Estates & Trusts - Checkpoint Learning · for estates and trusts ... Complex Trusts •Can retain income at trust level

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