Below are some legal issues that we wish to highlight for you. Let us know if you have questions, or need further detail, about any of these nuggets.
1. Income tax basis reporting: All estates required to file Federal estate tax returns (as opposed to an estate filing a return merely to make a “portability” election) must now also file a separate basis reporting form with the IRS (Form 8971). This new form is due thirty days after the estate tax return. Unfortunately, these new requirements will make estate administration more onerous for Executors and therefore more expensive to complete. The Treasury Regulations also require that every Executor provide to all estate beneficiaries a statement with detailed information concerning the basis of the assets they have inherited. The due date for the initial Form 8971 has been extended several times, as the IRS has struggled to promulgate the form and provide related guidance. The first Forms 8971 are now due to be filed on June 30, 2016. In many cases, an estate tax return extension will now be recommended, since it will be optimal to fund trusts established under the Will before the Form 8971 is filed. Any assets omitted from the Form 8971 will be received with a zero basis.
2. Divorce protection: Not all states afford trust beneficiaries and trust assets with the same levels of protection. While the protection of trust assets for beneficiaries going through a divorce in Texas is strong, as per divorce lawyers a few states are beginning to apply equitable principles, offsetting what a divorced beneficiary might otherwise receive in the divorce by amounts held in the trust. If not to be near you, this is yet another reason for your children to stay in Texas.
3. Life insurance health check: With recent market volatility, and with interest rates having remained low for such an extended period of time, now is a good time to request an “in-force illustration” for your life insurance policy and review it with your insurance professional. The in-force illustration is designed to help evaluate whether your policy is performing as projected, and if not, your insurance professional should offer advice on how best to address the situation.
4. Scrutiny of powers of attorney: Much to our amazement, it seems that with increasing frequency financial institutions find reasons not to accept powers of attorney. One suggestion is to ask your financial institutions to review your current financial power of attorney, and approve your agent’s use of it should it be presented in the future. Securing this approval in writing is recommended. Another protection is to consider executing the institutional power of attorney offered by your particular financial institution(s), though we suggest you have it reviewed by us in advance.
5. International reporting: Estate planning and probate matters with an international overlay present special complications and need extra attention. Federal tax law is ever-changing with regard to the reporting of foreign assets and transactions with foreign individuals, and requires diligent attention to ongoing developments. Some of the more significant of these types of reporting requirements include the following:
a. Reporting and Withholding on Distributions from U.S. Trusts to Non-resident Alien Beneficiaries (Form 1042-S)
b. Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts (Form 3520)
c. Annual Information Return of Foreign Trust with a U.S. Owner (Form 3520-A)
d. FinCen Report 114 (now supersedes Report of Foreign Bank and Financial Accounts (FBAR))
e. Foreign Account Tax Compliance Act (FATCA) and Statement of Specified Foreign Financial Assets (Form 8938)
Equally complex are the issues associated with estates owning foreign assets, or with estates having foreign beneficiaries. While much can be done in the planning stages to minimize the tax burdens and complication of these matters, issues which must be addressed include: the coordination of US and foreign Wills, or the probate of a US Will in a foreign jurisdiction; tax payments and assuring appropriate foreign tax credits, after consideration of relevant treaties; administration of trusts across jurisdictions including relevant taxation; and application of any forced heirship or inheritance rights imposed by the foreign country. Clearly these issues cannot be adequately addressed in a brief legal “nugget,” but if any of these international overlays present themselves in your situation, you should seek further tax and legal advice, and Farner & Perrin, LLP, can assist or direct you as applicable.
6. Pending estate tax legislation: House Democrats introduced legislation last week to restore the Federal estate and gift tax rate and exemption levels to the same amounts as in 2009. The proposed legislation would return the estate tax exemption to $3.5 million per taxpayer and increase the maximum tax rate to 45 percent. It would reinstate the $1 million lifetime gift exemption and retain the annual $14,000 gift tax exclusion and unlimited spousal portability. While this bill is not expected to be passed by Congress this year, it is a good indication of where Congressional Democrats stand on these estate and gift tax issues. Stay tuned, we hear there is an election this November….