Death certificate form

Given rising federal budget deficits and the war on terrorism, it's impossible to predict whether Congress will permanently retire the federal estate tax, which in 2001 produced revenues totaling a whopping $24.4 billion. The Economic Growth and Tax Relief Reconciliation Act of 2001 gradually repeals the tax; as of January 1, 2010, there is no federal estate tax at all. But these impending reforms should not cause CPAs to give up their estate tax practices. The 2001 act has a sunset provision. Unless Congress acts to make the repeal permanent, the estate tax comes back in full force in 2011 for estates of more than $1 million.

Whatever the tax's fate, CPAs still need to know how to navigate Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, due nine months after a client's date of death. This article may help CPAs avoid some of the pitfalls of form 706, such as which assets and deductions to include or issues related to family limited partnerships. In this way they can work smarter on behalf of their clients' estates. If CPAs understand the thorny 706 issues relevant to recording a decedent's assets, debts and administrative deductions, they will be able to do a better job of reducing the estate's tax liability.

FORM 706

Form 706 reports the value of a decedent's estate--the property the deceased left to his or her heirs. It shows the decedent's assets, liabilities and allowable deductions that combine to produce the estate's taxable value. CPA John Pace, senior manager with the wealth transfer group at the Fort Worth, Texas, office of Weaver and Tidwell, LLP, says the form "is like a balance sheet at the date of death."

A CPA should consult an attorney familiar with state laws governing property rights before listing a deceased client's assets on form 706. "State law doesn't necessarily dictate valuation," says an IRS estate tax attorney, "but it certainly determines what a person owns." Here are some of the specific areas where CPAs should exercise caution.

Income tax refunds, If the state or federal government refunds income taxes to the deceased, those amounts should be added to the gross estate on form 706. For married couples, only the decedent's portion of the refund should be recorded. In fact, CPAs should review the decedent's 1040 for the past three years--the time period the IRS allows to file for refunds--not only to verify that no further refunds are due, but also to look for any missing assets.

Pace, who prepared 706s for a Florida bank for 27 years, recalls, "When the IRS comes in for an audit, agents typically will search through canceled checks for assets not listed on form 706."

Joint tenancy and rights of survivorship. Even if a bank account or certificate of deposit lists both the decedent and the heir as having rights of survivorship, if the deceased contributed all the moneys, the account belongs on form 706. If the joint tenant made contributions, then the CPA should deduct them from the account's total worth to find its estate value. An IRS estate tax attorney says, "In that case, the CPA should attach an affidavit to form 706 signed by the heir as proof of his or her contribution."

Valuing stocks and bonds. When a person dies, his or her stocks and bonds automatically receive a step-up or step-down in basis to the market value on the date of death or the alternate valuation date. A CPA calculates each stock's worth neither on the purchase price nor on the closing price, but on the mean fair market value on the date of death. Pace explains: "A CPA would take the high and low of the security's market value for that day, divide by two, multiply the stock's mean value by the number of shares held and include that figure in the estate's total assets. For a weekend death, a CPA would obtain the stock's mean market values on Friday and Monday, and find the average of the two days."

"For example," Pace continues, "if a decedent died Saturday, October 19, 2002, owning Bank of America stock, a CPA would combine the October 18 (Friday) market value high of $69.95 and low of $68.05 for a mean value of $69, and the October 21 (Monday) high of $70.60 and low of $68.50 for a mean of $69.55, then add the Friday mean and the Monday mean and divide by 2. The result--$69.275--is the value of one share of Bank of America in the estate. Multiply that price by the number of shares the decedent owned for the stock's total value."

CPA and board-certified estate tax attorney David Adler of Adler & Adler, PC, in Dallas points out, in the case of a weekend death and no trading days on the weekend, the number of trading days from Friday to the valuation date and from that date to Monday are the same. But if there were more trading days, CPAs would be required to use a weighted average. Accountants would give the higher weight to the average price closer to the valuation date and the lower weight to the average price further away."

Timing of valuation. The IRS allows 706 filers to use the date of death or alternately a date six months from the decedent's death to value the estate. In cases of falling stock prices, CPAs might choose the alternate date in order to obtain a major tax reduction and put more cash in the hands of beneficiaries. The election may be made, however, only if valuing the estate on the alternate valuation date decreases the "gross estate and the estate tax" according to IRC section 2032(c). Pace cautions, however, that "if \a CPA elects the alternate valuation date and the fiduciary sells stock before that date, the sale price becomes the alternate value for the sold stock."

To value other properties, Susan Finnell, a board-certified estate tax attorney with Geary, Porter & Donovan, PC, in Addison, Texas, comments, "I typically get updated appraisals for alternate valuation if other assets have declined in value or if real estate prices have declined significantly since the date of death."

On the other hand, during a plummeting market, some beneficiaries may prefer greater capital losses that would result from the sale of estate stock during a plummeting market based on the date-of-death asset valuation. These losses would be computed by subtracting the stock's sale price from its fair market value at date of death and multiplying that figure by the number of shares held for the total loss. In the year of the estate's termination and distribution, the capital losses shown on Form 1041, U.S. Income Tax Return for Estates and Trusts, are passed through on form K-1 to the heirs proportionately in accordance with the decedent's will.

Beneficiaries may use these inherited losses to reduce capital gains on their own 1040 schedule D and then against up to $3,000 of ordinary income. Excess losses are carried to the next year, when they are subject to the same limits. One of a CPA's most important decisions is whether to elect the date of death for securities valuation for possibly greater capital losses for the beneficiaries' benefit or the alternate six-month valuation date for the greater hard cash benefits from reduced estate taxes. In making this decision, CPAs should be influenced by the choice that generates the greatest net benefit to individual beneficiaries.

Transfer limitations. IRC sections 2035, 2036, 2037, 2038 and 2042 mandate that a CPA bring back into the estate certain property transferred during the decedent's lifetime that meets conditions enumerated in these sections. For example, section 2035, which previously meant all assets transferred within three years of death had to be included, has now been narrowed to include only life insurance policies and a few other specific assets. Under section 2036, if a deceased client had retained the right to income from a transferred property, the CPA should list the asset on form 706, omit it if the interest in the property's income was also transferred, but include it if the right to the property's income was given away three years before death, in accordance with section 2035. Because of the complexities in this area, CPAs should make sure they thoroughly familiarize themselves with the relevant code sections and consult an attorney with such expertise if necessary.

FAMILY LIMITED PARTNERSHIPS

With family limited partnerships (FLPs), CPAs face a minefield that demands very careful navigation. An FLP is an unincorporated association of family members who pool assets to share profits and losses whereby certain partners' liability is limited to their contributions to the partnership. FLPs have become popular estate planning vehicles for a number of reasons. Senior counsel Elizabeth Howard, an estate tax attorney at Locke Liddell & Sapp LLP in Dallas, says: "A family member can bequeath a partnership interest rather than the underlying partnership assets. Often, the appraised value of the partnership interest will be less than the value of the proportionate partnership assets."