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As an estate planning attorney, I know the many tax reasons to do estate planning. For example, doing annual exclusion gifts may reduce or eliminate state and federal estate taxes.

But, there are substantive reasons to plan, besides keeping the taxman at bay. It’s good to remember these reasons to need to plan, even if there are not concerns about taxes.

1. Incapacity.  This may be the most important reason to plan. Without planning, health care decisions may not default to the people you want. By doing a Health POA, or similar document, you can designate who will make decisions if you are unable to do so. Expressing your preference regarding end-of-life decisions typically is done in a separate document, which is also important. A Property POA would provide some incapacity planning for property, even in the absence of a trust.
2. Divvying Up Assets.  This is often the first thing that leaps to most people’s minds, so don’t leave this off our list of non-tax reasons. This is especially important if you are overriding the list of intestate heirs provided in the state legislation. For example, if a person wants to leave assets to their unmarried partner, friends, or a charity, this simply will not happen without an estate plan.
3. Avoiding Conflict.  A well-drafted estate plan can go a long way to prevent family discord, especially when the assets are being divvied up in a non-traditional manner.
4. Guardians.  A guardianship appointment is the proper place to nominate guardians to care for minors or incapacitated people (like parents or grandparents) close to them. While they may not care about taxes, they will likely want to protect those close to them.
5. Managers.  An estate plan is how you designate who is to control the assets left behind. This can be done with a continuing trust such as a testamentary trust. For example, they might leave assets in trust for a beneficiary until the beneficiary attains a certain age. Maybe they want their sister to manage the assets until the beneficiary reaches that age.
6. Probate.  In some states probate is a cumbersome process. It’s a very public process by its very nature. When people discover the disadvantages of the probate process, you will want to utilize a revocable trust during life to manage the assets. Many people know that an intervivos trust avoids probate at death. They may not know that a trust also assists with incapacity planning.
7. Coordination.  I always consider the coordination of the estate plan I draft for the client with beneficiary designations that have been or are suggested for certain assets. For example, if a client wants the assets to go 50% to A and 50% to B, simply stating that in the Trust is not sufficient. If beneficiary designations leave the assets in a different proportion or to someone else, those designations will control and the wishes expressed in the Trust will be thwarted. Most people are unaware of this fact.

While taxes are an important element of estate planning, especially for those subject to state or federal estate taxes, the most important reasons to plan are non-tax reasons. Bob

An important new study about advance directives was just released October 5 in the Journal of the American Medical Association (JAMA). You and your clients may have already heard about this in the news.

The study’s findings are generally favorable (and certainly not unfavorable) toward advance directives. But — some of the press coverage has the potential to confuse people or cause them concern about the purpose of the advance directives. Specifically, some of the coverage describes advance directives as a “cost-saving measure” or as “not effective.”  

Here are some of the main points from the JAMA study that may be important for your to understand about this study:

1. This study looked at patients who wanted less aggressive treatment at the end of their lives. It used cost of care as the proxy measure of the treatment received, hence the reporting focus on costs.
2. The findings suggest that people with advance directives who wanted less aggressive end-of-life care did have their wishes met. Specifically:
   • this group of patients did not have everything medically possible done for them, as measured by their lower costs of care.
   • these patients had a higher rate of dying outside the hospital (a measure of less aggressive care)
   • these patients had higher rates of using hospice and palliative care (comfort and pain management) services 
3. In certain areas of the country, advance directives helped patients achieve their goal of less aggressive treatment. In other areas, advance directives were not necessary for people to have their wishes met because of less aggressive treatment norms there.
4. The study did not find or even suggest that advance directives were used as a cost-cutting measure. Nor does it suggest that patients received less care than they wanted for any reason. In fact, the study did not evaluate the care of patients who specifically stated in their advance directives that they wanted the most aggressive treatment possible (to determine if advance directives helped them achieve this goal).

In closing, this study suggests that having advance directives either helped or at worst had no effect on patients getting the less aggressive care that they wanted at the end of their lives. It did not find that advance directives were counterproductive to these patients receiving their desired care.

Call me to discuss at 630-215-3676.

Bob

How fast the changes have come these past few weeks regarding the Medicare provision to reimburse doctors who discuss the options for how patients want to be treated in their final days. 

The New York Times story on December 26 announced a Medicare provision to encourage end-of-life conversations during annual physical exams being instituted by regulation January 1. Then a “death panel” hue-and-cry erupted, crying foul since the provision had been dropped from the 2010 Affordable Care Act legislation. By January 5, the White House pulled the provision, saying there hadn’t been enough chance for all sides to comment on the change. 

I’d like to add my comment about having end-of-life planning discussions. Yes, they are a tough conversation to start. But, just as talking about sex won’t make you pregnant, talking about end-of-life issues won’t make you dead – and the family will benefit from the conversation. 

The conversation is not about “pulling the plug on Granny.” It’s about how you want to be treated when you are older (as we know, Medicare’s for those over 65) and health is failing. It’s an opportunity to speak your wishes and get it in writing, so everyone’s on the same page about your care. 

When you are unconscious, or delirious, or just not able to make your own health care decisions, it allows your family to know and carry out your wishes. In the fluorescent glare of the ER, it’s hard to remember what those wishes are. 

My family’s experience is a lesson in the need for advance directives. My 82-year-old father-in-law had fallen and broken his hip, and he did have advance directives in place. The family was exhausted after his seven weeks of hospitalization, battling pneumonia and allergic reactions during rehabilitation after hip replacement surgery. 

On his third ER admission with difficulty breathing, the doctors told us that my father-in-law’s body was tired and broken beyond repair. They recommended he be admitted under palliative care, where he would be kept comfortable, but not “fixed,” and nature would be allowed to take its course. 

Dad incoherently rambled, refusing a DNR order. Mom, the named decision-maker, was sad and torn. The monitors beeped, the oxygen hissed, the doctors waited for an answer. She looked to my husband and me to help make the decision. Based on Dad’s advance directives, we agreed to the palliative care. 

Dad died peacefully in the hospital a week later with the family gathered around him. But even with the advance directives in place, there was family conflict over his care. 

My husband’s brother, who lived out of town, insisted steps be taken to make Dad better. Nebulizer treatments were ordered, but they could not help a man who literally inhaled everything he ate or drank. A feeding tube was inserted, against written wishes. 

We had Dad’s statement that he wanted comfort care, not heroic measures, to guide us during his last days. Dad had made up these advance directives, under the advice of his doctor, after he barely came through his third open-heart surgery twelve years earlier. 

Would Dad have made up these guiding documents on his own if his doctor had not told him to do so? It’s hard to say. I’m glad we had his advance directives, but real life is messy. 

Even if something is written, if it’s not discussed within the family, conflict can erupt when the end is near. The one thing Congress or the president can’t legislate or regulate is families talking to each other. 

Medicaid is a government benefit program that pays for part of the cost of your long term care in a skilled nursing facility (a “Nursing Home”).  In most cases, you have to contribute your monthly income (less a small allowance for personal needs). Some benefits are available for at-home care.

Medicaid Planning is the process of legally arranging your assets to become eligible for Medicaid. In many cases, you can preserve your house and much of your money and still obtain Medicaid benefits.

Nationwide Elder Services Associates, LLC (“NESA”)  helps people navigate the Medicaid Planning rules, which are tricky and impenetrable at best. NESA is proud to have helped thousands of people for more than 23 years to keep their homes and lots of their money when they had a loved one who needed long term care.

However, we are most proud that our compassion and empathy have made it possible for us to give peace of mind and a high degree of comfort to those we serve.  NESA truly cares for you.

ELIGIBILITY

Medicaid benefits are available only to individuals who meet the Medicaid eligibility standards. There are seven parts to the Medicaid eligibility rules and you must qualify under all seven parts.

1. The applicant for Medicaid must actually need long term care in a skilled nursing facility (a “Nursing Home”) or, in limited cases, at home.

Usually the Nursing Home does a medical assessment automatically when an application for Medicaid benefits is made. NOTE: to avoid delay, make sure the assessment has been made and sent to Medicaid.

2. The applicant must be 65 or older or disabled.

3. The applicant must be a citizen of the USA or equivalent.

4. The applicant must already be in a nursing home in the state in which the applicant applies for Medicaid benefits.

5. The applicant’s monthly income (what you get every month, including your Social Security, pension, salary, interest, dividends, etc., but not including the spouse’s income, if any) must be less than the federal standard after medical expenses have been subtracted.

In some states, the cost of Nursing Home care is considered to be a medical expense. There are different rules for other states.

i. Scenario 1- “Medical expense” includes Nursing Home cost:   your income is $6,000.00 per month and Nursing Home cost is $5,000.00 per month.  Your income will not make you ineligible becauseincome ($6,000.00) less medical ($5,000.00) is less than the standard.

ii. Scenario 2 – “Medical expense” does not include Nursing Home cost:   your income is $6,000.00 per month, which is higher than the standard, so your income makes you ineligible. However, by using a legal device called a Qualified Income Trust or Miller Trust, you can still become eligible.

6. The applicant’s total COUNTABLE assets (what you own) must amount to less than $2,000.00 in many states or $1,500.00 or $2,400.00 in others. For married couples, the countable assets include assets owned by the applicant, the applicant’s spouse, and assets owned jointly.

Special rules for married couples allow them to keep more of their assets and possibly even some of the applicant’s monthly income.

Some assets are never counted. Some assets are temporarily exempt and are not counted when determining initial eligibility. Some assets are not available and are not counted when determining initial eligibility. See the section on Medicaid Planning below.

7. Even if all of the other criteria stated above have been satisfied, certain gifts or transfers for less than fair market value will make the applicant temporarily ineligible for Medicaid benefits anyhow.

Medicaid will review all gifts made within five years before the “trigger date”, which is the date on which the applicant resides in a Nursing Home, applies for Medicaid and would have been eligible for benefits but for the gift. Based on the size of the gift, when it was given away and the average cost of the Nursing Home care determined by the state, there may or may not be a period of ineligibility for benefits after the “trigger date.”

Gifts made more than five years before the “trigger date” do not cause ineligibility. However, if Nursing Home care or care at home and Medicaid benefits are needed within five years after the date of the gift, the gift may well cause ineligibility for a very long time.

A gift to a spouse does not normally cause ineligibility. Neither does a gift to a Trust for the sole benefit of a disabled child. In some circumstances, the gift of a home will not cause ineligibility. Finally, if you honestly try to sell an asset and can’t or you make a gift exclusively for a reason other than to become eligible for Medicaid, the gift will not cause a period of ineligibility.

RECOVERY

Upon the death of a person who has received Medicaid benefits, the state government has to try to recover the amounts paid to a Nursing Home for that person. In some states, recovery is permitted only from the “probate estate” of that person, i.e., the assets left under the individual’s Will or if the individual had no Will; while in other states, recovery is permitted from everything in which the individual had a legal interest one second before death.

MEDICAID PLANNING

Under certain circumstances, Medicaid law allows individuals or their spouses to keep their homes and some of their assets without becoming ineligible for Medicaid benefits.  For example, an individual could give away certain assets without causing ineligibility or could make certain assets unavailable so that they wouldn’t count against the asset standard.

However, the relevant laws are extremely complicated and extremely hard to understand, so Medicaid Planning should not be attempted without the assistance of a Medicaid Planning specialist.

Just remember this: You don’t have to go broke to get Medicaid benefits.

According to folklore, an ancient Chinese curse is “May You Live in Interesting Times.” Certainly, it does not get more interesting than 2010 for estate plans. 2010 has brought many major, temporary changes at the federal level. 2010 has also brought several unique changes at a state level.

2010 also may have a unique twist for state income taxes of decedents dying this year. Typically, states follow federal law with regard to income taxation rules. Section 1014(f) of the IRC provides that for federal income tax purposes the basis of property derived from a decedent is no longer derived by way of the step-up in basis rules. Instead, a modified carryover basis rule is applied. However, not every state will follow federal law in this regard. California, for one, is refusing to follow the federal lead in this regard. For California purposes, the basis of property of a decedent is determined without regard to IRC § 1014(f). See Cal. Rev. & Tax. Code §18035.6.

So, it will be necessary for a decedent’s attorney to keep two sets of basis records, one for California purposes and one for federal purposes.

Let’s look at an example. A person dies in 2010 with a single asset, a parcel of California real estate worth $5 million. The decedent purchased the property for $500,000 and made $200,000 of improvements over the years. So the basis immediately before death was $700,000. For federal income tax purposes the basis is $700,000 plus the executor allocates the $1.3 million of additional basis for a new federal income tax basis of $2 million for federal purposes. However, for California income tax purposes, the new basis is $5 million, i.e. the date of death value. The asset was inherited by Johnny who sells it in 2010 for $5 million. For California income tax purposes, Johnny has no gain. However, for federal purposes, Johnny has a gain of $3 million. For most other state income tax purposes, he would have a gain of $3 million.

This rule affects Californians who inherit property from a decedent dying in 2010. However, it may also affect non-Californians who inherit California property from a decedent dying in 2010. Basically, for California income tax purposes, the step-up will apply.

And you thought it couldn’t get any more complicated!

Below are 11 estates that each took multiple years to settle.

Marlon Brando

Death: July 1, 2004

Length of Dispute: 9 years

Ever since Brando’s death in 2004, his estate has been the source of a number of feuds. By 2009, it was involved in more than 24 lawsuits concerning his will and the heirs to his fortune. Less than two weeks before he passed away, Brando, to the surprise of many, handed over his legacy, image and estate to a set of new executors, replacing his personal assistant of 50 years and business manager of 40 years. The suspicious change of heart caused the new executors to take part in several purchases with Brando’s money, purchases that his heirs allege directly opposed Brando’s wishes. His relatives claim the executors unjustly commercialized the actor’s private island and refused to acknowledge the professed financial promises Brando made to his family members shortly before his death. The last of many disputes regarding the will was resolved in 2013. 

James Brown

Death: December 25, 2006

Length of Dispute: 9 years, ongoing

Singer James Brown died in 2006 from heart complications. He left behind an estate worth approximately $100 million and outlined that he wanted his money to be divided between two separate trusts: one intended for the education of his grandchildren, and another to help underprivileged children receive educations they otherwise couldn’t afford. Brown’s wife and children challenged his will three years after his death and were awarded half of the estate. Recently, however, record producer Jacque Hollander, who helped Brown create the two initial trusts, has challenged this decision. The conflict is still ongoing.

Ray Charles

Death: June 10, 2004

Length of Dispute: 11 years

Ray Charles’ children asserted that their father’s manager, Joe Adams, had frozen them out of the estate, despite the fact Charles never named him in the will. They claimed that two years before Charles’ death, Ray promised each of his 12 children $500,000 and more to come once he passed away. U.S. District Judge Audrey Collins has sided with the children and opposes the foundation’s, and Adams’ refutations. 

Doris Duke

Death: October 28, 1993

Length of Dispute: 20 years

Socialite and philanthropist Doris Duke, of Duke University and Duke Energy Corporation, died October 28, 1993. Ever since, her fortune has become an exceedingly contentious issue for her heirs. Currently, her nephew’s children, Georgia Inman and Walker Patterson Inman III, are struggling with JPMorgan Chase and Citibank, the managers of the Duke trusts, to simply finish their educations. As of 2013, the dispute over their finances was still in full throttle. 

Jimi Hendrix

Death: September 18, 1970

Length of Dispute: 44 years

Jimi Hendrix passed away in 1970, and his father/manager, Al, fought an arduous battle for control of the rights to his songs and merchandise. After Al’s death in 2002, the remainder of the estate passed to Al’s daughter Janie. Janie’s brother Leon and his children sued for being left out of the will. It appears that the courts sided with Janie and Leon in early 2014.

Howard Hughes

Death: April 5, 1976

Length of Dispute: 34 years

Nearly 34 years after Howard Hughes’ death, the heirs to his fortunes were still seeking compensation for the last payout from his estate. In 1996, Rouse Co. bought the remainder of Hughes’ assets, including 22,500 acres of Nevada land. Under the arrangement, the heirs were each promised a portion of the profits from the land’s future sales. However, once General Growth bought out Rouse in 2004, there remained the unresolved issue of how the heirs would be paid after the remaining land was to be appraised in 2009. The final liquidation of Howard’s estate in 2010 brought an end to the rousing feud.

Fred Koch

Death: November 17, 1967

Length of Dispute: 20 years

The four sons of Fred Koch, co-founder of Koch industries, conducted a 20-year feud regarding their inheritance from their father. William and Frederick asserted that their brothers Charles and David stole from them $2.3 billion when they sold their shares of Koch Industries. The four siblings of the energy conglomerate king finally reconciled in 2001. 

John Lennon

Death: December 8, 1980

Length of Dispute: 16 years

Julian Lennon, son of icon John Lennon and his first wife Cynthia, became estranged from his father at the age of five after Yoko Ono came into the picture. Once his father was assassinated in 1980, it came as no surprise that Julian was absent from John’s will. Julian sued his father’s estate, worth around 220 million pounds, for compensation. After a long legal battle, he won in 1996 what he disclosed was a meager fortune compared to what his father had left Ono.

Bob Marley

Death: May 11, 1981

Length of Dispute: 10 years

Robert Nesta “Bob” Marley died in 1981 after suffering an acute bout of melanoma. Due to his Rastafarian faith and belief in reincarnation, Marley didn’t write a will. This started a bitter, antagonistic feud between wife Rita Marley and her late husband’s manager. The singer’s manager alleged, and later proved true, that Rita had forged Bob’s signature on a plethora of documents disguised as dated before his death, so that she could acquire the majority of his estate, royalty rights and money. Her fraudulent scheme, created in tandem with her lawyer and accountant, was brought to the attention of Florida courts and she soon lost control of the fortune. In 1991, however, the Jamaican Supreme Court took control of the case and determined that Rita and her children did, in fact, inherit the right to profit from Bob’s name, image and likeness.

Marilyn Monroe

Death: August 5, 1962

Length of Dispute: 7 years

Marilyn Monroe’s legacy and fortunes ended up in the hands of Anna Strasberg, a woman she had met only once. Following Monroe’s death in 1962 at aged 36, the star’s publicity rights and estate were left to her acting coach Lee Strasberg. When Lee passed away years later, his wife Anna attained complete control over the estate. In 2005 she sued photographers who used Monroe’s image for profit without permission. The battle lasted seven years. In 2012, a federal court of appeals ruled that Monroe’s estate was governed by New York, not California, meaning that anyone could in fact use her image for commercial purposes without compensating the heirs. Consequently anyone is now able to profit off of her likeness. 

What do all of these stories have in common?  Anyone can contest a Will, if the person believes there is enough money to be had.  With a properly worded and funded Trust, the above stories would have dramatically different endings, meaning the intentions of the person making the Trust would have been followed.

Call me to set up an appointment, so that your estate is protected from the ridiculousness and tragedy that death creates.

Bob

It seems there’s a shifting tide in the way wealthy Americans feel about transferring their financial wealth to their children. And the kids may not be ok with this.

While many financially wealthy parents do plan to leave a tidy financial inheritance to their children and / or grandchildren, there is also a clear, growing trend that “the kids need to work hard and make their own money.”

It used to be that parents felt obliged to leave their financial assets to their children, as well as their values. In fact, many of these parents sacrificed a great deal for their children and did not tend to “live it up” in their later years, to make sure they would indeed be able to leave a nice sum to their kids.

But many of the wealthy amongst the baby boomer generation have a much different attitude. They feel “I made it on my own; they can too.” In fact, they believe that their children might be harmed by being left a large inheritance. They believe that the children might best be prepared for life by being given solid values, a good education, and a more modest nest egg.

Maybe people are following the likes of Warren Buffet and Bill Gates: these super-rich guys plan to leave only a small fraction of their wealth to their children. A recent research study confirms this is indeed a trend. Conducted by U.S. Trust, the study found that less than half of wealthy parents thought it was important to leave their money to their kids.

The survey of 457 individuals, who each had $3 million or more in investable assets, concludes that more wealthy Americans want to spend their money on themselves while they can, then leave what’s left to charity, not just to their children.

Why?

Many of the survey respondents were baby boomers who sacrificed and struggled to make it on their own. Many built up successful businesses. But it also seems they are not all that confident that money they leave would do a great deal of good:

• 34% feel that their children would not be able to handle an inheritance
• 24% fear their kids would become lazy
• 20% believe their kids would make poor decisions
• 20% feel their kids would squander the money
• 13% believe their children would be taken advantage of by outsiders

There are many variations on the theme: some wealthy families will leave some assets to their children and the rest to charity, or perhaps leave a lot to their grandchildren and none to their kids. Of course, the use of trusts can also ameliorate some of the concerns expressed by those in the survey

However, there’s little doubt – as evidenced not only by the U.S. Trust survey but also from talking to estate planning and asset management firms across the U.S. – that many baby boomers have a much different take on transferring wealth as compared to previous generations.

How do you feel about it?

Bob

Recently, I explored how clients could leave assets to their children and grandchildren. I explored the use of 529 plans, as well as the use of trusts. This week, I’ll explore other ways clients can choose to leave a legacy.

If clients want to leave a financial legacy, other than to their family, they are typically considering charitable options. There are lots of ways to leave assets to charity. But, the first step is choosing which charity, i.e., “to whom” do they want to leave the asset? In other words, do they wish to leave the assets to their own private foundation or do they wish to leave assets to an established charity?

Once the identity of the charity is chosen, clients can leave assets to charity during their life or at death. So, the next question to ask is “when.” Of course, if they leave money during lifetime, they get an income tax deduction which they would not get at death. This can enable the client to gift with a lower after-tax cost. Either way, the assets will not be included in their taxable estate for estate tax purposes.

The next question is “what.” What assets do the clients wish to leave to the selected charity? If they are leaving the asset during lifetime, a charitable remainder trust may be a great option for highly appreciated assets which they wish to liquidate. Also, appreciated assets can be a good lifetime gift, as long as the client will be getting a deduction for the full fair market value of the asset. If the asset will not be left until death, assets which comprise Income in Respect to a Decedent (“IRD”), like an IRA, make attractive assets to leave to charity. IRD assets do not get a step-up in basis at the death of the taxpayer. But, a charity will not pay tax on the IRD asset, while a non-charitable beneficiary would pay tax. Thus, an IRD asset is worth more to a charity than it is to a non-charitable beneficiary.

The final question is “how.” Should the assets be given, outright or in a trust? If the assets will be left in trust, what sort of trust should be used; a CRAT, a CRUT, a CLAT, a CLUT, etc.? A trust may allow for continued control by the family.

A client can leave or build a charitable legacy in a variety of ways. There is not just one “right” way to leave or build a charitable legacy. As we’ve seen, you can help your client maximize the financial benefit of their charitable act, depending upon the asset and timing of the donation. Regardless of how the legacy is left or built, the client can know that they are truly making a difference, long after their decision is made.

Aside from his genius, Steve Jobs had two characteristics that have been repeatedly highlighted by the press since his death: he was a meticulous planner and he was an intensely private man with regard to his personal life.

Not surprisingly, these qualities appear to have combined in Jobs’ estate planning. Unlike other well-known people who have died in recent years, it looks like Steve Jobs had a solid plan in place to accomplish his final wishes. We’ll probably never know the details of those final wishes, because part of his plan was to guard his family’s privacy zealously.

I have written here of how other famously wealthy people, such as Bill Gates and Warren Buffet, have decided to leave a legacy through philanthropy. While interested in charitable endeavors, Steve Jobs reportedly declined to make such a public commitment. He preferred to keep his private life just that, private.

That’s why, at first blush, it seems out of character that the fiercely private Jobs gave Walter Isaacson carte blanche to write his authorized biography. Until you learn the reason behind Jobs’ decision. According to Isaacson, Steve Jobs approved of the biography and participated in a series of interviews with the author because he wanted his kids to know him and understand why he had not always been there for them. In other words, always the planner, Jobs used the biography as one way to leave his kids a priceless, non-financial legacy.

Most people do not approach estate planning in the big-picture way Steve Jobs did. I would be willing to bet that many estate planning attorneys do not encourage their clients to take a broad view when it comes to leaving a non-financial legacy. Until very recently, this approach just has not been on the radar screen for most estate planning attorneys.

I venture beyond financial issues to counsel clients on how to use planning strategies to make sure their kids and grandkids know them and encourage them to leave a non-financial legacy.

Call me to set up a time where we can meet to discuss estate planning.

It is a widely held belief that one of the most unfortunate circumstances in modern society is to have a tax return selected for audit by the Internal Revenue Service (Service). Estate tax returns are subject to audit and adjustment like any other tax return.

Under current law, an estate tax return must be filed by the Personal Representative of the estate of every U.S. citizen or resident whose gross estate exceeds $675,000. The return must be filed no later than 9 months after the date of the decedent’s death unless an extension has been granted.

As a general rule, the Service has 3 years from the date the return is filed to assess additional tax against the estate. It is possible, then, that the estate may not receive an estate tax closing letter from the Service until nearly 4 years after the decedent’s death. In practice, however, the Service will usually, within 9 to 15 months from the date it receives the return, send the estate either an estate tax closing letter or a notice that the return will be audited.

For estates over $3,000,000, the marginal rate of tax is 55 percent. Hence, the larger the estate, the more money the government will earn on any adjustments in the government’s favor resulting from audit. Once a return is selected for audit, it is assigned to an estate tax attorney within the Service for examination. The purpose of the examination is to verify the basis for the tax computation, as well as the legality of the positions taken on the return. If the estate and the auditor reach agreement, an estate tax closing letter will be issued once payment of any additional liability is received and processed.

If an agreement cannot be reached at the audit level, the estate will receive a letter from the Service setting forth the proposed adjustments and informing the estate of their appeal rights. The estate will then have 30 days to file a written appeal with the Administrative Appeals Office of the Service. The appeals office is independent of the office in which the case is audited. The appeals office function is to assess the hazards of litigation. Hence, the appeals office generally has authority to settle cases based on potential litigating postures and the likely outcome of a trial. If the estate cannot resolve the case at the appeals office, a statutory notice of deficiency will be issued to the estate offering the estate the opportunity to file a petition with the United States Tax Court.

The estate can, within 90 days, file a petition with the United States Tax Court if the estate has not paid the tax. Alternatively, the estate can pay the tax, file a claim for refund, and if the Service does not act on the claim for refund within 6 months, file a refund suit in the United States District Court or the Court of Federal Claims.

Due to the heavy case load in the federal court system, however, a final verdict in a tax trial may take 2 to 3 years. Consequently, an estate could be opened for many years after the decedent’s death because of the lack of an estate tax closing letter from the service.

The process of resolving disputes with the Service is fraught with obstacles. Choices made at the audit level could, in fact, be detrimental at a later stage in the process. Therefore, if the Service notifies you that a return is being selected for audit, it is extremely important to consult a tax professional to assist you.