the word, but what is it?  Here is a brief overview to let you know what triggers the probate process and what is involved to complete the journey.  In general, probate is the court supervised collection of assets, payment of debts and expenses with the net amount being distributed to the beneficiaries.  The actual paperwork for submission to the court for its supervision is done by the personal representative of the estate and their attorney and the fees charged by the attorneys and personal representatives are set by statute.

Who Needs Probate?

Not everyone will need to take their loved one’s estate through probate.  As I will discuss in another post, if the value of the assets in the estate is less than $150,000, there are simplified procedures that will allow you to avoid having to file a petition in probate.  If these procedures allow you to gain control over the deceased assets, there will be no need to go through a full blown probate.

If these procedures do not work and you are being told by banks, brokerage firms or title companies, for example, that you need a court order or “Letters Testamentary” to manage property, you are looking at a filing a petition in probate.

What is the Procedure?

Probate procedure can be surprisingly complex and will vary from county to county.  This will be a thumbnail sketch to give you a rough idea of what to expect.

The first question is to determine whether a probate proceeding is really necessary. The answer will be no if all of the decedent’s assets are in a living trust or are owned in joint tenancy. If the deceased person has more than $150,000 of assets, there is no surviving spouse or the assets were not left to the spouse, or if an institution will not release control of property without Letters Testamentary, the answer is yes, a probate proceeding is very likely necessary.

If it is necessary to file a probate petition, the next question is, who will act on the decedent’s behalf? If the decedent left a will, they probably named someone in the will to act as the executor of their estate.  If the will did not appoint an executor, or if the named executor chooses not to accept the nomination, or if the deceased died without a will, an interested party can petition the court to be named administrator of the estate. The executor or administrator does not have to be a California or United States citizen or resident.

After appointment of the executor, the court will issue Letters Testamentary granting the executor the power to act on behalf of the estate.  The executor will be charged with taking control of the deceased’s assets and producing an inventory and appraisal.  The court will further supervise any creditor claims for debts owed at the time of death. There is a fixed period of time for creditors to come forward to demand payment.  It is important that the executor take prompt action notify known creditors to start that clock.

Along with the payment of debts, the executor must see that taxes are paid. Income taxes must be paid for the personal income up to the date of death.  Income collected during probate requires the filing of a separate estate income tax return on behalf of the estate.  In 2013, a federal estate tax return is required if the decedent owned over $5.25 million of assets as of the date of death.

After the executor collects all of the assets of the decedent and taxes and debts are paid, the executor will then request court approval to distribute the remaining assets in accordance with the terms of the decedent’s will or the rules of intestate succession, if the decedent died without a will.

Cost and Time

As you can see, the probate process has the potential to take a great deal of time.  Notice has to be given far and wide so creditors have at least four months to file a claim against the estate.  In my experience, the fastest one can get through a probate proceeding start to finish is six months, and that is really pushing it.  The average time to take an estate through probate is eighteen months. In the event there is any type of dispute or will contest, the matter can drag on for years.  I’ve discussed the costs involved with a standard probate proceeding in detail here.

You have many options to avoid probate, such as lifetime giving, revocable (living) trusts and irrevocable trusts.  If you need to take an estate through probate, please contact us as we are very experienced probate attorneys. We are available to discuss your options at 415-781-4000.