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Estates & Trusts
Charles Burdoin, CPA
Today's Topics
• Fiduciary income tax-form 1041-income tax return
for estates and trusts
• Fiduciary accounting-principal vs income
• Estate tax-tax on the right to transfer property at
death-transfer tax
Estate Work is Good Work
• Can be done outside of tax season
• Higher level professional work = higher fees
• Short attention span-finish project and wait for
next one
Building an Estate Practice
• Greatest source of estate work is your clients
• Start a dialogue "Do you have a will or trust?"
• Lawyers
• Colleagues
• Capacity-age of majority & sound mind
• Must be in writing
• Need witnesses
• Holographic in some states
Will
Terms
• Probate (a thing proved): gather assets, pay debts,
distribute property
• Testate: died with a will or trust
• Intestate: died without documents
• Executor: named as personal representative in will
Terms (continued)
• Administrator: appointed by court; same duties as
executor
• Trust: property sharing arrangement
• Beneficiary designation: assets pass without
administration
Revocable Living Trust
• Avoids probate, faster, cheaper, private
• Shift financial management of assets to a trustee
• Provides continuity in case of death or
incompetence
• Protect privacy of clients
Irrevocable Trusts
• Grantor gives up control and dominion
• Subject to gift tax on present value of assets
• Requires annual tax returns
Final Return
• Same standard deduction and exemption
•Must file if refund desired
•MFS-if must itemize, no standard deduction
•Must file if any tax on return
Form 1310 For Refunds
• Not required for married filing joint
• Not required for court-appointed fiduciary
• All others (adult children, successor trustee) must
use Form 1310
Income to Be Included on Final Return
• Include items of income actually or constructively
received before death
• Income received after death reported by
successors-in-interest
• Watch out for "bad" 1099's received next January-
will have to allocate
Wages Received After Death
• Reported on 1099-MISC, Box 3 under TIN of
successor-in-interest, not decedent
• If paid in year of death, reported in Boxes 3 & 5
of W-2 (FICA) only
• If paid in next calendar year: no FICA, just 1099
Special Provisions
• Capital losses and NOL's
• Passive activity interests
• Medical expenses
• Moving expenses
Fiduciary Accounting
• Tells fiduciary how much to distribute to income
beneficiary
• Tells how much to hold back for remainder
• Needed in computation of "income distribution
deduction"
Trust Properties
• Trust is a property-sharing arrangement
• Grantor (trustor or settlor) drafts document
• Trustee takes legal title on behalf of benes
• Beneficial title rests with beneficiaries
• Beneficiaries: income or remainder
Interest Expense
• Investment-same as individual
• Personal-no
• Business-yes
• Sec. 6166-no; Sec. 6163-yes
Complex Trusts
• Can retain income at trust level
• Can distribute capital gain
• Can distribute principal
• Can make discretionary distributions
• Can deduct contributions
Contributions
• Must be complex trust
• Must be mentioned in trust document
• Must be paid from income
Business Losses
• Schedule C or F on Form 1041
• Rental losses
• Casualty losses
• Business losses from K-1
• Losses on sale of business assets
Expenses Subject to 2%
• Investment advice
• Custody or management of property
• Gift tax preparation fees
• Defense of claims by creditors
• Section 212: maintenance, insurance, gardening, etc.
Income in Respect of a Decedent
• Taxable on Form 706
• Taxable again on Form 1041/1040
• No "step-up" in basis
• Inheriting income, not asset
IRD Issues
• 691(c) deduction only when "double taxed"
• Keep track of "basis"
• Can take deduction prior to 706 filing
• Alert beneficiaries to the deduction
• Include all info and calculation when taking deduction
Income Distribution Deduction
• Income passed to beneficiaries deductible by trust
or estate so not taxed twice
• Income retained by estate or complex trust is
taxable on Form 1041
• Distribution deduction for income, not assets
Simple vs. Complex or Estate
• Simple must distribute income-only tax is c/g
• Complex must distribute if no tax on 1041
• Use 65-day rule to clear out income for the year
• Fiduciary returns hit top bracket @ $12,300
• Don't forget NIIT-3.8%!
Tier System
• Tier one is from current income req. to be dist.
• Tier two is anything else
• Tier one recipients pay tax first
What's New
• New strategies emphasize including assets on 706 for basis
step-up
• New Form 708-Covered expatriates
• Form 8971-Consistent basis reporting
• Final regulations on portability
Deadlines!!
• Final 1040-usual date (April 15th)
• Estate-15th day of 4th month (any fiscal year elected)
• Trusts-April 15th (unless 645 election)
• 706-nine months
• Disclaimer- nine months, no extension
• Section 6163-nine months, no extensions
Valuation of Property
• General rule: date of death, FMV, highest and best
use
• May be valued at sales price if close to DOD
• Alternate valuation date
• Special-use valuation
New 706 vs Old
• Portability sections
• Abbreviated reporting
• Schedule PC-protective claim
• Proof of personal rep's status
Elections
• Alternate valuation date-section 2032
• Special-use valuation-section 2032(a)
• Pay tax in installments-section 6166
• Postponement of tax on remainder interests-
section 6163
Schedule A
• Describe property in sufficient detail so IRS can locate & inspect
• Use valuation expert; one who will go to tax court
• Be sure appraiser knows he's appraising for estate tax, not re-if
• Be alert to zoning, easements and other restrictions
Schedule B
• Value securities at the average high & low on DOD
• Worthless securities should be listed and valued @ zero
• Use www.treasurydirect.gov for government bonds
Schedule F
• All 706's will have Sch. F because of questions
• For any assets that don't have their own schedules
• In general, list personal property at a minimum
Schedule G
• For transfers during decedent's life under sections 2035-2038
• Decedent's property held in revocable living trust
• Gift tax paid by decedent or spouse within 3 years of death
• Don't duplicate items here on Line 4 of Form 706
Post-Mortem Elections
• Elections and opportunities by executor
• Estate tax savings
• Income tax savings
• We will be involved at this point
Alternate Valuation-Section 2032
• Same date used for all property-it's all or nothing
• Can only be used if there is a tax and the tax goes down
• Property sold or distributed is valued at date sold
• Assets whose bases are reduced by 2032 will result in higher
capital gains to beneficiaries
Special Use Valuation-Section 2032A
• Property used in farming or closely-held business can be
valued at less than "highest and best" use
• Many requirements to use this benefit
• Total decrease in value cannot exceed $1.1 million for 2015
and $1.11 million for 2016
Qualified Conservation Easement
• Election made on timely filed return and is irrevocable
• Inter vivos, testamentary, or post-mortem
• Exclusion is impairment of value and charity enforces
easement
• Easement must not be junior to a mortgage
Extension of Time to Pay Section 6166
• At least 35% of adjusted gross estate must be farm land or
closely-held business; deferred tax is same per cent
• Only trade or business assets-not passive
• Interest only for 5 years, 1st of ten installments in 5th year
• Reduced interest rate on 1st $1.47M; 1st $1,480 in 2016
Marital Deduction
• Bypass trust or portability
• Watch out for intra-family disputes when there is a second
marriage
• Portability for everyone??!!
Disclaimers
• In writing to executor within 9 months-no extensions
• Disclaimant must not have received property-except for year-
of-death RMD.
• Disclaimant does not designate recipient. It's goes where it
would have gone if disclaimant had predeceased decedent
• Keep beneficiary designations up to date