Oct. 2009

Top 5 Estate Tax Solutions 2009

Help Navigating Estate 'Murkiness'

By George Lawton

Preparing estate tax returns adds layers of complexity to the tax preparation process. For 1041 returns, CPAs are faced with a maze of esoteric processes on how to allocate income and disbursements between a trust and one or more beneficiaries. Estate tax preparation software applications help CPAs overcome this complexity, but they still must have the experience necessary to produce accurate returns.

"The main issues with estate and trust preparation is there are more judgment calls in estate and gift returns than for individual returns," says Patricia Williamson, CPA, department manager at Philip Vogel & Co. PC. "The lines you draw on where to place income, who it is taxable to, and the type of income is murkier."

Williamson says she likes ProSystem fx Fiduciary because it details the allocations between the trust and the beneficiary, which helps reduce the 'murkiness.'

Part of the challenge lies in the variety of trusts and estates and different ways of accounting for their financial elements. Indeed, "the No. 1 issue in managing estate and trust returns is the fairly broad variability of the elements that go into the process," says Dave Olsen, CPA, director of product management, CCH Small Firm Services. "It makes a big difference whether it is a revocable or irrevocable trust, and whether there are foreign grantors or beneficiaries involved. The sources of information can be broader and in some ways, more complex to deal with as well."

Furthermore, the terms lawyers and CPAs use differ. "The trust documents deal a lot with accounting income, which from a CPA point of view, is book income," says Jo Ann Cummings, CPA, product manager of ProSystem fx Tax at CCH. "It takes effort to translate what the trust document says into a tax situation. Sometimes it is not always clear to the CPA on how that might or might not happen."

Doing estate taxes using related software in conjunction with a tax preparation software suite simplifies the tax prep process. For example, ProSystem fx Fiduciary can be set up with direct links to estate tax research and integrated with a document storage system.

"Integration and ease of workflow is a big deal for preparers," Cummings says. "Each year, you run across more complicated estate returns. The complexity of compliance law makes it more significant and more critical. You cannot just do it by hand anymore."

Overrides Common
Although software applications can help reduce the grunt work, it is important for CPAs to be familiar with what the numbers should look like. Most of the users interviewed noted that overrides of the numbers automatically generated by these tax programs were more common for estate taxes. To help improve the process of finding problems, these packages have features for going back to the original calculations and flipping between workbooks and the final forms.

"Estate returns are challenging because we have to do overrides," Williamson says. "We can do overrides after we determine what they should be. ProSystem fx has a help screen that determines the suggested way to do something. But at the end of the day, it is up to the judgment of the CPA who is handling it."

Although Larry Crutcher, PC, CPA, only does a few estate returns a year, he says that he has to know what numbers he expects to get:

"TaxWise provides a very nice flow through that helps me to verify that the results match what I need to get out of the process. I know from experience that I can't just enter items and expect that what comes out is perfect. I have to check it against what I know it should be."

Quick Answers
Most of the tools reviewed this issue focus on finished returns, but NumberCruncher takes a different track. It provides CPAs with instant answers to financial questions about trusts and estates.

"NumberCruncher does the specific, discrete calculations that one needs in order to make a decision as to whether to use a particular strategy or not," says Steven Liemberg, senior partner at Liemberg & LeClair.

"It is mostly used in the planning stages," he says. "It is not designed to do a tax return, though it can be used to check numbers on a return. It is designed to provide instant answers and give you what you need to make a quick analysis of a particular tool or technique."

NumberCruncher helps CPAs calculate numbers and get authoritative answers quickly. For example, clients might ask about deductions for charitable remaindered trusts and code section entitlements. With NumberCruncher, CPAs can answer these questions within minutes as opposed to hours.

Easier, But Not Easy
Ultimately, there is no easy way to prepare estate returns. Although software solutions help, CPAs must rely on their judgment and experience to ensure that they produce accurate returns.

"Some of the young CPAs think that I'm an old schooler in terms of the way I do the returns," Crutcher says. "But you have to look at the whole flow to ensure it makes sense; because if you don't, you can be hurt."