Practical Estate Administration Tips

Unlike many audit and tax services, estate administration does not start from a prior-years blueprint. To minimize time, maximize client satisfaction and enhance profitability, a highly organized set of systems and procedures to provide estate administration services is invaluable.

Estate administration should be handled only by individuals with extensive specialized training and experience. Although they may be assisted by other tax, audit or accounting service staff on limited aspects of an engagement, they should prepare and review Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, and undertake many related functions, or supervise such activities.

Tips

Every tax adviser should have an estate master forms directory in a computer database (accessible by all staff, if applicable). Reusable forms should include the following:

1.  A spreadsheet for administering estate engagements, to monitor status, deadlines and critical steps.

2.  An engagement letter.

3.  A consent form to request and obtain confidential information from third parties and releasing third parties from liability for complying with such a request.

4.  Initial document request. These should be customized based on an initial review of a clients income tax file, permanent file and other documents.

5.  A spreadsheet table of contents for a clients workpapers. For larger engagements, a numbering system should be used to locate each workpaper. The actual workpaper files are assembled using colored divider pages between each section noted in the contents page, to locate information easily.

6.  A spreadsheet copy of a table of contents page that precedes the numbered exhibits attached to each estate return. The exhibits expected to be used in every engagement should be shown first (e.g., death certificate, will, request for prompt determination and discharge and revocable trust). The remainder of the forms should be customized to suit each client, for attachments such as appraisals, life insurance statements, etc.

7.  A copy of the firms internal estate tax return preparation/review checklist. A good starting point is the AICPA Tax Divisions checklist, modified to the state in which the practice is concentrated.

8.  A one-page document titled Request for Determination of Tax and Discharge of Personal Representatives and Trustees for any revocable trusts under Regs. Sec. 20.2204-1 and -2. This should be attached to all estate returns, as it shortens the statute of limitations to nine months for the IRS to audit and make changes to the returns. Note: If a taxpayer does not receive a closing letter from the Service within six months after filing Form 706, the tax adviser should call an estate tax examiner in a local IRS office, which may help in expediting the letter.

9.  A formatted standard transmittal/filing instruction letter, which is very useful for communicating additional matters (not involving Form 706) to clients. Examples include requests to brokers to update their records to reflect the proper stepped-up basis of assets (based on the estate valuation schedules that a tax adviser can provide); arranging the transfer of assets previously owned jointly to a surviving spouses revocable trust; ensuring that title insurance on real property, homeowners insurance and vehicle insurance will continue if assets are retitled in the name of the survivors revocable trust; and many other details. (This may also be an ideal time to generate additional consulting work, by offering to discuss estate planning with the surviving spouse or other family members.)

10. Generation-skipping transfer tax exemption allocation for use with Form 706, Schedule R, Generation-Skipping Transfer Tax.

11. A spreadsheet schedule for calculating the decedents share of income tax liabilities and refunds from a joint return.

12. A spreadsheet schedule for calculating estate tax for income in respect of the decedent. This allows information to be communicated easily to the beneficiaries or heirs permitted to claim a deduction of the estate tax on their own income tax returns. Estate tax resulting from inclusion in an estate of IRAs, accrued income on securities and similar types of assets taxable later to the recipient for income tax purposes, may result in a significant deduction to the recipient.

13. A spreadsheet for calculating trustee fees.

14. A spreadsheet for calculating trust termination fees.

15. A spreadsheet schedule summarizing the entire estate. This should show overall how the assets pass (whether by terms of trusts, joint ownership, beneficiary designations, etc.). The spreadsheet provides a clear picture of how all heirs share in the property to be distributed, which can be a very effective client communication tool when dealing with a complex estate. It can also be used to ensure proper funding of subsequent trusts and to explain to clients the effect of using disclaimers.

How many times have tax advisers reviewed a Form 706 prepared by another and found it difficult to determine which assets pass to which heir? While not required by the IRS, advisers should indicate how each and every asset and debt included in a Form 706 is owned. This makes it much easier to determine (sometimes years later) how assets passed.

16. Security valuation spreadsheet. As most brokers do not provide accurate date of death security values (including accrued income), tax advisers should enter all security data into an estate valuation software program that prepares reports in accordance with IRS presentation requirements. This allows an easy determination of the alternate valuation amounts, by merely accounting for any sales that occurred during the six-month alternate valuation period. The software automatically revalues those assets for which specific sale information has not been entered. This is a tremendous timesaver for estates with large security portfolios. The schedules generated by the estate valuation software should be attached to Form 706 as an exhibit.

Conclusion

These tips can assist tax advisers in developing and operating an effective and lucrative estate and trust administration practice.

From Larry W. McGowen, CPA, Huber, Ring, Helm & Co., P.C., St. Louis, MO