Estate Planning Basics – The Importance of Updating Your Estate Plan in 2020

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They know the estate tax has changed a lot in recent years, and probably will change again.

Many believe that since today’s generous estate tax exemption exceeds the value of their estate, they don’t need to worry about an estate plan.

That’s a big mistake, and needs to be emphasized.

An estate plan includes many more phases than tax planning. Neglecting a plan can lead to far worse consequences than higher taxes. You need to be sure all the details are in order and up to date to avoid a disaster.

Two fairly recent cases show why procrastinating about or neglecting an estate plan is dangerous.

In the first case, a family corporation’s ownership was divided among the husband, wife, and two adult sons.

The wife passed away first. There apparently was no will, and no estate proceedings were undertaken.

The husband passed away some years later. He had a will, and his estate was processed.

The husband’s estate tax return assumed the wife’s shares had passed to the husband and assigned a modest value to all the shares he owned.

The IRS revalued the husband’s shares, giving them a value of $142 million and assessing taxes.

The IRS argued that when the husband’s shares were combined with his late wife’s, he had control of the corporation.

That put a high value on the shares.

If his wife’s shares had been inherited by others, the husband would have had a minority ownership interest, and his shares would have a lower value.

The sons eventually located a will the wife had prepared years earlier.

Under that will, her shares were bequeathed to a trust for the two sons.

The result under that will was that the husband owned only a minority interest in the business, not the majority initially assumed by both the IRS and his estate.

The Tax Court accepted the wife’s will as valid and said since the husband owned only a one-third interest in the corporation, a substantial discount was applied to the value of his shares.

It’s nice for the sons that they found their mother’s will and convinced the Tax Court to follow its terms.

But you can see the obvious problems here. The wife apparently didn’t let anyone know about her will, so it never was filed for Probate.

The husband and sons all assumed that the husband inherited the shares and controlled the corporation for years, and the sons filed their father’s estate tax return to reflect that.

The husband also didn’t do his homework.

There was a long history of a lack of corporate activity.

The wife’s shares never were recorded on the corporate books in anyone else’s name, and there were no board meetings or other activities for years.

The husband also didn’t bother to determine the consequences of inheriting his wife’s shares.

If the court had ruled that the husband had inherited the wife’s shares, his lack of other estate planning would have resulted in additional taxes of millions of dollars.

If in the meantime the father and sons had disputes over corporate actions, the issue of ownership of the wife’s shares would have created problems. (Est. of Richard, TC Memo. 2012-173)

In another estate planning case, a man made a substantial gift.

He died before filing a gift tax return or paying the gift taxes.

His executor was unaware of the gift, so his estate never paid the gift tax or took any other action related to the gift.

The IRS located the gift while auditing the estate and notified the executor that the taxes needed to be paid.

The executor ignored the IRS and distributed the estate to the beneficiaries and a charity.

The IRS told the executor he was personally liable for the unpaid gift taxes.

The court agreed. Since the executor became aware of the gift and the unpaid taxes, he was personally liable for the debt if he distributed the estate without paying the taxes.

The deceased was at fault for not paying the gift tax and filing the gift tax return after making the gift.

He also apparently didn’t leave records that made it easy for the executor to know there was an unfiled gift tax return.

The executor here obviously didn’t receive good legal advice.

Probably the most important mistake here was the selection of the executor.

Too many people name executors as an afterthought.

You need to name someone who’s going to pay attention to details, know when advice needs to be sought, and follow that advice.

You don’t want someone like this executor who’s going to ignore details and treat the IRS cavalierly. (MacIntyre, D.C., Tex.)

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