Lewes CPA
officeProgar & Company, P.A.
Certified Public Accounting services for businesses and individuals
Planning to prevent loss of tax attributes at death (MS Word)
Planning to prevent loss of tax attributes at death (.pdf)
Planning to prevent loss of tax attributes at death
Dear Reader:
Based on our prior communications or from information gleaned from
other sources, you no doubt are well aware of how proper planning
during life can reduce or eliminate Federal or state estate taxes or
state inheritance tax to the benefit of your heirs. But what you may
not know and why I am writing this letter is to inform you that many
important income tax considerations come into play in “planning for
the inevitable.” You need to understand how various income tax
attributes are affected at death, steps you can take during life to
use those tax attributes that would be lost at death, the factors
involved in transferring tax attributes to your estate or
beneficiaries where you have such choices, and other special rules
that arise when a person dies.
In many cases, your executor or other personal representative will
be in a position, after appropriate consultation with us or another
professional advisor, to take actions that will save taxes on your
final income tax return or save income taxes for your estate or
beneficiaries. But, in other cases, the personal representative will
be locked into choices you make during life and won't have the
latitude to take actions that will save the most taxes for you, your
estate or your beneficiaries. Therefore, it is imperative that you
have at least a basic understanding of the various choices and the
kinds of planning you can take during life to optimize savings for
all parties involved. Here are the more widely applicable topics to
consider:
Choice of executor.
The primary duties of your executor or other personal representative
will be to collect your assets, pay your creditors, and distribute
the remaining assets to your heirs or other beneficiaries. The
executor also will have to file various types of tax returns and
make important choices on them. Therefore, it is imperative that you
choose someone who is both trustworthy and competent to serve as
your executor or personal representative.
Income in respect of a decedent (IRD).
Income that was due to a person but wasn't paid before his or her
death will be taxed to his or her estate or beneficiaries. With
proper planning, charitable-minded clients can wipe out the income
tax bite on IRD.
Partners and S shareholders.
Clients in this category need to know how they will be taxed on
their share of the entity's income in the year of death and how
their successors will be taxed.
Tax-favored medical accounts.
An individual who has a health saving account, Archer medical
savings account, or Medicare Advantage medical savings account is in
a position to choose whether the account's assets will be taxed in
his final return or to a named beneficiary or will escape tax if he
is married and names his spouse as beneficiary.
Holders of Series E or EE savings bonds.
Choices can be made before and after death to minimize taxes on the
interest on these bonds.
Compensatory options.
Individuals who have received compensatory options, statutory or
nonstatutory, face various issues with respect to transferring them
at death and the ultimate tax consequences to beneficiaries who
receive the options. For example, incentive stock options are
accorded favorable tax treatment but this treatment is lost for
disqualifying dispositions of the stock acquired on the option
exercise. A transfer at death isn't a disqualifying disposition even
though it might have been if made while alive.
IRAs and retirement plans.
Owners of individual retirement accounts (IRAs) and participants in
company-sponsored qualified retirement plans need to understand how
their benefits will be taxed at and after death. For example, IRA
distributions from an inherited traditional IRA are taxable to the
beneficiary in the year received as IRD up to the
IRA-owner-decedent's taxable IRA balance at death. If the estate is
large enough, the IRA funds also will be subject to estate tax but
the recipient of the IRA distributions will get a special income tax
deduction for the estate tax attributable to the IRA.
Deductions.
A host of issues come into play with respect to deductions at death.
For example, unused net operating losses carryovers and capital loss
carryovers expire if not used on an individual's final return—they
can't be used on the estate's income tax return. Certain deductions
may be allowed to recipients of IRD. Unpaid medical bills at death
are subject to a special deduction choice for an executor.
This is just a sampling of the many different income tax rules that
affect an individual at death. With proper planning during life, you
can help to reduce taxes for the benefit of your heirs. You can also
arm your executor with the key information he will need to make the
best choices for them.
Please contact us if you would like to learn more about any of these
items or other items that could impact your estate and your heirs.