Margaret A. Munro

Cheat Sheet / Updated 04-11-2023

When you're ready to start saving for college, check out the different savings plans available so you pick the one best for you. Find out how you can cut wasteful spending from the budget to contribute more to your college saving plans, and be aware of provisions affecting the conditions of the 529 and Coverdell accounts.

Article / Updated 10-06-2022

As of January 1, 2013, an additional 3.8 percent tax was added to investment income in estates and trusts, thanks to provisions in the Health Care and Education Reconciliation Act of 2010. It's not an additional tax on every dollar, but only on the lesser of undistributed net investment income or any amount of adjusted gross income in excess of the highest tax bracket in any year. What sorts of investment income are included? Here’s a list: Annuities Capital gains (including the taxable portion of the gain on the sale of a personal residence) Dividends Interest Passive activity income from partnerships and Subchapter S corporations Rents and royalties You may have noticed that excluded from the list are tax-exempt interest, wages, and distributions from qualified pension, profit-sharing, and stock bonus plans — although you may still be tagged with this tax (or a portion of it) if the trust or estate’s overall income is too high. In addition, it’s important to note that the tax is on net investment income, not gross investment income. As a result, you can allocate portions of all your deductible expenses against the total income, and only pay the tax on the portion that remains that’s over the limit. All irrevocable trusts that are required to file Form 1041 are subject to this tax. However, the following trusts are apparently excluded: Grantor trusts (all income is reported by the grantor on his/her individual income tax return) Charitable foundations Charitable remainder trusts The rules surrounding how investment versus non-investment income are treated in Electing Small Business Trusts (ESBTs) are quite complex. If you’re the trustee of an ESBT, you should check with a competent tax advisor for assistance in this calculation. How to calculate the tax The UIMC tax was only intended to apply to high-income individuals, but the basic inequity in the size of the tax brackets for trusts and estates versus individuals created an unfriendly environment for estates and trusts, one where only quite small entities are exempt from paying it. The tax is imposed as an additional tax, after all other income taxes are levied. How to lessen the tax’s impact The UIMC tax is only imposed on taxable income in the trust or the estate over certain limits; if the income doesn’t reach those limits, there’s no additional tax. So, your job as executor, administrator, or trustee is to try to reduce the taxable income in the trust, while still behaving in a responsible way. You could, for example: Keep track of capital gains and plan to offset gains with some losses, if necessary. As executor, you should be aware of the size of the estate’s capital gains before the end of the year. If your gains are large but you own something that’s a less-than-sterling performer, sell it before the end of the tax year. The loss from that sale will reduce the total gains year-to-date. Invest in tax-exempt bonds and funds. Remember, tax-exempt income isn’t included in the threshold calculation, so it isn’t subject to the tax. Increase distributions to beneficiaries, but only if the trust instrument allows, and the distribution otherwise makes sense. You still have to follow the terms of the trust instrument and pay attention to the intentions of the settlor. But if you manage to pass out income to beneficiaries, that income will be included in their threshold calculation for this additional tax, not the trust or estate’s. Plan deductions to fall into years when income is higher and pay fewer deductible expenses in years the trust doesn’t perform as well or when more is distributed to the beneficiary. That’s assuming you can predict these things, which you may not be able to precisely. But if you normally pay a trustee fee in January, and your income for the prior year is high enough to trigger this tax, you may want to take the January fee in December of the prior year. There is no perfect solution here because the techniques that might enable the trust or estate to pay taxes at a lower rate may not be consistent with either the intent of the donor or what’s in the best interest of the beneficiary. It’s up to you to weigh all these possibilities and arrive at the most equitable solution. Whatever you do, be sure to jot down your reasoning and put it in the file. That way, should anyone ever question your decision, you’ll be able to remind yourself why; and next year, when faced with the same questions and the same dilemmas, you’ll be able to see what you did in the past and judge for yourself how well it worked.

Cheat Sheet / Updated 02-25-2022

As the fiduciary of an estate or trust, you have many duties, beginning immediately upon the decedent’s (deceased person’s) passing. You’re also guaranteed to become intimately familiar with a host of tax forms you may not have known existed.

Article / Updated 07-06-2021

If you are serving as executor for a loved one's estate, you’ll need to consider all the stuff you find in the decedent’s residence (or residences). Everything the decedent owned outright on their date of death is now under your care as executor; you’re responsible for making sure that you account for this stuff and that it ends up where it’s supposed to. Start by documenting their property You need to prepare a detailed inventory of all the personal and household items (being sure not to include any that belonged solely to the surviving spouse). This inventory is necessary to put a value on the items for the probate inventory and the Form 706. If the decedent has a surviving spouse, the personal and household items may be staying in place after the decedent’s death, except items the decedent specifically bequeaths (leaves by will) to others. If the decedent has no surviving spouse and the house needs to be dismantled, you still need to list and document everything and set aside anything of real value for later valuation. Don’t allow relatives and friends to rummage through the house and remove items until you’ve listed them, and if valuable, had them assessed. Seriously consider collecting all outstanding house keys immediately after the death or, even better, changing the locks as soon as is humanly possible. And if you don’t get to the house until after Cousin Hester has emptied it with a moving van because she knew the decedent wanted her to have “a few special things,” you’ll need to try your best to either retrieve the items removed or value what you remember and then charge that against Cousin Hester’s eventual share of the estate (if she has one). Determine what is valuable Usually, going through the personal and household property is an exercise in cleanup and clear-out. For most people, these tangible items, though they have great sentimental value, rarely have a correspondingly large cash value. Clothes are usually given to a local charity, and household furnishings either follow the same route or are disposed of in a yard sale or on eBay or Craigslist. Of course, not all the personal and household effects are intrinsically valueless, and your job is to separate out the wheat from the chaff. Just because something may not be your style doesn’t mean that it has no value; in fact, we’ve found that some of the most hideous pieces of furniture are among the most valuable! Regardless of your personal opinion, you need to carefully check the furniture, the knickknacks, the dishes, what’s hiding in the attic and the cellar, and the garage. If you’re familiar with the contents of the house before inventorying what’s there, you may want to obtain a recent valuation guide to get some idea of what you’re looking at and a rough idea of its value. Get help if you need to and take pictures If you know before you go into the house that it contains items of great value, you may also want to consider bringing an antiques dealer or auctioneer with you to help sort out what has value from what doesn’t. Make sure that you have witnesses with you when you inventory and dispose of the contents of the house. If you can, take many pictures or videos of each room before you move anything, so that, should someone question what was there when you opened the door, you'll have visual proof as well as third-party confirmation.

Article / Updated 03-13-2020

When you’re administering an estate or trust, you may have to prepare a seemingly endless array of tax returns. The following table lists some of the most popular ones. Check with your accountant or attorney if you have any questions. Federal Tax Form Number and Name When It’s Required When It’s Due Form 1040 U.S. Individual Income Tax Return When the decedent had income prior to death that hasn’t been reported. April 15 following the year of death; automatic 6-month extension of time to file provided Form 4868 is filed on or before April 15. Form 4868 doesn’t need to be filed if no tax is due; the extension is automatic. Form 1041 U.S. Income Tax Return for Estates and Trusts When the estate or trust receives income earned. 3-1/2 months after the year-end of the estate or trust; most trusts are required to use a December 31 year end, but estates may elect a fiscal year, provided the first fiscal year ends no later than 11 full months after the date of death. Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return For estates with assets more than a certain amount. Even though not every estate with assets over that amount will have an estate tax, those estates are still required to file. 9 months after date of death; due date may be extended by 6 additional months for cause. Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return Generally, if the decedent gave gifts to someone (other than his or her spouse) totaling more than $14,000 in calendar year 2013, or if the decedent was splitting gifts with a surviving spouse who made the gifts, and the gifts haven’t yet been reported. April 15 of the year following the year the gift was made. Automatic 6-month extension of time to file provided Form 4868 is filed on or before April 15 for taxpayer’s Form 1040. Form 1310 Statement of Person Claiming Refund Due a Deceased Person If a tax refund is due a decedent on his or her Form 1040 (whether final or any prior year), but he or she has no surviving spouse or court-appointed representative, the person requesting the refund must complete and file Form 1310. File together with the related tax return. If claiming a refund for a prior year for which a tax return has already been filed, send as soon as possible to the IRS Service Center where the original return was filed. Form SS-4 Application for Employer Identification Number For any trust or estate that will maintain bank or brokerage accounts, or to whom anyone who makes a payment may be required to issue either a Form 1099 or a Form W-2. Immediate prior to opening any accounts for estate or trust. You can apply online at www.irs.gov. Form 1099-MISC To report payments in any amount to attorneys, or of $600 or more to accountants, trustees, or any non-corporate entity to whom the estate or trust paid compensation. Send copy to recipient no later than January 31 of the year following the tax year involved. Copy should be filed with the IRS by February 28 (if filing on paper, and accompanied by Form 1096), or by March 31 if filing electronically.

Step by Step / Updated 03-10-2017

When you’re asked to administer a trust or estate for a relative or friend (especially if that person didn’t have a will), this important responsibility can feel overwhelming during an already difficult time. Here are ten pitfalls that often trip up unwary administrators — and that you should avoid:

Article / Updated 03-26-2016

The American Taxpayer Relief Act of 2012 (the Act), fondly known as the "Fiscal Cliff Act," contains a number of provisions affecting estates and trusts. It makes permanent a number of expiring tax provisions and revives others that had already vanished. Here's a breakdown of what you need to be concerned with as the fiduciary of an estate or trust. Top marginal rate The Act permanently increased the top marginal federal estate and gift tax rate from 35 percent to 40 percent. Previously, the top marginal rate had been set to revert to 55 percent for decedents dying in 2013 and beyond. Exclusion amount The amount that can be excluded from federal estate and gift taxation has been set by the Act at $5 million, adjusted annually for inflation. For 2013, it's $5.25 million. Prior to the Act, the exclusion amount had been set to revert to $1 million in 2013. Portability of the exclusion amount The Act makes permanent the ability to elect to transfer any unused estate and gift tax exclusion amount to the surviving spouse. So if the decedent doesn't have a taxable estate but the surviving spouse has or may have a taxable estate, Form 706 is filed for the decedent electing to transfer the unused exclusion amount to the surviving spouse. The amount transferred to the surviving spouse is called the deceased spousal unused exclusion (DSUE). The executor of a decedent's estate can elect transfer, or portability, of the unused exclusion to the decedent's surviving spouse, but he or she must do so on a "completely and properly prepared" and timely filed estate tax return. The surviving spouse can later apply the DSUE amount received from his or her last deceased spouse against his or her own subsequent lifetime gifts and transfers at death. The IRS recognizes that preparing and filing Form 706 when you wouldn't otherwise have to is a burden and has said that, in valuing the property for inclusion on a return that's being filed solely to elect the transfer of the DSUE, the executor may estimate the total value of the gross estate based on a determination made "in good faith" and "with due diligence" regarding the value of all of the assets includible in the gross estate. Deduction for state death taxes The Act permanently extends the deduction for state death taxes that was created in 2005. Before 2005, decedents received a credit against their federal estate tax for any state death taxes paid. In 2005, the credit was eliminated and decedents were granted a deduction instead. Generation-skipping transfer taxes The generation-skipping transfer (GST) tax is a relatively new invention intended to ensure that the federal government gets its slice of the pie each and every time assets move from one generation to the next. As a result of more and more people discovering that they may be able to pay less overall transfer tax by bypassing their children and giving property directly to grandchildren (or even better, great-grandchildren), Congress plugged this particular loophole so that the gift tax and estate tax can no longer be evaded at any generational level by skipping a generation on the transfer. So now rules trigger the GST tax any time a transfer is made that skips a generation, with the exception of transfers made into irrevocable trusts (trusts that can't be amended) created before September 25, 1985, which are "grandfathered" from the GST tax. The Act extends several GST tax provisions that would otherwise have expired at the end of 2012, all of which are quite technical. Income tax rates The Act extends the top marginal income tax rate for estates and trusts to 39.6 percent in 2013 (from a 2012 maximum of 35 percent). Estates and trusts continue to reach the highest marginal rate much faster than individuals, hitting the ceiling at a princely $11,950 of taxable income in 2013 (adjusted annually for inflation). Capital gains and dividend tax rates For top-bracket trusts and estates, the maximum capital gain and qualified dividend tax rate permanently rise to 20 percent in 2013, up from a maximum of 15 percent in 2012. Alternative minimum tax Everyone was hoping that the alternate income tax would be repealed entirely, but no such luck. The alternative minimum tax (AMT) has been permanently embedded into the Internal Revenue Code. There is good news, though: The exemption amounts available for all taxpayers, including estates and trusts, are now automatically indexed for inflation each year.

Article / Updated 03-26-2016

If you’re an executor, personal representative, or administrator of an estate, your job begins at the death of the person whose estate you’re administering. The following list contains tasks you need to take care of in the first days and weeks after the decedent’s death. Determine the decedent’s wishes regarding arrangements such as funeral and burial. Obtain copies of the death certificate. Ascertain whether the decedent had a last will and other estate-planning documents and then try to find them. Apply for a federal Taxpayer Identification Number for the estate, using Form SS-4. (This is like a Social Security number for the estate.) Figure out the decedent’s domicile (where he or she “lived” for probate and tax purposes) and where real property (real estate) is located, because the executor may have to probate the estate in multiple jurisdictions. Determine whether you need professional advisors such as an attorney, CPA, or enrolled agent. If the decedent has no surviving spouse: Change the locks on the decedent’s residence immediately. Locate and take possession of decedent’s checkbook and credit cards and notify banks and credit card companies of the decedent’s passing. Notify the decedent’s homeowner’s insurance company and automobile insurance company. Add executor, when appointed, as insured and determine whether coverage, particularly on items of unusual value, is adequate. Cancel pending contracts (such as purchase and sale agreements on real estate) and rewrite as executor. Marshall and safeguard the decedent’s assets by Locating the safe-deposit box and inventorying its contents Collecting information regarding the type, value, and manner of holding for all the decedent’s assets Determine heirs at law (those who would inherit if the decedent was will-less) and beneficiaries (those who inherit in the presence of a will) of the decedent’s estate. Decide whether probate of the decedent’s will (or administration of the decedent’s estate) is necessary and file the decedent’s last will with the probate court. If probate is necessary: Figure out whether ancillary, or supplemental, probate is also necessary (for real property in another state). Decide whether temporary administration of the estate is necessary for assets that must be dealt with immediately.

Article / Updated 03-26-2016

Many people carry life insurance — your job as executor is to find all the policies and collect the proceeds, or at least advise the beneficiary to file a claim. Your search of the decedent’s papers may have turned up some clues to any insurance on the decedent’s life. You may have found the policy itself, records of premiums paid or due, dividend information, or other papers pointing toward a policy. To collect the policy’s proceeds, send a certified copy of the death certificate and a copy of your appointment as executor or administrator to the insurance company. If the company wants the policy itself, which it probably will, be sure that you send it certified mail, return receipt requested, or some other form of delivery service where you’ll receive proof that someone at the insurance company received it. Be sure to request IRS Form 712, Life Insurance Statement, at the same time that you request the proceeds. You’ll need it to prepare Form 706 and any state estate or inheritance tax form. It’s much easier to get it now rather than search for it later. Insurance may come in a couple different forms. Keep an eye open for the following: Traditional life insurance: Traditional life insurance owned by the insured can be whole life, term, or some other product. Regardless of type, if the policy was in force on the date of death, life insurance pays out an amount specified in the insurance contract to the beneficiary designated by the insured, minus the value of any outstanding loans taken against the cash value in the policy. Note that insurance on the decedent’s life that is owned by another person or entity isn’t included in the decedent’s probate estate or taxable estate. When searching for life insurance policies, you often need to look in less-than-obvious places. Many people have small policies as a courtesy from their banks or credit unions. Because you’re writing to request date-of-death balances for all the decedent’s bank accounts, inquire at the same time whether the decedent also had a life insurance policy in force. Mortgage, credit card, and other loan insurance: Insurance is available to cover the balance due on a mortgage, credit card, or other loans upon the death of the person. You want to keep your eyes peeled for any reference to such insurance in the decedent’s papers, and ask the holders of any mortgages, credit cards, or other loans if any exist.

Article / Updated 03-26-2016

Surviving spouses may have some important rights to collect on and decisions to make with regard to the will and the decedent’s estate. There are a few important rights, allowances, and decisions the surviving husband or wife needs to make when the decedent has died and probate has begun. Your duty as executor is to inform the surviving spouse of these rights as soon as possible. How to exercise rights ahead of the provisions of the will In just about every state the surviving spouse, (and sometimes the decedent’s children) has rights to certain property whether or not there is a will, and no matter what the will says. These rights come ahead of the provisions of the will for disposition of the property. Check with your probate court if your decedent leaves a surviving spouse and/or children. For instance, in Michigan, the surviving spouse is entitled to the following, all indexed for inflation: Homestead Allowance: The surviving spouse receives a homestead allowance of $21,000 as of 2012. If there’s no surviving spouse, the $21,000 is divided equally among the minor children and each dependent child. Family Allowance: A “reasonable amount” can be paid to the surviving spouse for the benefit of the spouse and the minor and dependent children each year the estate is in existence (limited to one year if the estate is inadequate to discharge allowed claims), as a family allowance. While no amount is set in the law, it can be up to $25,000 per year as of 2012. Exempt Property: The surviving spouse is entitled to exempt property in the amount of $14,000 as of 2012, including household furniture and furnishings, appliances, personal effects, and automobiles. If there is no surviving spouse, the decedent’s children are entitled to this property. How to elect against the will The surviving spouse has the right to elect to take against the will. In other words, instead of receiving what the decedent left to him or her as a beneficiary under the will, he or she may choose to receive instead what that surviving spouse is entitled to under state law; his or her statutory share. The statutory share isn’t the same as the intestate share. Because you, as executor, do not the surviving spouse, you should not advise the spouse on whether to accept the will’s bequest. However, be sure that the surviving spouse is aware of this right. In some jurisdictions, you are required to provide a form of Notice to Surviving Spouse of Elections and Allowances and file it, along with a proof of service and the spouse’s election, with the court. Sometimes, a spouse electing against the will just has to file a document waiving his or her share under the will and claiming the statutory share within a set period after the allowance of the will. Electing to take against the will is an all-or-nothing proposition. If the decedent and the surviving spouse prepared their estate plan documents together and were in agreement on their plans,this is unlikely. Electing to take against the will has many consequences, some of which may not be readily apparent. For example, if the decedent exercised a power of appointment in the will over a trust in favor of the surviving spouse and the spouse elects against the will, the spouse also loses the property subject to the power of appointment. The estate tax consequences of a waiver should also be kept in mind, as should the fees and expenses involved in dealing with the waiver and its results. How to claim dower Statutory dower (governed by legislated law) exists in many states to replace common law dower (governed by customary law) and curtesy. Dower is the right of a surviving spouse to an estate for life in a portion of the property owned by the decedent at death, subject to any encumbrances on the property. Translation: The surviving spouse gets the use of, for instance, one-third of the real estate for life. Depending on what the real estate is, that use can be, for instance, to live in one-third, or collect one-third of the rents, or receive one-third of the profits from the crops grown on it. Although dower originally only applied to widows, it now applies to widowers as well, because common law curtesy (the right of the widower to the use of all the wife’s real estate for life) has generally been abolished. To claim dower, the surviving spouse files a claim in the probate court within a fixed period after death. If dower is claimed, the surviving spouse must also waive the will (if applicable) and take his or her statutory share. Few spouses actually find it beneficial to claim dower because they’ve planned their wills together and don’t have a reason to take against the will, and dower is a clumsy means of inheritance. Someone may choose this option if his or her deceased spouse didn’t include them in his or her estate plan.