The increase in the estate tax threshold to $5.25 million has significantly decreased the estates captured by the U.S. estate tax. The IRS reported that in 2012 at which time the estate tax threshold was $5.12 million only 9,400 estate tax returns (Form 706) were received. Nevertheless, for the estates valuable enough to require an estate tax return the scrutiny can be intense and an IRS audit should be anticipated. The Estate of Michal Jackson exemplifies the scrutiny applied to large estates and the subjectivity of valuations attached to hard to value assets.
The executors of Michal Jackson’s estate attached a surprisingly low value of approximately $7 million to his assets, but were still required to file an estate tax return. The Estate’s filing included valuations that were so low that they captured the attention of major news outlets. For example, the Estate attached a value of $2,105 to Michael Jackson’s likeness and valued his interest in a trust that owns part of the Beatles’ catalog at $0. To state that the IRS disagreed with the Estate’s valuation is an understatement as it valued the Estate at $1.125 billion. The Estate has argued that the valuations were provided by independent appraisers and that Michael Jackson’s image was hurt by allegations of child molestation and his lack of public appearances prior to his death. The posturing of the parties indicates that the matter will be decided by the Tax Court.
The low volume of estate tax returns filed and the relatively high value of such estates ensures that the IRS will apply greater scrutiny to the valuations contained therein and an audit should be assumed. Estates exceeding $5.25 million typically include assets that can be hard to value and are subject to interpretation. Such assets do not necessary have to be as unique as a Chagall, but instead can be as simple as a vehicle. For example, Michael Jackson’s Estate valued his vehicles at $91,600 whereas the IRS attached a value of $250,000. Such scrutiny and discrepancies demonstrate the need for high net worth individuals to carefully consider estate planning options prior to death.
WF and Collegen is one of the few firms that has reviewed and filed U.S. estate tax returns and is versed in U.S. estate planning. Accordingly, should you have any questions and/or comments regarding U.S. estate taxes and planning we encourage you to contact us.
