Estate Tax Planning


U.S. Income Tax Return for Estates and Trusts

Unfortunately, the time will come when someone dies.  For tax purposes this can be a trying and confusing time.  For the majority of Americans, their estates are small and less than $5,450,000.  If the estate of a person is less than $5,450,000, in most cases there will be no estate taxes due.  Usually, the calculation is based on the fair market value of the assets on the date of death or six months after.  Normally, the personal representative will have an inventory of the decedent’s assets shortly after death.  However, if extensive gifting has taken place before death, then a worksheet should be done to see if the lifetime exclusion has been reduced.  If a sizable amount of gifting has taken placed beyond the normal annual exclusion for gifting, a portion of the estate may be subject to be taxed.  The estates larger than $5,450,000, form 706 (United States Estate Tax Return ) is normally filed within 9 months of death.

However, a fiduciary tax may be due on the estate of the increase due to income since death.  The tax form used for this report is a 1041 fiduciary tax return.  After death the income from interest income, dividends, sale of assets, pension liquidations, IRA distributions and other forms of income should be listed on this tax return.  The related expenses from the administration of the estate are offset against this income.  If there is a net taxable income, then the estate can either paid the tax or distribute the net income to the beneficiary to pay the tax.

If a trust is involved, then many of the same calculations will be performed.  Both the estate fiduciary return and the trust fiduciary tax return should be coordinated to avoid double reporting of income and expenses.  Depending on the nature of the will and trust documents on how complex these filings can become.

The final 1040 for the individual should be filed for the year in which death occurred if the income exceeds the requirements set by the Internal Revenue Service.  I usually recommend filing a return in order to start the statute of limitations and to make sure that the Internal Revenue Service does not send out inquiries several years later.  A copy of the death certificate is recommended to be sent with the final tax return.  The final tax return should show all the income received up to the point of death.

Please consult your local CPA for more information on this matter.  If you are a client or future client, please contact us at 727-733-1026.

The Advantages of Having a Living Revocable Trust

There are advantages of having a living revocable trust. One advantage is while you are alive; you just can use your social security number for reporting taxable the income from the trust. The Internal Revenue Service made it easy to report the since many individuals so not want anything that is too complex. Once the trust is set up, the individual takes the document to the bank and the various financial institutions to place the assets into the trust. A copy of the trust is left with the financial institution.

The reason a copy is left with the financial institution is so that the trustee can access the account. The trustee does not have to be the owner of the account. This makes accessing the account much easier for the successor trustee to access the account. In cases of death or disability, the successor trustee can access the account to pay bills or move assets to protect them according to the trust document. The successor trustee does not require court appointment and therefore can begin their duties upon death of the owner of the trust or disability of the owner.

Please consult your local CPA for more information on this matter.  If you are a client or future client, please contact us at 727-733-1026.