1.  Special Elections And Post Mortem Planning

2.  Estate Planning after Death o Decisions made on the estate that Impact heirs Impact taxes Impact executor o Issues that need consideration Liquidity issues for estate and heirs Election of expenses Gifts (splitting for taxes) Asset valuation

3.  Liquidity Issues for Estate and Surviving Heirs o Estate needs funds to pay Last medical expenses – can be high Funeral costs Costs to maintain assets while in probate Expenses of probate process Taxes of the estate o Surviving heirs may need funds for Transition period (awaiting final distribution of assets) Replacing income of deceased  Executor or administrator of estate may need to make decisions to “smooth” transition period

4.  Sources of Liquidity o Cash accounts of the deceased (checking, savings, etc.) If titled simple fee of deceased – frozen by bank and released to estate If titled joint tenancy with rights of survivorship then available to surviving heir and can be used for liquidity needs o Sale of highly liquid assets (stocks and bonds) provide liquidity for estate Issues with taxable basis for estate Typically sold at fair market value o Sale of other assets Quick sale may be well below fair market value reducing estate Past and potential appreciation of asset important o Life Insurance Policies – generally distributed outside of estate

5.  Sources of Liquidity -- continued o Tax Advantage Accounts “Cashing In” tax deferred accounts usually triggers a tax event Taxes are incurred at “withdrawing” of funds Taxes may be postponed if whole account distributed to heirs via estate and heirs pay as they withdraw o Corporate Redemptions from Closely Held Business Sell stock back to company (treasury stock purchase by company) Proceeds treated as “dividend” and taxable to estate Exception on proceeds (IRC Section 303) Treated as capital gain If proceeds used for estate taxes, inheritance and generation skipping taxes, funeral expenses, and estate administrative expenses

6.  Income Tax Issues - Who pays the taxes may matter o Final income tax for deceased Calculated at time of death for all income for the year up to date of death – still qualifies for joint filing status (Form 1040) Qualified widow(er) may continue to file using joint filing status for up to two years o Estate starts on date of death and files tax return for income (Form 1041) o Executor can elect which filing includes an expense Medical expenses can be filed with individual return or estate return With small estates, general rule is to include expenses on individual return for permanent reduction of taxes With estates incurring a tax, generally include expenses on estate return as tax rate is higher and thus lowers overall taxes paid

7.  Tax Elections for Estate o Filing Year Estate is not a person so it can choose ending period Ending period must be the last day of the chosen month o Two Forms will be completed Fiduciary income tax form (1041) Estate tax form (706) o Executor can elect where expenses are recorded on tax forms Either 1041 or 706 but not both Determine marginal tax rates and select tax advantaged form o Waive executor fee – do not record as expense of the estate Taxable income to executor – but not taxed if executor receives as heir Calculate net proceeds with multiple heirs of estate

8.  Gift tax Issues o Election of the split gift between spouses Spouses elect to split a gift so that 100% of gift qualifies for annual exemption For example, a car worth $28,000 is given to a child by one of the parents – the second parent can “elect” to provide their exemption to the car and thus split the gift between the two parents with each giving $14,000 This election requires sign off other spouse but in the case of a deceased parent, the surviving spouse can make the election post mortem for the deceased spouse

9.  Valuing the Assets of the Estate o In general the rule is the fair market value at time of death o Incentives For small estates write up assets to highest value (still no estate tax) and pass on higher basis to heirs For large estates keep assets at low value (avoid some estate taxes) and pass on lower basis to heirs to postpone taxes o Alternative Date – six months out Assets and estate taxes must be lower for this election

10.  Installment Payment of Estate Taxes o Section 6166 – For closely held business Business Interest must be at least 35% of the estate Business Interest must be 20% or more of the business o Installment payments include interest expense at 2% Up to $1,450,000 over the estate exemption of $5,340,000 If above $6.790,000 (current rate) than interest rate increases up to a potential of 45% on remainder o Interest expense is not deductible for estate tax filing  Highest and best use of property o Fair market value determined by best use of property – exception is continuing use (farm land)

11.  Disclaimer by heir o An heir of the estate chooses to disclaim property Must be in writing Must be made within nine months of date of transfer Disclaimer cannot direct property to another party Disclaimer cannot have beneficiary interest in property o Reasons to disclaim By surviving spouse – into By-Pass Trust In favor of surviving spouse – take care of parent’s needs In favor of charities – do not need property

12.  Portability of the Unused Estate Tax Exemption o The surviving spouse can use the unused portion of the one-time estate tax exemption (currently $5,340,000) o Executor must file a deceased spouse’s exclusion amount to surviving spouse (not automatic) o Prior to 2011 estates below exemption did not file for portability o However, surviving spouse may eventually accumulate wealth above individual exemption so file any unused portion to future use

13.  What are the implications for Financial Planning? o Need to understand that some decisions can be made about estate after death of deceased Aware of potential choices by executor Executor as heir has potential conflicts in post mortem decisions Timing of elections important o Heirs can disclaim property Second in line for property spelled out Must be aware of requirements for heir(s) to disclaim property  Questions?