Hamill: Why estate tax knowledge still matters for tax professionals

My first tax job was with an international certified public accountant firm in Philadelphia. I was the first person hired with a master’s degree.

Two of the 12 courses in the program dealt with estate and gift taxes. Others were corporate tax, partnership tax, tax research and real estate tax.

A partner in our Philadelphia tax practice was the firm specialist in estate planning. We did work for Philadelphia clients and for other offices throughout the firm.

When I transferred to Phoenix, I continued heavy work in estate planning. In those days, 8% of all decedents had estates large enough to potentially pay estate tax.

Today, it is less than a quarter of 1%. The proposals to extend the 2017 tax law would actually reduce that number a bit.

All of this means that most graduate education in tax no longer teaches estate and gift tax. Why bother if it is such a minor part of a tax practice?

Undergraduate courses in taxation used to cover estate and gift tax as a part of the second tax course.

Many such courses have dropped the estate and gift section in favor of state and international taxes, or just more discussion of other issues.

The result is that, unlike the old days, most new graduates have no training at all in estate and gift taxes.

This, of course, is intentional for the reasons noted above. But is it a good idea? Well, it’s what employers want, which we hear is a good thing.

There is another angle to this lack of estate and gift training that is ignored.

Yes, only the rare person worries about paying estate tax. But everyone’s heirs care about the tax consequences of the property they inherit.

The tax law allows inherited property to get a reset to its tax basis to the fair market value.

A regular person who inherits a stock portfolio worth $450,000 that mom purchased for $200,000 can avoid income tax on the $250,000 appreciation.

The same is true for inherited real estate. The income tax avoidance is important to the regular person.

So, how does this regular person get this income tax basis reset? Isn’t it simply that the person inherits the property?

Well, not really. The law says that they must have “(acquired) the property from a decedent.”

Yes, you inherited the property! But as Inigo Montoya said in “The Princess Bride,” “I do not think (that word) means what you think it means.”

The tax law interpretation of “acquired” focuses on whether the property was included in the gross estate of the decedent.

That is, the justification for the income tax basis adjustment is the property was potentially subject to the estate tax.

The estate tax definition of what is in the gross estate is quite broad. It includes property owned at death. No surprise there.

It includes property that used to be owned by the decedent, for which the decedent continued to maintain some control after a lifetime transfer.

For example, if I transfer property to a trust for my children’s benefit, but I retain the right to the income during my life, that property is in my gross estate.

I did not own the property at death. But my form of transfer allowed me to continue to benefit from the property.

Gross estate includes some property that the decedent never owned. Huh? Well, what if I could have owned the property if I wanted to?

This is called having a general power of appointment. Say I am the trustee of a trust for your benefit. The terms allow me to take the property if I choose.

Even if I don’t take the property, the tax law says I owned that property at my death. Rules like this are designed so I can’t avoid the estate tax with clever wording of powers.

When the estate tax is not an issue, these broad estate inclusion rules can be helpful. They can allow heirs to successfully adjust the income tax basis.

All of this means that tax professionals still must learn the estate tax rules. If not for the estate tax, for the income tax.

The well-trained professional can help a client successfully get a tax basis bump. The poorly trained would just say, “inconceivable!”

Avoid poorly trained professionals. That word does not mean what they think it means.