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Are Assets That May Not Be Assets Still Taxable When Your Client Dies?

Always err on the side of caution. File timely returns when estate matters are not clearly ascertainable and base valuations on what a willing buyer would pay a willing seller.

By Hyman G. Darling

Key Takeaways:

  • Whenever a client has assets that are not quite ascertainable as of date of death, the estate tax return should be filed in a timely manner and an amended return should be filed within the statute of limitations.
  • Fair market value of some assets can be tricky to determine upon your client’s death. The IRS says value is based on what a “willing buyer pays a willing seller.”
  • Always err on the side of caution when there is an estate matter that is not clearly ascertainable. File a timely return, which is normally due nine months from the date of death.


Remember the case in which a Bernie Madoff client, who had invested approximately $4.8 million in an investment account with the disgraced financier, died in 2006? At that time, the exemption for estate taxes was considerably less than the current exemption ($5.34 million). As required, the estate filed a timely tax return and also paid the estate tax on the assets held with Mr. Madoff’s company. When the Madoff Ponzi scheme was brought to light, the estate then filed a supplemental/amended federal estate tax return claiming a refund on the assets that possibly were not going to be returned, as the estate claimed that they had a “zero” value.

As anticipated, the IRS filed a motion for summary judgment claiming that under the fair market value standard, at the time of death the assets had a value based on the fair market value as of that date. They claimed that the standard to determine how assets are valued is based on what a “willing buyer pays a willing seller.” At that time, no one knew that the assets were part of an elaborate Ponzi scheme and may have had a lesser value than reported.

The IRS’s motion was denied, and currently this matter may go to trial. At the trial, it will probably be the taxpayer’s burden to prove that that a lower value should be listed on the return, but NOT a zero value, as there may be some value in the account.

In this particular case, the estate had made some withdrawals, and therefore the decedent probably did have some value in the account. The bankruptcy court has allowed certain people to be declared as net winners and some as net losers based on whether those people deposited more money into the account than they got back or got back less money than they deposited. There are also claims against many of the net winners, including this particular estate, by the trustee in bankruptcy.

There is no question that in every case in which there are assets that are not quite ascertainable as of date of death, at least the estate tax return should be filed in a timely manner and then an amended return should also be filed in a timely manner within the statute of limitations. This way, you and your client can attempt to reduce the value or, in some cases, report an increase in the value if it is appropriate to do so.

Conclusion

These matters get quite complex, and is not easy to merely speculate on what the value is, but when there is a matter that is not ascertainable, it is always best to err on the side of being careful and file the timely return, which is normally due nine months from date of death, as well as have all taxes paid at that time.


About the Author

Attorney Hyman G. Darling is chairman of Bacon Wilson, P.C.’s Estate Planning and Elder Law departments. His areas of expertise include all areas of estate planning, probate, and elder law. He is a frequent lecturer on various estate-planning and elder-law topics at local and national levels, and he hosts a popular estate-planning blog at bwlaw.blogs.com/estate_planning_bits. He may be reached at (413) 781-0560 or HDarling@BaconWilson.com