Estate Tax Considerations.
Distinction between the Probate Estate and the Taxable Estate
The “probate estate” is the property that passes through the probate process. This does not include real estate (unless it is specifically bequeathed to the estate), or property owned by a Living Trust, or property that is held with another person with the right of survivorship, or that passes by beneficiary designation.
On the other hand, all property owned by a person at his or her death, in no matter what form, plus all taxable gifts made during one’s lifetime are included in a person’s “taxable estate” for purposes of calculating the estate tax.
Estate, Gift and Generation Skipping Taxes.
Estate taxes are imposed on estates that exceed the “estate tax exemption” amount. In 2017, that number was set at $5,490,000 per person. Because Congress revises the tax laws frequently, those with larger estates must monitor the estate tax exemption in the event the exemption is lowered below the threshold value of their assets.
Currently the portion of a deceased spouse’s unused exemption amount (“DSUEA”) can be transferred to the surviving spouse, thereby doubling the amount of exemption available to the surviving spouse. This concept is called “portability.” As of 2017, this allows surviving spouses a combined portability tax exemption for estates valued at $10.98 million or less. The surviving spouse must make an election to receive the unused exemption amount.
Lifetime gifts in excess of the gift tax exclusion amount of $14,000 per donee per year are included in calculating the value of an estate for estate tax purposes. A gift tax return is required when such gifts are made.
Generation skipping transfer taxes are imposed on gifts that are left to persons that result in skipping a generation as in the case of grandchildren or to unrelated persons who are more than 37.5 years younger than the donor. The generation-skipping tax will be imposed only if the transfer avoids incurring a gift or estate tax at each generation level. For example, property is placed in a trust for the donor’s child and grandchildren, with the income distributed among the child and grandchildren and the principal distributed outright to the grandchildren following the child’s death. If the trust property is not subject to estate tax at the child’s death, a generation-skipping tax will be imposed when the child dies.
Asset protection is a strategic process involving the ownership of property in ways that offer the best protection against creditors. The degree of concern about asset protection typically increases according to one’s exposure to liability and has to be counterbalanced by the amount of work required to maintain whatever asset protection mechanism is put into place.
One of the simplest examples of increasing protection of assets is to consider real estate ownership as Tenants by the Entirety with a spouse. In this scenario, should one spouse be sued and a judgment obtained against that one spouse, the creditor could not seize property held as joint tenants because the other spouse owns an interest in the entirety of the property, and that spouse is not subject to the judgment.
A few of the tax controversies I have dealt with include the following:
- Tax return preparer liability for failure to gather sufficient information regarding the earned income tax credit
- Tax return preparer liability for the additional tax, penalties and interest assessed as a result of an North Carolina Department of Revenue audit
- Penalties payable by taxpayer for underpayment of tax
- Penalties payable by taxpayer for failure to file a return
- Personal liability (“third party liability”) for failure of a corporation to pay withholding tax (the “trust tax”)
- Innocent spouse relief when the other spouse fails to pay taxes
- North Carolina county tax penalty for failure to pay personal business property taxes
- Preparation of Federal and North Carolina Estate tax returns and defense of audits
- Offers in compromise to settle large tax bills that will be uncollectable in full
- North Carolina taxation of capital gains from properties located in other states
- Taxation of Unrelated Business Taxable Income (UBTI or UBIT) earned by tax-exempt corporations
- North Carolina tax penalties owed by taxpayers
- Taxation of and penalties from early withdrawal from an Individual Retirement Account (IRA)
- Federal tax lien effect on a successor corporation
- Installment Agreements for repayment of taxes owed
- Section 1031 tax -free exchanges