PPC1 Probate & Tax common mistakes
PPC1 Probate & Tax · Understand the traps and how to avoid them.
Applying the wrong intestacy distribution scheme, such as giving the entire estate to the surviving spouse when children from a prior marriage exist, or ignoring the distinction between per capita and per stirpes distribution.
Candidates rely on general assumptions about spousal shares or forget that intestacy statutes vary by jurisdiction and often give the spouse only a fractional share when the decedent had children from another relationship. They also confuse per capita and per stirpes when dividing among descendants.
What to do instead
Memorize the default intestacy rules for the tested jurisdiction, especially the spouse's share when there are children from a prior marriage. For every intestacy question, draw a family tree and apply the statute step by step, explicitly labeling distributions as per capita or per stirpes.
Misidentifying which assets are included in the gross estate for federal estate tax purposes, such as omitting life insurance proceeds from a policy the decedent owned, or including assets held in an irrevocable trust the decedent did not control.
Candidates conflate probate assets with taxable assets, forgetting that the gross estate includes non-probate property like life insurance, jointly held property, and certain transfers. They also overlook that only retained powers or interests trigger inclusion for irrevocable trusts.
What to do instead
Create a checklist of inclusion categories under IRC §§2033–2046: probate assets, jointly held property, life insurance (if incidents of ownership), retained interests, powers of appointment, and transfers within three years. For each asset, ask: did the decedent have an ownership interest or control at death?
Using the wrong basis for inherited property, such as carrying over the decedent's basis instead of using the fair market value at date of death (or alternate valuation date), or failing to adjust basis for community property.
Candidates confuse gift basis rules (carryover) with estate basis rules (step-up). They also forget that community property gets a full step-up for both halves, while common law joint property may get only a partial step-up.
What to do instead
Memorize the general rule: inherited property takes a basis equal to FMV at date of death or alternate valuation date (IRC §1014). For gifts, basis carries over. For joint property, only the decedent's portion is stepped up unless community property. Practice with scenarios involving gifts and joint tenancy.
Incorrectly computing the estate tax deduction for administration expenses, such as deducting expenses on both the estate tax return (Form 706) and the fiduciary income tax return (Form 1041) without making the required election, or misclassifying expenses as administration expenses when they are actually selling expenses.
Candidates overlook the waiver requirement: administration expenses can be deducted on either the estate tax return or the fiduciary income tax return, but not both. They also fail to distinguish between expenses of administration and expenses of sale, which may reduce the sales price rather than be deductible.
What to do instead
Remember that administration expenses are deductible on Form 706 under §2053 or on Form 1041 under §642(g), but only if the estate files a statement waiving the estate tax deduction for those items. For selling expenses, treat them as offsets to the amount realized on the sale, not as administration expenses.
Missing or miscalculating the portability election, such as failing to file a timely Form 706 to elect portability, or incorrectly computing the deceased spousal unused exclusion (DSUE) amount by not adjusting for taxable gifts made by the deceased spouse.
Candidates assume portability is automatic or that it only applies to large estates. They also forget that the DSUE is based on the deceased spouse's remaining exclusion after considering all taxable gifts, and that a timely filed estate tax return is required even if no tax is due.
What to do instead
Memorize that portability requires an affirmative election on a timely filed Form 706 (including extensions) and that the DSUE is the lesser of the basic exclusion amount or the excess of the exclusion over the deceased spouse's taxable gifts. Practice computing DSUE with and without prior gifts.
Misapplying the annual exclusion and lifetime exemption for gifts, such as treating a gift to a non-citizen spouse as eligible for the annual exclusion, or failing to split gifts properly on a joint return.
Candidates forget that the annual exclusion does not apply to gifts to non-citizen spouses (though a higher annual exclusion applies) and that gift splitting requires both spouses to consent and file Form 709. They also overlook that gifts of future interests do not qualify for the annual exclusion.
What to do instead
Review the rules: annual exclusion (indexed) applies to present interest gifts; no annual exclusion for future interests; special annual exclusion for non-citizen spouses; gift splitting requires consent and a timely Form 709. Practice with scenarios involving gifts to spouses and trusts.
Failing to file the correct fiduciary income tax return (Form 1041) or misreporting distributable net income (DNI), such as treating all distributions as deductible without considering the tier system or the separate share rule.
Candidates are unfamiliar with the tier system for distributions and the concept of DNI, which limits the deduction for distributions. They also overlook the separate share rule, which can affect how income is allocated among beneficiaries.
What to do instead
Study the tier system: first-tier distributions (required) are deductible up to DNI; second-tier distributions are deductible only to the extent of remaining DNI. Understand that DNI is computed similarly to taxable income but with adjustments. Practice allocating income among beneficiaries using the separate share rule.
Missing critical filing deadlines, such as the estate tax return (Form 706) due nine months after death, the fiduciary income tax return (Form 1041) due April 15, or the gift tax return (Form 709) due April 15, and failing to request extensions properly.
Candidates rely on general tax deadlines (April 15) and forget the special nine-month deadline for estate tax returns. They also may not know that extensions for Form 706 (up to six months) and Form 1041 (up to six months) are available, but that an extension to file is not an extension to pay.
What to do instead
Create a timeline chart: Form 706 due nine months after death (automatic six-month extension with Form 4768); Form 1041 due April 15 for calendar-year estates (extendable); Form 709 due April 15. Note that portability election requires timely filing. Always check for filing requirements and extensions.
Breaching ethical duties by not recognizing conflicts of interest, such as representing both the executor and a beneficiary with adverse interests, or failing to maintain confidentiality when communicating with beneficiaries.
Candidates may not appreciate that the fiduciary's interests can conflict with beneficiaries' interests, and that the attorney represents the fiduciary, not the estate or beneficiaries. They also may not understand the duty of confidentiality and the need for informed consent.
What to do instead
Review the MRPC rules on conflicts (1.7, 1.9) and confidentiality (1.6). In estate administration, the attorney's client is the fiduciary. If a conflict arises, obtain informed consent or decline representation. Communicate clearly that the attorney does not represent beneficiaries individually.
Incorrectly computing the marital deduction, such as taking a deduction for property passing to a non-citizen spouse without a qualified domestic trust (QDOT), or failing to reduce the deduction for death taxes payable from the marital share.
Candidates forget the special rules for non-citizen spouses and the requirement that the marital deduction is limited to the net value of property passing to the spouse. They also overlook that the deduction is reduced by any estate tax payable from the marital share.
What to do instead
Memorize that the marital deduction is generally unlimited for property passing to a surviving spouse who is a U.S. citizen, but for non-citizen spouses, a QDOT is required. The deduction is the net value of the property after reducing for death taxes and administration expenses payable from that share. Practice with scenarios involving QDOTs and tax clauses.