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By William Downs, CPA
The two most important words in estate planning are “record keeping.”
A proposal by President Biden would limit the step-up of basis upon inheritance of property from a decedent. Here in California, home prices have been skyrocketing. So, if you or your clients have owned a family home for decades located in a desirable metropolitan area of the state, that home by itself could have a $1 million potential gain.
Whether it actually has that much of a gain will require some careful record keeping. The additions and improvements made over many years could be important to minimize taxable gain.
The proposed change in tax law isn’t the only reason to pay attention to record keeping. Say a married couple have lived in their home for decades, in a desirable neighborhood in California. The value of their home has likely increased by more than the $500,000 income tax exclusion available on sale of their home. If our hypothetical couple wish to sell their home and move to a different type of living arrangement, they would do better if they have records of the upgrades and expansions made to their home over the decades.
Home basis is just one example calling for reliable record keeping. Your clients can do their families a favor by keeping good records and letting at least one person know where to look in case they are not available to provide details and explanations.
Eventually, we may all have to have someone step in to handle our affairs. A good idea is to make a list of all the things—big and little—that would be helpful to know. Little things would include online subscriptions that automatically renew with a charge to a credit card or access to a Facebook account. Bigger things would include online access to bank accounts and brokerage accounts. Or a crypto currency wallet, which may need to include some instructions, as well as username and password.
Estate Planning May Include Gifting
For now, there’s a very significant estate and gift tax exemption: $11,580,000 for 2020, $11.7 million for 2021 and continuing up with inflation adjustment until 2025. For 2026, without additional legislation, the exemption will drop by about half. For those with wealth near or above those current amounts, gifting makes sense.
There have been proposals to reduce the exemption to $3.5 million, which would certainly encourage gifting as well.
Save the Unused Exemption on a First-to-die
Many times it’s recommended to file a Form 706 upon the passing of the first spouse to salvage unused exemptions. With more than $11 million of exemption available now, that exemption could disappear and a surviving spouse’s own exemption could be all that is available on his or her passing in future years. A deceased spouses unused exemption (DSUE) can be established and retained by the filing of an estate tax return (Form 706) after the first spouse has passed away. This filing is a special type of filing, as it’s not required if there is no taxable estate and no estate tax. The form is filed specifically to establish the DSUE amount.
The 706 must be filed timely, and if you used provisions of Rev. Proc. 2017-34, the due date is two years after the date of death. Then there is the issue of whether the surviving spouse and the family wish to employ the CPA professional to prepare the Form 706. Those forms take time, which means the fee will be an issue. There’s a “streamlined” method of preparation spelled out in the Form 706 instructions that may save some time. Under that method, descriptions of assets are entered on the various schedules with no dollar figures associated. The preparer would prepare complete worksheets with the dollar amounts, which would be necessary to keep track of the updated basis of assets. The overall total gets entered on lines 10 and 23 of Part 5 of the 706 return, with the amount rounded up to the next $250,000.
These types of 706 filings are particularly valuable right now, while the exemption is high.
If one spouse has passed away, the trusted CPA is in position to help the surviving spouse make the decision on whether to proceed with filing a Form 706 return. The potential savings in future estate tax might be quite significant.
William Downs, CPA is partner at William H. Downs CPA and 2021-22 Chair of the CalCPA Estate Planning Committee.