Estate Tax Questions

[ajkroy]

What is the name of your state? FL

I have an unusual problem, and I thank you in advance for any advice. My father died with a rather large estate in May of 2006. Nearly all of it is real estate. We have several lawyers and accountants, but I have been refused their contact information by the executrix because she says they charge the estate every time someone calls them and she doesn't want to "waste" the money. I am a beneficiary with a strained relationship with the executrix and would like to verify what I am being told is correct.

We currently have 3 out of five properties on the market and are literally seeing NO action. The accountant is assessing our taxes based upon the highest appraisal of each property...even though they are listed at far below the assessed values and we still aren't getting offers. We are literally under the gun because we have a sizable tax bill due next month and will have to resort to obtaining a loan to pay it off (This is only after MUCH convincing that we can't simply get an "extension" to wait to pay the tax; according to the IRS website, an extension is just for filing paperwork and all monies are due nine months after the date of death. Please correct me if I am wrong).

1) Does the IRS ever refund tax if it is based on a much higher price than we actually receive?

2) Would the interest on the loan used to pay off the tax be deductible in any way?

3) If I were to retain an attorney to represent my interests, should it be a Florida attorney (I live in NH)?

4) (I know this is a long shot, but I have to ask) Is there a way to extend the time allotted by the IRS to pay the tax? Is there a special circumstance that we can apply for because the market is in the toilet? As it is, we would have to fire-sale several pieces in order to pay off the loan...which means that Uncle Sam ends up getting a significantly larger piece of the proceeds than what they should. We would not sell ANY of the properties until the market stabilized, if it weren't for this bill looming over us.

I appreciate any help or advice you can offer.

[tranquility]

1) Does the IRS ever refund tax if it is based on a much higher price than we actually receive?

No. You must appropriately value the estate property per IRS rules. While a arms-length bona fide sale near death can be an appropriate valuation, you don't have that here. It is possible to use an alternative valuation date for all the property. See your own tax/estate attorney and have him recommend this to the executor/administrator and mention their duty to you as beneficiary.

2) Would the interest on the loan used to pay off the tax be deductible in any way?

No.

3) If I were to retain an attorney to represent my interests, should it be a Florida attorney (I live in NH)?

That is best for many reasons. However, any qualified attorney would be all you need to advise on federal tax issues.

4) (I know this is a long shot, but I have to ask) Is there a way to extend the time allotted by the IRS to pay the tax? Is there a special circumstance that we can apply for because the market is in the toilet? As it is, we would have to fire-sale several pieces in order to pay off the loan...which means that Uncle Sam ends up getting a significantly larger piece of the proceeds than what they should. We would not sell ANY of the properties until the market stabilized, if it weren't for this bill looming over us.

Depending on the facts, some in similiar situations use the ability to defer some estate taxes on family-owned businesses. If the property was income property and the deceased actually worked on the property the estate may qualify for the deferral. It is a fact-based query and a truly rich person would probably not qualify (as his involvement would not be enough), but you said you were looking for a long-shot.

[LdiJ]

The only thing that I am going to add is that its probably in your best interest to have your own representation (and yes, it would need to be an FL attorney) if things between you and the executrix are strained, and she is trying to avoid you communicating with the legal and tax professionals handling the estate.

[ajkroy]

Thank you both for such prompt replies. I will retain my own counsel in order to see that not only my rights are protected, but also to make certain that my liabilities are minimized. I don't want to go to jail if this gets mishandled!

Tranquility: I understand about the alternative date for valuation. We have already been told that we can use an alternate date. On our first appraisal, the appraiser thought we wanted an approximate value of each property at the time of Dad's death, which was just before the downswing in the real estate market. The second appraisals came through in December and are significantly higher than what they can reasonably fetch, but I guess that is just a bullet we will have to bite. The difference in the two appraisals equaled roughly $1 million, which translates to $430,000 in tax. Is there a limit of how many appraisals we can obtain?
Also, they were investment properties in that Dad had the intent of fixing each up, living in it for two years, and sell it to avoid capital gains while he moved on to the next. Not exactly a family business nor did he actually "work" the property (like a farm, maybe?). Thanks for the shot, anyway.

LdiJ: I agree with your assessment and will retain a lawyer of my own. It just seems so cliche to me that families fight about money and I didn't want to be one of those. But just today, I was reading on this site about people who lose their right to assert their rights if they don't do it in a timely manner. Kind of freaked me out and inspired me to start this thread. Thank you very much for your advice.

[abezon]

Why is the accountant using the highest appraisal? This is a textbook alternate valuation date case. Since the properties were placed on the market around 6 months after dad's death and hasn't sold after a reasonable time, it's obviously not worth the listed price. I'd think the max tax value would be the price you're trying to get now.

A high valuation is great when you're going to depreciate an asset or expect it to rise in value. However, once the estate hits the taxable estate zone, high valuations are not helpful. You're paying estate tax at 43% now, and capital gains tax at 15% whenever you sell. Example: Asset A is worth $500,000 on the alternate valuation date & was worth $1M when dad died. You plan to sell in about 2 years & expect to net $1.25M after expenses. If you use the date of death value, you pay $430,000k taxes now and $37,500 taxes at sale. If you use the alt valuation, you pay $215,000 now and $112,500 at sale.

BTW, "we" don't have to obtain a loan to pay the taxes; the executrix does. SHE is personally responsible for filing the estate return(s) & paying any taxes from the estate's assets. You have no responsibility to co-sign a loan for tax purposes. Your liability for the estate's taxes is limited to whatever assets you receive from the estate. I'd suggest you talk to the other heirs who are not estranged from the executrix to get their views. They might prevail upon her to recalculate the estate value, and sell the property least likely to rise dramatically in value to pay the taxes. Keep the rest until the market goes up.

[ajkroy]

Thank you, abezon, for your thoughtful response. I don't know why the accountant is using the highest appraisal; the only reason I even know that to be true is because the executrix quoted a figure for the tax and I dug out my calculator and performed the math myself. In addition to retaining a lawyer, I am going to demand to speak to the accountant myself.

You've hit the nail on the head with the valuations, and the scenario you described is exactly what I have been trying to explain to my sister (executrix) for so long. Thank you for putting it so succinctly.

Unfortunately, all of the other heirs are located in Canada and seem to think that what Uncle Sam doesn't know, won't hurt him. They want what will result in the most money for them.

I cannot tell you what a relief it is knowing that I am not personally responsible for any debts incurred by the estate. We are (scratch that, SHE is) obtaining a loan for nearly a million dollars and I don't expect that to be at prime. Does that also mean that I cannot be punished from the IRS if the tax is figured incorrectly?

I appreciate all that took the time to read and respond to my question. I feel better equipped to ask the questions I need and to be able to assert my rights.

[tranquility]

I cannot tell you what a relief it is knowing that I am not personally responsible for any debts incurred by the estate. We are (scratch that, SHE is) obtaining a loan for nearly a million dollars and I don't expect that to be at prime. Does that also mean that I cannot be punished from the IRS if the tax is figured incorrectly?

The estate is responsible for the tax. There have been some situations where the heirs must pay from the amount distributed. The executrix is a fool if she completely distributes before receiving a closing letter from the IRS as she could be responsible for any shortfall.

[abezon]

Perhaps you should present the math to the Canadian heirs. They should also know that any property sales will (a) be taxable in both the US and Canada, requiring them to claim foreign tax credits, and (b) capital losses produced by selling the land for a loss are not deductible against ordinary income on their Canadian returns. They also should keep in mind that the US dollar has strengthened in the last 6 months, so their basis for Canadian purposes will be a bit higher than yours. I.e., $1M US 6 months ago would have been about $1.10M CDN; $500,000 US now would be about $570,000. CDN.

Given exchange rate fluctuations, they could end up with a loss in the US and a taxable gain in Canada.