There is plenty written on the importance of advisers, and why individuals should use them. But little is written on the importance of an adviser during an IRS estate audit. A good adviser can help connect the dots, provide documentation, and communicate to clients what the process is going to be like and how they will help the attorney prepare for what can be a long and tiresome process.
It is not uncommon to help an attorney or CPA gather the required information for filing a 706 for the deceased, but when it comes to helping support the documentation when the IRS asks for it takes another level of help. Admittedly, most advisers do not or are not able to help with this type of work. So if you find one that does, stick with them. Recently a situation arose where two deceased parents were not able to be represented by the same attorney during the audit, but the work done for the family occurred all within the attorney’s practice. While a second attorney was retained to help with the other audit, it fell on the adviser to provide a history to the otherwise complex strategies that the heirs did not have a good grasp on at all.
We spent many hours gathering supporting statements, explaining SCINs, and reproducing sales contracts for a very thorough IRS audit. Doing these actions, on top of managing assets, while the clients are working and traveling, requires a thorough understanding of the techniques used, the location of sensitive information, and a continuity that only comes with a fiduciary working with a family for many years.
During an estate audit, the strategy to managing the assets changes. Once the audit begins the end of the estate is usually in sight, so the timeframe is shorter and the potential to need capital for a settlement increases. Planning for this while simultaneously minimizing capital gains for the estate, while keeping the deceased’s goal of certain funding requirements is a delicate balancing act. It is often best to look at the standard deviation of the assets to minimize large swings, but to implement general portfolio theory that looks for non-correlated assets as a way to do so. Realizing that any transactions that occur will change how the portfolio will act during general market hours, so it may require a Monte Carlo scenario to off set these moves. Non-standard assets like interests in private equity funds, privately held securities and LLC’s also need to be evaluated as most have redemption periods that require advance notice, or require the institution to be the market maker for the position.
Advisers are a great resource to help rebuild a payment schedule for a note, or to work with the client CPA to gather all the gift tax returns filed during the client’s life along with income tax returns too, if needed. It is not uncommon for an IRS agent to consider prior received inheritances, so having an adviser who can help build out a family tree can be of great use, since there is a short time frame on most of these requests.
In a complicated estate audit, most clients will show up with a box of statements and papers and just want to drop them off, but this is hardly the most efficient way to complete what is often a detailed response to a lengthy IRS request letter. For both the attorney and the client it really is in their best interest to have someone who can help gather, organize and support them both. It is not the intent of any adviser to replace the attorney, but to complement the attorney and help gather what is needed on what always seems to be a tight deadline.
This article is for informational purposes only and does not constitute a complete description of our investment advisery services. No information contained in this article constitutes tax, legal, insurance or investment advice. This article should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. Viewers of this article will not be considered clients of TBH Global Asset Management LLC just by virtue of access to this article. ADV available upon request. Travis S. Anderson