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AICPA Personal Financial Planning (PFP)
Bob Keebler on Avoiding Costly Estate Planning Mistakes
00:27:39
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- [00:00]
A
Foreign I'm Kari Sinnett and this is your Personal Financial Planning podcast. Bob Keebler has spent decades helping advisors navigate some of the most complex corners of the tax code. And in that work, he's seen a consistent pattern. Some of the biggest planning opportunities in estate planning are the easiest ones to miss. In today's episode, we're exploring three areas where technical details matter more than most advisors. Portability, elections, fiduciary income taxation during periods of market volatility, and the often misunderstood canon doctrine. Each of these can dramatically change the tax outcome of a plan, sometimes by millions of dollars. If you're a CPA financial planner who wants to sharpen your judgment in trust and estate taxation, this is a conversation you'll want to stay for. Welcome to the American Institute of CPAs Personal financial planning Podcast. I'm Carey Sinnott. As the leader of the PFS designation, the financial planning credential exclusively available to CPAs, my role is to keep you informed, educated and connected to a premier community of thought leaders delivering trusted financial planning. We explore the full range of planning topics and the current events shaping our profession. If you're an advisor, a CPA financial planner, or simply want an inside look at today's topic of portability, this podcast is for you. Joining us today is Estate Planning Authority Bob Keebler, who will help us unpack where the traps are, where the opportunities live, and how thoughtful advisors can make better decisions for the families they serve. Bob, welcome.
- [01:58]
B
Great to be here, Carrie.
- [02:00]
A
Bob, portability has been part of the estate tax landscape for, well, more than a decade, but many practitioners still struggle with how it fits into real world planning. When you strip away all the technical language, what are the core concepts advisors really need to understand about portability in order to use it effectively for clients? And let me just add on, probably just as important, where do you see practitioners misapplying portability or overlooking its strategic trade offs with tools like bypass trusts or Q tip structures?
- [02:41]
B
That's a great question. I think the number one goal of most CPAs is to identify after someone dies whether a federal estate tax return should be filed so we can obtain portability. So here's the rule. I die, my family files are returned, my wife now gets my exemption. Okay, assuming we didn't do a bypass
- [03:08]
A
trust, and that, Bob, is the essence of portability is my spouse giving gets my exemption. Correct?
- [03:16]
B
That's the essence of it. Now that's a very one dimensional thing because it only works for the exemption from the gift and estate tax that shifts to my Wife. The generation skipping transfer tax exemption does not shift to my wife. So when we want to use both exemptions, we'll go to a bypass trust. But many times CPAs are going to be confronted with somebody died, they didn't have an estate plan. Everything went to their spouse, let's call it the wife. And there's a chance when she dies, there'll be an estate tax at her death. And so what we want then is to move my $15 million estate tax exemption from me to my wife. And we do that by filing a timely federal estate tax return.
- [04:10]
A
Okay, and when you say timely, what is the amount of time you have to file it?
- [04:15]
B
We have nine months for my date of death to file, and then we can get a six month extension. Now, there's a nuanced rule. If we miss those two deadlines in my estate, I'm the decedent, was under the $15 million exemption for 2026. Then what's going to happen is we can file for up to five years after my death. And there's a specific RevProc 2022-32 that allows that to happen. But that's only five years, Carrie. If I miss the five years. So somebody died in 2011, their estate was below the exemption. They come to my office 15 years later and say, you know, Bob, we just need you to help my mom with some estate planning. My dad died 15 years ago. If I see that, then what we're going to do is see if we can get portability for that family. And provided the decedent husband's estate was below the exemption at the time, we can go to the government in a private letter ruling request and ask for portability. And that's a very critical thing.
- [05:32]
A
So you basically get three swings at portability. You know, the two normal times that you have to do the file a five year look back period. But Bob, if, if a client is working with a highly sophisticated CPA like yourself, then you, you can even ask for a private letter ruling, even if it's 15 years hence. Am I hearing you correctly?
- [05:59]
B
That's right. But to get into the private ruling, the original estate has to have been below the exemption at the time the person died.
- [06:08]
A
That's key at the time, because in 2026 it's 15 million. But you really have to roll back the years to make sure that the estate at the time was below the exemption at the time. Correct?
- [06:21]
B
Exactly. And what CPAs have to be careful of is somebody comes to see you during tax season. My husband died can you help me file his fight? You know, our final 1040 together? And by the way, his IRA went to me and we had a joint account and his insurance went to me. My lawyer says there's nothing else I need to do. Okay. Or the financial planner says there's nothing else we need to do. And it would be now. It's beyond the standard of care. I want to be very clear on this. If your engagement letter is to do the 1040, that's what you're there for. But you could ask the question, did anyone talk to you about filing an estate tax return so that when you die, we can protect not only your exemption, but your husband's exemption? Now, the real key, Kerry, is to imagine a different world where the exemption is no longer $15 million, but it's smaller. What we know about American politics is the pendulum will swing. No one would disagree with that. And let's say it swings in a direction where the exemption goes down. I want to have that 15 million of the Sioux from when somebody died in 2025 in case the exemption goes back to call it seven and a half or five.
- [07:49]
A
Yeah. If you look back in history, we're at other than times where it's been eliminated temporarily altogether. We are at a time in history where it's probably the highest it's ever been. And there have been times where it's been sub $1 million. And if a very strong movement happens away from the current administration, especially as it hits on taxation of wealthy people, we could see that in the near future. That's why it doesn't seem like it's urgent in this moment, but it is so important to plan ahead. And Bob, I liked how you were just laying out for a CPA in a normal engagement where you find out there's a spouse that has passed away about adding value on the table. Just like you said, it's not the standard of care. You don't have to do that. They just asked you to help with the tax compliance. But when you show your mettle by going, let me ask you this one question, suddenly you become the quarterback of the financial situation. That client is very likely to come back to you and ask further questions, and you get to deepen that engagement. So let me talk about a situation many advisors eventually encounter. So just like you're talking about, a client comes in, their spouse has passed away. Now, let's put that into the practitioner standpoint. How do we evaluate that situation? Perhaps they don't even mention to us that somebody has passed away specifically what potential remedies do we want to look at? We've talked about the five year look back and a private letter ruling. But are there simplified relief procedures and what should we be looking at before concluding that maybe portability opportunity has been lost? I loved what you talked about looking back even 15 years. Tell me, what's our simplified relief procedures? That should be our very first step.
- [10:00]
B
Well, if you haven't filed on time, we're beyond the extension, period. The first question is, was the decedent's estate above or below the exemption? And if the decedent estate was above, above the exemption, there's nothing you can do. There's no relief available, plain and simple.
- [10:23]
A
Even $1 over. I mean, is it just a bright line at exactly the amount?
- [10:29]
B
Yes. And the theory is if you were over the exemption, you had an affirmative responsibility to file a return. Failed to do that. The U.S. treasury Department, the IRS cannot give you relief to file late. Okay. They can't let you get back in the portability game. I have this right now with a gentleman. He died, they didn't file and we can't fix it, period.
- [10:56]
A
Okay.
- [10:57]
B
Because his estate was above the exemption.
- [11:00]
A
All right, so to you listening right now, that is so important, here is one of the deepest experts in the profession saying make sure you have this conversation as early and as often as you can, because if you are over the exemption and the client didn't do what they should, then it is lost forever. So with that idea, let me kind of circle back around to considering future portability. What are some of the strategic trade offs of tools that we might use like bypass trust or Q TIP structures for those listening who maybe have not delved deep into those particular tools?
- [11:45]
B
Well, there's three things to pay attention to in this equation. First is basis. Second is the estate tax. And third is the gst. So we have to examine all those. For example, if I was sure my wife wasn't going to have an estate tax, I would want everything in my estate to end up in her estate because it'd probably get a second step up in basis. Right? So that would be something on the basis side. Now, if a couple comes to see me and they only have one child, that child's doing fine. But this couple's worth, let's say, $30 million. I want to make absolutely certain that at the first death and then at the second death that we use every penny available of GST exemption so that when that child dies, generation two, the property falls to G3 and G4 and G5 without the further imposition of the tax. You know, everyone gets all focused on saving estate tax between G1 and G2, very important. But the real game is a long term game of tying up as much property as possible in trust. So it falls not from G1 to G2, but from G1 eventually to G4 or 5.
- [13:15]
A
And when we say G1, 2 and 3, we're talking about each generation. You probably know that already. And because we could encounter, really, we're trying to make sure that we don't unintentionally pay both estate tax and generation skipping tax. If we think about it in advance, we can prepare not only for G2, but Generation 3 and on down the line in trusts that are structured appropriately.
- [13:46]
B
Absolutely, Carrie. So what you have to keep in mind is do you want to get a second basis, step up at the second death, want to shelter dollars at the first death? How important is it to get property down to grandchildren? Somebody comes to see you, Carrie, and they have six children and you're not too worried about the grandkids. The kids are probably going to spend it. Anything divided by six is a small number.
- [14:09]
A
So true.
- [14:10]
B
But if they only have one child, it's going to be very important to focus on the gst. And this cannot be programmed robotically. This is something the CPA is going to have to talk to them about, understand their goals, and then determine what is the most important.
- [14:29]
A
Absolutely. And if you're listening right now and this conversation is meaningful to you, you can join us at the AICPA Personal Financial Planning Symposium, where the financial planning community comes together to learn from professions, thought leaders. Bob Keebler's workshop at the last symposium was like drinking from the technical knowledge fire hydrant. So come explore the ideas shaping the future of planning. Strengthen your technical judgment and connect with peers who share your commitment to delivering trusted advice and be part of the conversation shaping what's next for financial planners. Bob, you have mentioned that market volatility actually creates both traps and opportunities in fiduciary income taxation. And that's a fascinating idea because most practitioners think about volatility, often from an investment perspective. So from the standpoint of trusts and estate taxation, what are the key tax dynamics that volatility introduces? And how can advisors recognize when those moments create planning opportunities rather than unintended tax consequences?
- [15:53]
B
There's a lot of issues, but the issue that we want to recognize is an issue under a case from May of 1940 called the Kennan case. And here's what happens. Gary. My will says I leave that dollar amount, which results in no tax to a bypass trust. And I think everybody listening would agree that's probably $15 million. So I die and we fund it with $15 million of cash. Absolutely no problem, no gain or loss, because cash always has a basis of 100%. US currency always has a base of 100%. But we fund it. Let's change this up. We fund it with stock of a company that on the day I died, the company was at 50. And as the day you funded the trust carry, the company was at 125. It's going way up in value. That gain is called a Kennan gain. And when you fund a pecuniary bequest, a bequest of a specific dollar amount under the Kenin case, you're going to recognize, in this case, $75 of gain per share. Now, how would we avoid that? We might avoid it by funding it with different property and letting that appreciated security go to a residual trust. Okay, so you want to be very careful on the trust funding. Now, normally our friends, the trust and estate lawyers are going to be managing this process of funding these trusts. And the CPA wants to be able to work with them, sometimes spreadsheet out these gains so that everybody, the executor, the trustee, the lawyers all know what's going to happen depending upon the sequencing of how we fund things. Now, the other important thing for everybody to understand is that when you have a trust administration. So, Kerry, I get an A plus on funding my revocable trust. Nothing in the estate, and I die, my trust has a Ken and gain. I'm going to recognize the Ken and gain, but I'm not allowed to offset that Ken and gain with Ken in losses. And my experience is any diversified portfolio, a year after somebody dies is going to have gains and losses because we got to step up and then the market took it from there. Right? So if you had a probate estate, the person didn't have a revocable trust, under the the law, you're allowed to net gains and losses. Let's go back through this. An estate, you can net gains and losses. A trust, you cannot net gains and losses. Now, here's where it gets tricky. If you have a trust administration, remember, under the tax law, we can make an election called a 645election to treat the trust like an estate. And when we treat the trust like an estate, we're now back to netting. And this is way at the deep end of the pool.
- [19:20]
A
Well, I like swimming here with you, Bob, for Those listening, and mainly for me, let me just take a moment to make sure that we're on the same page. Because, you know, often when practitioners first encounter the canon doctor and might surprise them. So here's my simplified understanding. When a beneficiary is entitled to receive a specific dollar amount from a trust or an estate, satisfying that obligation with appreciated property can actually trigger a realization of a capital gain at the trust level. And so is that a fair way to frame the doctrine? Did I get it correctly?
- [20:01]
B
That's exactly correct.
- [20:03]
A
All right, so the way advisors think about avoiding unintended gain recognition when they're satisfying the monetary bequests is you have some choices around depending on is it all gain in there or are there gains and losses? Break that down again where you have the ability to to have that taxation pass through as though it's an estate. How do we do that?
- [20:35]
B
Sure.
- [20:36]
A
That's with a $645,000.
- [20:37]
B
Well, let's just go through the whole thing again. I'll give you some numbers.
- [20:40]
A
Great. Let's do it.
- [20:42]
B
$100 gain and a $99 loss. Okay. If you have an estate, a probate estate, you would net those and you'd have 100 minus 99. A gain of a dollar. Okay. Now, if you have a trust, no estate, no probate estate, no 645 election,
- [21:07]
A
you perfectly funded your trust just like we were talking about. All the money was in there and there is nothing in the estate, correct?
- [21:15]
B
Exactly. And you do not make the election. Now you have $100 gain which you have to pay tax on, but you have no loss, that loss becomes suspended. Okay? So you can't use that loss. Now, if you make the proper 645 election, the trust is treated as falling under the estate rules. And we're back to netting.
- [21:39]
A
Okay, thank you for walking us through that. I appreciate you taking the time with me and my simple understanding. I think that leads naturally to some related planning issues. So if beneficiaries hold a fractional or residual interest instead of a fixed dollar bequest, the tax consequences can look very different. So can you walk us through the mechanisms planners have available to manage the capital gains exposure and basis outcome in those situations? That's basically what you're talking about. Did I get that right?
- [22:20]
B
That's exactly correct. Let's just think about this. So if all you have is grandma dies, grandpa died many years ago, and grandma dies, and she just leaves everything to her daughter, no fancy trust, nothing, there's going to be no gain on Funding, the daughter is going to receive a carryover basis on the property that comes out of the estate. So if the property would have received a step up when grandma died, let's just say it's apple. On the day grandma dies, it was at 100. At the day we give it to the daughter, it's at 107. That's $7. No tax shift. And the daughter will get $100 basis from the estate. So that's a very easy thing. Now, if grandma's will said, I leave $200,000 to my sister Bertha and everything else to my daughter, if we can fund Bertha with cash, there's no gain on that. And then when everything goes to the daughter, she just takes grandma's stepped up basis.
- [23:25]
A
But the real world is there's six kids, four cousins. What are the particular strategies you've seen work? Well, when advisors are trying to balance fairness among beneficiary while also minimizing tax friction. How do we do that, Bob?
- [23:45]
B
Sure. No, I had a project a while back where very good lawyer and what she wanted was everybody to receive the same dollar amount. That's what the will said. But she says, bob, we have to slice and dice this so everybody receives approximately the same basis because some stuff had gone up and some stuff had gone down. There was no pecuniary funding, but she recognized that if Apple tripled in value and you got a million dollars with Apple, and I got a million dollars worth of bank of America, which has stayed the same, once you figure out that you got that low basis stock, you're going to realize you got a sharp stick in the eye. That's right.
- [24:27]
A
That's right. Or one of the beneficiaries just ended up with cash. You can take a million dollars of Apple, $1 million of bank of America and a million dollars in cash. On the surface, that feels like that's equal. Below the surface, with the embedded tax friction, it is not.
- [24:44]
B
And that's what people have to work very hard to understand.
- [24:47]
A
Okay, so that's where the real value comes in, is being able to explain that to our clients, being able to go, here's how we actually meaningfully get to fairness like most people want for their beneficiaries. And Bob, I so appreciate you taking the time to walk us through the details of portability, the Kennan doctrine, and really figuring out how to manage capital gains exposure in these situations. So thank you for sharing with our community listeners, as always. That is just amazing. And if you're an advisor listening to this podcast and you want to deliver premier financial planning with confidence, you might want to consider exploring everything the AICPA PFP section has to offer@aicpa.org Pfp for $269 a year, AICPA members get access to a library of technical guidance, webcasts, planning tools, and expert insights like Bob's, all designed to help you serve your client at the highest level. And this is near and dear to my heart. If you're a CPA with 3,000 hours of financial planning experience already, consider showing your expertise next to your name by obtaining the PFS credential@aicpa.org PFS this is our podcast together. If this episode helped you in your practice and I don't know how it wouldn't, I love Bob's technical details detail, but we'd be grateful if you hit subscribe, maybe even shared it with your professional community. With almost 600,000 downloads so far, the AICPA PFP podcast is helping to advance the profession one listener at a time. This has been Carrie Sinnett for the AICPA Personal Financial Planning Division. Thanks for listening, and until next time, keep earning trust through clarity, guiding with compassion, and delivering premier planning that elevates our profession.
- [26:57]
C
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