How to Prepare to File Tax Returns for a Decedent, Estate, or Trust

By Margaret Atkins Munro and Kathryn A. Murphy from Estate and Trust Administration For Dummies

Income taxes are a main focus of estate or trust administration. As the administrator, you must prepare the decedent’s final Form 1040 and the trust or estate’s Form 1041. To prepare the decedent’s final income tax returns and the tax returns of an estate or trust, first obtain a federal tax ID number. Then choose a tax year-end.

Obtain a federal tax ID number

Before you start any tax return, you must have a federal taxpayer identification number (or TIN). If you’re preparing the decedent’s final Form 1040, just use his or her Social Security Number (or SSN).

However, if you’re thinking ahead to filing that first return for the decedent’s estate or for a trust, you need a TIN before you can begin. Although individuals use their SSN, estates and trusts must each have their own EIN in order to file any tax returns. Apply for the estate or trust’s TIN by using Form SS-4, Application for Employer Identification Number, which you can get from any IRS office or on the IRS website.

If you need to open even one bank or brokerage account for an estate, you have to apply for a TIN to do so. Applying alerts the IRS that a new trust or estate exists.

Choose a tax year-end

Although Congress created a general rule in 1986 that all individuals, businesses, and most trusts had to use December 31 as their tax year-end, every rule has exceptions. An estate may choose the last day of any month as its tax year-end, provided the first year doesn’t include more than 12 months.

Depending on how much income the estate stands to receive (and when), using a different year-end can substantially reduce the total income tax bite, especially if the estate’s administration will take more than 12 months from start to finish. If you haven’t already, create a schedule of when and how much income you expect the estate to receive.

Because estates and trusts reach the highest tax bracket very quickly, we recommend that you split the initial flow of income into two years, if possible. Whether the estate is paying the tax, or distributions to the beneficiaries means they’ll be responsible for the income tax bill. Splitting income into two years can ease the overall income tax burden for both the estate and the heirs.

You’ll be asked to declare a year-end when applying for the trust or estate’s EIN, but your decision isn’t absolutely final until you file that first income tax return and put the year-end on the top of page 1.

If you choose a year-end other than December 31, you’re responsible for correctly accounting for all income received because the 1099s you receive from banks, brokerages, and others may not accurately reflect income for the tax year. Only your good recordkeeping will produce an accurate tax return.