Chapter 12 Tax Considerations In Estate Administration

Chapter 12

Tax Considerations In Estate Administration

Wills, Trusts, and Estates Administration, 3eHerskowitz

© 2011, 2007, 2001 Pearson Higher Education,Upper Saddle River, NJ 07458. • All Rights

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Learning Objectives

Understand what responsibility the personal representative has concerning the decedent’s taxes

Understand how to complete the decedent’s final income tax return

Learn how to complete the estate’s federal tax return Learn how the decedent’s estate is valued Learn what may be done legally to minimize the estate’s

tax burden Learn how recent changes in federal tax laws affect estate

administration Learn a few post-mortem estate planning techniques



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Who Is Responsible For The Estate’s IRS Obligations?

The executor or administrator is responsible If the correct forms aren’t timely filed, the

representative will be personally liable for all penalties and back interest

But—there is IRS Publication 559! Pub. 559 details what forms need to be filed on the

decedent’s behalf Pub. 559 provides sample forms Pub. 559 has instructions on completing the forms



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Important IRS Forms To Be Filed First Form 56: Notice Concerning Fiduciary

Relationship identifies the decedent and the personal representative not required by the IRS, but filing this form makes

things easier; insures IRS knows who to contact Form SS-4: Application for Employer

Identification Number the estate, as a non-human entity, needs a tax ID number the tax ID number needs to be used on all later IRS

documents and correspondence



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The Decedent’s Final Income Tax Return Form 1040 is filed by the personal representative

The 1040 form for a decedent has two distinguishing features It should be marked “final return” the tax year should only include the time the

decedent was alive If a refund is due, file a Form 1310 If the estate pays the decedent’s medical expenses, they

may be deducted on the decedent’s income tax return Remember—state and local tax returns need to be filed

also (where there are state taxes)



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The Estate’s Federal Income Tax Return Income of the decedent accrued during life but

not paid before death flows to the estate

So, the estate must file a tax return to account for that income

IRS Form 1041



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The Estate Tax Return Federal and state estate tax returns must be filed IRS Form 706 must be filed within nine months of

the decedent’s death Five parts of Form 706

1) Information on decedent and personal representative2) Tax computation, which requires 19 schedules to be

completed3) Alternative valuation election4) “General information,” including decedent’s occupation,

marital status, etc.5) “Recapitulation,” a summary of the totals on the 19

schedules



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How Ugly Is The Gross Estate? The gross estate is the value of the property and

interest of the decedent, at death, including jointly held property, pensions, and life insurance

Usually fair market value (FMV) is used to value the estate’s assets

But…the representative can elect to value the property six month after decedent’s death (alternate valuation)

The alternate valuation must be used for all property if chosen

This could lead to a reduction in value if some of the properties’ value are falling

The taxable estate (adjusted gross estate) is calculated after exemptions and deduction offset the gross estate



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Form 706

Schedules Relating to AssetsA: Real EstateA-1: Real Estate Used in Farming

or Closely Held BusinessB: Stocks and BondsC: Mortgages, Notes and CashD: Insurance on Decedent’s LifeE: Jointly Held PropertyF: Other Miscellaneous PropertyG: Transfers During Decedent’s

LifeH: Powers of AppointmentI: Annuities

Schedules Relating to Deductions

K: Debts of the Decedent, and Mortgages and Liens

L: Net Losses During Administration and Expenses Incurred in Administering Property Not Subject to Claims

M: Bequests and the like to Surviving Spouse

N: Qualified ESOP Sales (this schedule is repealed!)

O: Charitable, Public, and Similar Gifts and Bequests



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Form 706 (continued)

Schedules Relating to Credits Credits directly reduce the amount of taxes that

are due by the decedent’s estate

P: Credit for Foreign Death Taxes

Q: Credit for Tax on Prior Transfers repealed – do not use

R: Generation-Skipping Transfer Tax

U: Qualified Conservation Easement Exclusion



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Unified Tax Credit Formerly, persons were entitled to a credit of $600,000

against their estate’s value, or 1.2 million for spouses, but it included gift and estate credits together

That changed in 2001 when federal tax laws were changed Under the present law, the gift and estate tax schedules are

separate The new law’s tax credit increases each year until January

1, 2010 when it becomes unlimited and someone can die without any estate tax. But…

January 1, 2011 the old unified credit system is scheduled to go into effect again and if you die then your credit is only $1 million each.

As of December 2010 Congress had not fixed this predicament



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Estate Valuation Exemptions Under The EGTRRA of 2001

Exclusion Amounts for Estate Transfers2001 $ 675,0002002-2003 $1,000,0002004-2005 $1,500,0002006-2008 $2,000,0002009 $3,500,0002010 the law is repealed2011 $1,000,000

If EGTRRA isn’t made permanent, living past

December 31, 2010 could be costly



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Top Gift and Estate Tax Rates for Years 2003 Through 2011

Year Bracket

2003 49%

2004 48%

2005 47%

2006 46%

2007 45%

2008 45%

2009 45%

2010 35% (Gift Tax Only)

2011 55%



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The Paralegal And Estate Valuation

Paralegals working in this area should have or learn accounting, computation, and considerable organization skills

Learning how to maneuver through IRS Form 706 and its 19 schedules is paramount

Learning how to organize and complete the various federal and state tax forms is also critical

Working with accountants, appraisers, tax experts, and financial institutions (not to mention the personal representative) is standard in this area of paralegal practice

Documents

Chapter 12 Tax Considerations In Estate Administration