[IMGCAP(1)]Many CPAs are involved with estate planning and need to determine the assets and liabilities of a client.

Clients often create limited liability companies for tax and creditor rights protection. In fact there are well over 3 million partnership returns filed with the IRS each year. LLCs make up the majority of the partnership returns that are filed (over 60 percent).

CPAs who prepare the Forms 1065 each year for a client may or may not be involved in estate planning.

If they do estate planning for clients that have interests in LLCs, then they may have to become much more involved regarding the formation of the client’s LLC for a number of significant reasons. The CPA should determine whether or not there are buyout provisions provided for the operating agreement for the members of the LLC in the event of the death, retirement or disability of a member.

I have found a number of real-world problems over the years with LLC operating agreements:

(1) The LLC operating agreement can’t be found.

(2) The LLC operating agreement fails to provide for any buyout provisions if a member dies, becomes disabled or retires.

(3) The CPA does not ask the client for a copy of the LLC operating agreement.

(4) The CPA does not ask for a copy of the partnership agreement when a general or limited partnership is involved.

(5) The CPA feels the attorney should be responsible for the preparation of the operating or partnership agreement and doesn’t discuss it with the client or attorney.

An attorney who prepared the operating or partnership agreement may be long gone and the CPA does not pursue the issue. Unfortunately, in many cases, the CPA is just involved in the IRS compliance regarding the preparation of the Form 1065.

The real problem is the CPA does not even mention the need for the client to look into whether or not there is an operating agreement or partnership agreement in place.

I have found in a number of cases that the assets that should be titled in the name of the LLC are still titled in the individual members names. This is bad news for the client who may have creditor rights problems.

In the event there is no operating agreement in place for an LLC, nor any partnership agreement for a general or limited partnership, then significant tax and legal problems may be triggered. Even if there are such agreements in place, they may not cover the death, disability or retirement of a member of the LLC or a partner of the limited or general partnership.

In many cases, the default language in the state law will make the estate of a deceased member of an LLC a mere assignee. An assignee has no voting rights, but only the right to receive distributions and allocations of profits and losses that the decedent had when he or she was a member. Another real problem lies in the fact that the laws in each state are periodically updated and often dramatically affect the LLC, the limited partnership and the general partnership.

If there is a buy/sell agreement in place that is realistic in terms of valuation, then there should be no problem in valuing the interest that the decedent had in the entity at the time of his or her death. However, if there is no buy/sell agreement in place, then generally the state law kicks in by default. In that case the value of the decedent’s interest can then be a nightmare.

In my opinion, the CPA should always obtain copies of the existing operating agreement, limited partnership and general partnership agreement and check with the current attorney for the entity as to whether or not the state laws have changed regarding the entity involved.

This is not a joke. I recently discovered that the laws were significantly changed years ago for a client who had many partnerships in a particular state. Under the revised partnership law for that particular jurisdiction, significant legal and litigation rights were created. No one advised the client about these changes.

In many cases, it may take many years to resolve a buyout dispute between the estate of a deceased partner or member of the partnership or LLC. This can present a real problem in the event that an accurate federal or state estate tax return is required to be timely filed.

Upon the death of a member of an LLC, then he or she is no longer a member. The same is true for a partner who dies. However, it is possible in most cases to provide in the operating agreement that the deceased member’s estate shall automatically become a substitute member or that a deceased partner’s estate shall automatically become a substitute partner. Provisions can be made in most cases that the member’s interest or partnership interest can be bequeathed to certain family members and become substituted members or substituted partners. However these provisions cannot be used when the entities consist of only licensed professionals.

In addition there are new IRS disclosure rules that apply if the estate meets certain threshold requirements. These rules apply for estate tax returns filed after July 31, 2015.

In such cases the executor of the estate or another person required to file a Form 706 must file a timely Form 8971 (Information Regarding Beneficiaries Acquiring Property from a Decedent), together with copies of all completed Schedule As with the IRS. In addition only the Schedule A applicable to the particular beneficiary must be timely provided to such beneficiary.

According to the IRS, the Form 8971 (including all attached Schedule As) must be filed with the IRS and only the Schedule A is to be provided to the beneficiary listed on the Schedule A no later than the earlier of:

• the date that is 30 days after the date on which Form 706 is required to be filed (including extensions) with the IRS; or

• the date that is 30 days after the date Form 706 is filed with the IRS.

If the value of the decedent’s interest is litigated in a civil court (not involving the IRS) with the LLC or partnership regarding valuation issues and is ultimately settled for a value that differs from the Form 706 value, then a supplemental estate tax return must be filed if that settlement happens before the statute of limitation expires for the assessment of the federal estate tax. The same rule would apply if a civil court (not involving the IRS) renders a decision.

According to the IRS, the executor or other person required to file Form 8971 and the Schedule As must then file a supplemental Form 8971 together with the affected Schedule As with the IRS and provide an updated supplemental Schedule A with each affected beneficiary no later than 30 days after filing the supplemental Form 706.

If the settlement of the litigation or the court decision (not involving the IRS) takes place after the statute of limitations for the assessment of the federal estate tax has expired, then no adjustment to the valuation of the entity is permitted.

Civil litigation with the IRS regarding the estate is subject to different rules regarding the determination of the estate assets and its value for both federal estate tax liability and the supplemental disclosure rules.

If the executor or person required to file the estate tax return does not report any changes based on any new information discovered before the expiration of the statute of limitations for the assessment of the federal estate tax has expired on a supplemental federal estate tax return, then no adjustment to the basis of the property involved can be considered.

In addition, if information regarding newly discovered assets is found after the statute of limitations for the assessment of the federal estate tax has expired, then no adjustment to the basis of the property involved can be considered.

Seymour Goldberg, CPA, MBA, JD, a senior partner in the law firm of Goldberg & Goldberg, P.C., in Melville, N.Y., is Professor Emeritus of Law and Taxation at Long Island University. He has taught many CLE and CPE programs at the state and national level as well as CLE courses for the New York State Bar Association, City Bar Center for Continuing Legal Education, NJICLE, local bar associations and law schools. He has been quoted in major publications including The New York Times, Forbes and The Wall Street Journal and has been interviewed on CNN, CNBC and CBS. Mr. Goldberg is a member of the IRS Long Island Tax Practitioner Liaison Committee and the Northeast Pension Liaison Group. He was formerly associated with the Internal Revenue Service and has been involved in conducting continuing education outreach programs with the IRS. He is the Chairman of the Estate & Financial Planning Committee of the Suffolk Chapter of the New York Society of CPAs. He is the author of Inherited IRAs: What Every Practitioner Must Know, 2015 Edition, IRA Guide to IRS Compliance Issues, Can You Trust Your Trust? What You Need to Know about the Advantages and Disadvantages of Trusts and Trust Compliance Issues and Fundamentals of Trust Accounting Income and Principal Rules Under the Revised New York State Laws, available on Amazon.com and the American Bar Association at shopaba.org.

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