Estate & Trust Administration For Dummies
Overview
Estate and Trust Administration For Dummies, 2nd Edition (9781119543879) was previously published as Estate and Trust Administration For Dummies, 2nd Edition (9781118412251). While this version features a new Dummies cover and design, the content is the same as the prior release and should not be considered a new or updated product.
Your plain-English guide to administering an estate and/or trust
As more and more of the population reach senior ages—including baby boomers, many of whom do not have wills—an increasing number of people are being thrust into the role of executor, administrator, personal representative of an estate, or trustee of a trust after the death of a loved one. This updated edition of Estate & Trust Administration For Dummies guides you through the confusing process of administering an estate and/or trust.
Settling an estate and administering a trust can be complicated, messy, and time-consuming for individuals named as executor or trustee, most of whom have no previous experience with such matters. Estate & Trust Administration For Dummies shows you how to make sound decisions for your unique circumstances.
- Guides you through the confusing process of administering an estate and/or trust
- Provides expert advice on unfamiliar estate and trust tax law
- Gives you a practical checklist to follow for all of your estate and trust administration questions and concerns
Whether you're looking for guidance on how to navigate the probate process and estate taxes, settle debts and bequests, fund a trust, comply with tax regulations, or anything in between, this hands-on, friendly guide takes away the mystery and provides detailed answers to all of your estate and trust administration questions.
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About The Author
Margaret Atkins Munro, EA, has more than 30 years' experience in trusts, estates, family tax, and small businesses. She lectures for the IRS annually at their volunteer tax preparer programs. Kathryn A. Murphy, Esq., is an attorney with more than 20 years' experience administering estates and trusts and preparing estate and gift tax returns.
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estate & trust administration for dummies
CHEAT SHEET
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.Tax forms to know as the fiduciary of an estate or trustWhen you’re administering an estate or trust, you may have to prepare a seemingly endless array of tax returns.
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Estate Planning
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:Don't fail to terminate an existing real estate purchase and sale agreement.
Estate Planning
As of January 1, 2011, one spouse can elect to transfer any unused exclusion amount to the surviving spouse. So, if your decedent doesn’t have a taxable estate but the surviving spouse has or may have a taxable estate, you’ll want to file a 706 for your decedent. The amount transferred to the surviving spouse is called the deceased spousal unused exclusion (DSUE).
Estate Planning
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.
Estate Planning
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.Tax forms to know as the fiduciary of an estate or trustWhen you’re administering an estate or trust, you may have to prepare a seemingly endless array of tax returns.
Estate Planning
If you filed a Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return, and/or a state estate or inheritance tax return, you need estate tax closing letters (letters saying that the IRS and the state have accepted the returns) before you can close the estate. At this point, you pay any added taxes caused by adjustments; if you’re lucky enough to avoid those, you may even get a refund.
Estate Planning
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.
If you’re preparing Form 1041, you’re almost done. All that’s left is to answer some questions at the bottom of page 2. Some of these questions are easy and obvious, but questions 3 and 4 concerning foreign accounts and trusts are more complex; you may want to ask for professional advice if you think the decedent, the estate, or the trust qualifies.
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.
Estate Planning
Although valuing tangible property may give you scope for some creative research, calculating the value of an estate’s intangible property, those bank and brokerage accounts, and any stocks or bonds that the decedent physically held, should help complete your quest. Provided that you have a complete list of the intangible property, figuring out what it was worth on the date of death should be a simple matter of math.
Estate Planning
You may have realized that many of the deductions available on the Form 706 look familiar, and you may be wondering if you can have it both ways, deducting them the first time on the 706 and then again on the 1041. Well, you can’t. In fact, the IRS refers to this practice as double-dipping and seriously frowns upon it.
Given that only estates with a relatively high asset threshold have to file Form 706, you can understand that the IRS audits a higher percentage of these returns than any other type. Assume that yours will be one of the ones chosen and prepare the return and all its exhibits with that in mind.
This way you save yourself a lot of headache instead of trying to re-create what you did six months or a year after you filed the forms.
Estate Planning
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.
Estate Planning
After you create an initial inventory, you can begin tracking the activity in the trust account. Just like maintaining a running balance in your own checkbook, tracking this basic information helps in any number of ways. With it, you can determine how much is available to distribute to the income beneficiaries, while at the same time keeping track of the trust’s ongoing tax situation.
Estate Planning
Completing the 706 may seem bad enough to you, but you probably have a pile of supporting documentation that you need to send with it. If you do, attach whichever of the following documents are applicable in your decedent’s estate to the return when you file it.
Consider preparing an index, or list, of exhibits.
Estate Planning
You only began telling the IRS about the decedent in Part 1. Now you really have a chance to fill out the picture in Part 4. The first item under Part 4: General Information on Page 2 of the return is the authorization to receive confidential tax information, act as the estate’s representative before the IRS, and make written or oral presentations on behalf of the estate.
Estate Planning
Lines 9–17 of the Estate Form 706 are to remind you of other property that may be includible in the decedent’s estate. If you aren’t including it, the IRS wants an explanation.
Line 9: If any insurance on the decedent’s life isn’t included on the return, answer “yes” on line 9a, complete Schedule D, and attach as an exhibit Form 712, Life Insurance Statement, together with an explanation of why the policy isn’t includible in the estate.
Part 6 of Form 706 is where you elect Portability of Deceased Spousal Unused Exclusion (DSUE) for the estate. This list details what do for each section of Part 6:
Section A, Opting Out of Portability: Check the box to elect out of portability. Don’t complete B and C. If no estate tax return was filed for a decedent, he or she is assumed to have opted out of portability.
Estate Planning
If the estate you’re administering requires a 706 for any reason, you must complete the first four pages, together with all the other schedules needed to report your decedent’s assets, deductions, exclusions, and credits.
Part 1: Decedent and Executor
On the face of the Form 706, fill in the decedent’s name, address, Social Security number, year domicile (residence) was established in the decedent’s state of residence, date of birth, and date of death.
Estate Planning
All the Form 706 schedules up to Schedule J deal with the decedent’s assets. With Schedule J: Funeral Expenses and Expenses Incurred in Administering Property Subject to Claims, you’re finally beginning the portion of the tax return where you take every last deduction you can on behalf of the decedent (except those you may elect to take on the estate’s income tax return).
Estate Planning
If your decedent left a surviving spouse, you may have a whopper of a deduction available to you, which you report on Schedule M: Bequests, etc. to surviving spouse. All property that passes to the surviving spouse as a result of the decedent’s death qualifies for the unlimited marital deduction, provided that the surviving spouse is a U.
Estate Planning
No matter which tax return you’re preparing (the decedent’s personal return or one for an estate or trust), you have to calculate the tax after you figure out the income and the deductions. If you’re working on the decedent’s return, you arrive at your tax liability exactly the same way as you would your own.
If you’re finishing up a Form 1041 and need to figure out Schedule G (on the back), read on.
Estate Planning
Sometimes, even when the trust or estate doesn’t have to file Form 1041, you still receive tax information from other sources. When you won’t be preparing a 1041 (perhaps the trust or estate has terminated), there won’t be a Schedule K-1 either.
Instead, pass along any tax information you receive via a Form 1099 for income earned by property formerly owned by the trust or estate to the property’s new owners by issuing them a nominee Form 1099.
Organization is the key, and no more so than when you’re a trustee. The grantor has relied on you to handle the trust’s assets competently. When you’re organized, you know where the trust’s important documents and records are, which helps you to properly and efficiently administer the trust.
Organizational lapses can mean extra time spent searching for a crucial piece of correspondence or, more important, failure to make a required distribution or file and pay the trust’s taxes.
Estate Planning
We’d love to tell you that, when you’ve completed the estate’s final tax returns, the final accounts, crossed your t’s and dotted your i’s, that you’re done, finished, complete. We’d be lying. No matter how careful you are, matters beyond your control may mean small amounts of additional money, or assets you never knew about, whether belonging to principal or income, will eventually find their way into your hands.
Estate Planning
After you put the sum of lines 1a through 1c on Schedule G, line d, you’re ready to see whether you can reduce your tax with tax credits. Tax credits are dollar-for-dollar amounts that you subtract from your tax liability; they’re better than deductions. Estates and trusts aren’t eligible for most tax credits that individuals can take, and no credit on Form 1041 can reduce the tax liability below zero.
Knowing where the decedent’s domicile (where the decedent had his or her primary residence) was at date of death is key when figuring out where you must probate the assets and what state you must pay taxes to (although real estate is subject to state estate or inheritance tax, if any, in the state in which it’s located).
Estate Planning
Just because an employer, bank, brokerage firm, or other payer continues making payments to the decedent doesn’t necessarily mean that’s whose tax return they should go. As the administrator of the estate, you make the final determination of where these items rightfully belong — and you have the responsibility of reporting them correctly.
Estate Planning
To get tax-exempt status for your foundation, file Form 1023, Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code. Expect that your application will be rejected at least once, but know that this is a situation of “if at first you don’t succeed, keep trying.”
The IRS will give you explicit reasons why it has kicked back your application.
Estate Planning
If your decedent owned a computer or other electronic device, it’s an important resource for sorting out what the decedent owned. If the decedent and/or his estate planner were really on top of things, they’ll have included the digital estate in the estate plan. You can hope for a list of digital devices and their passwords, and a list of online accounts.
When searching for an attorney to help you with your estate or trust, you may be wondering, where’s the best place to look? Unfortunately, you can’t rub a magic lamp and ask for an attorney to appear, but you can do some investigative work on your own to uncover one that’s a good match for you. Check out the following resources when searching for an attorney:
Phone directory or search engine: Your first thought may be to rush to your phone directory and start flipping through the listings, or turn on your computer and begin a search.
A life insurance policy can fund a trust that eventually creates some available cash for future expenditures, such as anticipated estate taxes. Life insurance policies come in many flavors, and they guarantee a reasonably large cash payout down the road for a relatively small investment now.
No matter what type, life insurance policies may be acquired by a trust in two ways: The trustee may purchase a policy on the life of the grantor, or the grantor may transfer ownership of an existing policy into the trust.
Estate Planning
As soon as someone dies, make sure that you immediately familiarize yourself with the organ donation and autopsy wishes of the deceased. Check to see whether the decedent had a notation on his or her driver’s license or a donor card, personal identification card, or other legally recognized document by which he or she indicated a desire to make an anatomical gift.
Estate Planning
In the process of administering the estate or trust, you may find that the tax and accounting requirements are beyond what you’re happy or comfortable doing. If this describes you, having a tax professional, like a Certified Public Accountant (CPA) or an Enrolled Agent (EA) on your team, can help ensure that the trust or estate is always in compliance with tax and accounting rules.
Estate Planning
The grantor of the trust has indeed set the stage for his or her wishes to be played out under the trust instrument. As trustee, identifying the players is one of your important first steps because you need to know who the beneficiaries and remaindermen are (you presumably already know the grantor if he or she appointed you as trustee) and if there are any co-trustees acting with you.
Estate Planning
Not all estate investments are created equal, and certainly not in their treatment by Congress and the Internal Revenue Code (IRC). There are many types of investments, such as wages, rental income, deferred retirement income, royalties, interest, and short-term capital gains that are taxed at the highest applicable rate of the taxpayer (in 2013, that could be as high as 39.
Bonds are pieces of loans, packaged by a corporation or a government as an investment product. When you purchase a bond, you’re purchasing a piece of someone else’s debt. In exchange for the money you’re lending, that debtor agrees to pay you interest. Bonds are sometimes referred to as fixed-income securities because the income that they generate for the trust is tied to the stated interest rate on the bond.
Estate Planning
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.
Estate Planning
As you read the decedent’s mail, you may find references to many assets, including bank accounts (from bank statements), the safe deposit box (from any rental bills), real estate (from real estate tax and insurance bills), stocks and bonds (from dividend and interest checks, brokerage statements, mutual fund statements, retirement account statements), and correspondence regarding other assets.
Estate Planning
As executor, you should have all the decedent’s bills (or be in the process of collecting them). One of your first tasks is to pay all administration expenses and legitimate debts of the decedent before you make any distributions to beneficiaries. That is, if you have enough assets to do so.
How and when to pay claims
One of your first duties as executor (after the payment of administration expenses) is to pay the debts incurred by the decedent during his or her life.
The IRS generally loves the concept of electronic filing for just about everything, but the estate tax return is one return you can’t submit online. You must file Form 706 nine months after the decedent’s date of death, on paper, by snail mail.
Send the completed tax form to Department of the Treasury, Internal Revenue Service Center, Cincinnati, OH 45999.
Estate Planning
In many states, traditional probate proceedings can be supervised or unsupervised, and unsupervised can be formal or informal. Consult with an attorney experienced in probate matters in your state if there is any question as to what form your probate should take.
Unsupervised informal probate
Use unsupervised informal probate, or a similar proceeding in your state, if you don’t feel the need for any extra intervention or supervision by the court at the beginning of your estate administration.
The starting point for any trust is the property funding it. This property is listed on the trust’s initial inventory (that is, a list you create of all the initial assets of the trust), where you show each asset’s cost basis (the acquisition cost it carries as it enters the trust, which may be the grantor’s purchase price, or the date-of-death value for assets that flow into the trust).
Estate Planning
Thinking about income taxes may not be high on your list of priorities as you begin administering an estate or trust, but it will soon become a main focus of your administration, whether you’re thrilled by the idea or not. Planning for those first income tax returns should begin right away, not at year-end when the first deadline for filing is fast approaching.
Estate Planning
Everyone makes mistakes. When determining if a mistake with your estate or trust is malpractice, it’s the nature of the error and what steps are taken to rectify it that counts.
Professional malpractice covers quite a bit of ground. Among the reasons you may claim malpractice are cases where a professional has been negligent, where a professional has acted unprofessionally according to the standards set by his or her peers, and where there is a fee dispute.
Estate Planning
If your decedent’s probate estate (assets in his or her name alone, payable to the estate, or held jointly for convenience only) is of limited size, it may qualify for one of several small estate procedures, whether or not your decedent left a will. These streamlined procedures can save you time and the estate money.
Estate Planning
After death, the rules governing receipt of income in an estate and the payment of its expenses loosen up somewhat. It’s not as though the electric company can threaten the decedent with shutting off the power.
Because the standard sanction of “you don’t pay, we don’t provide” doesn’t carry any weight with an estate, you have an opportunity to place at least some of your income, deductions, and expenses in years, and on tax returns, where they’ll save the greatest amount of income tax across all affected returns.
You may find it valuable to file a Form 2848, Power of Attorney and Declaration of Representative, with the IRS as executor or administrator, appointing an attorney, certified public accountant, Enrolled Agent, family member, or someone else who prepared the tax return in question to act on your behalf with regard to some or all of the decedent’s tax matters.
Estate Planning
As trustee, you have the ultimate choice of investments, and you can choose based on your philosophy of life. Socially responsible investing has been around for a long time, beginning with the Quakers in the 18th century, but it’s taking on greater importance and variety in the 21st century.
If you want to invest only in companies whose stated goals are making the world a better place, you now have plenty of company and an abundance of options.
Do all you can to file your 706 by the due date (as extended) and pay the estate tax on time, because you incur penalties for late filing and late payment unless you can show reasonable cause for the delay.
If you’re filing the 706 after the due date and any extensions, be sure to attach an explanation to the return to try to show reasonable cause.
Estate Planning
When you’re trying to figure out exactly how much the estate owns, you may be tempted to liquidate everything into cash. Although this thinking may work sometimes, don’t do it with any pension plan, IRA, or deferred compensation plan if you can avoid it. As soon as you cash out that plan, the estate now owes income taxes on every penny that the decedent hadn’t already paid tax on.
Estate Planning
In addition to allowing you to split each income distribution into all its component parts, Schedule K-1 also gives the estate income beneficiary all the other tax attributes that can pass through the trust or estate to the beneficiary.
Deductions
Except for in the last year of an estate or trust, a Schedule K-1 rarely shows any deductions that the beneficiary can use on his or her tax return.
Estate Planning
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.
Estate Planning
In a simple world, the only assets owned by trusts would be publicly traded stocks, bonds, and cash. But this isn’t a simple world, and many grantors have less traditional sorts of property that they want to transfer into their trusts. One of these assets is often shares the grantor owns in a small business corporation, commonly known as a Subchapter S corporation.
Just as many states impose an income tax, many also impose estate or inheritance taxes. Most states used to calculate these taxes based on a credit on the federal Form 706. In other words, if the federal government was going to allow a credit for state estate or inheritance taxes, most states said, “Hey, just give us that money instead.
Because federal and state tax authorities are much more concerned with how much of the decedent’s property they can tax, they allow for a much broader definition of what the decedent owned at the time of his or her death.
Although the probate estate includes only property in the decedent’s name alone or payable to the estate, for estate tax purposes all property owned by the decedent in any form, including jointly held or in a revocable trust, and any property payable to any person or the probate estate as a result of the decedent’s death, is includible in the taxable estate.
Estate Planning
Handling an estate can be confusing and overwhelming. After you’ve been appointed as executor, there are some important first steps every executor should take to make things as simple as possible.
Adding the executor to insurance policy endorsements:
Homeowner’s and other real property insurance — Add your name as executor to any policies of insurance on the decedent’s real estate (and if the decedent’s home is unoccupied, let the insurance company know in case a special rider is needed.
Estate Planning
By the time you start administering the trust, the distinction between a trust created during the grantor’s lifetime or after his or her death is probably moot. Still, you need to know whether the trust is inter vivos or testamentary.
Grantors’ reasons for establishing trusts vary, from protecting certain pieces of property to providing an income stream for heirs to trying to establish a framework within which a messy family situation may become manageable.
When it comes down where the action is as far as administration is concerned, the real meat and potatoes of trusts are the irrevocable trusts, or trusts that grantors have created to hold property where the trust instrument may not be revoked or changed. So what is an irrevocable trust?
The grantor has given up all right, title, and interest to the assets held in an irrevocable trust, and has also given up any right to terminate the trust.
Leaving a trust behind for your husband or wife after you die isn’t a sign that you don’t think he or she can handle your money; instead, it’s a crafty tax technique designed to minimize the taxes paid on your estate at your death and also those due and payable after your spouse’s death.
No matter what type of marital trust you’re administering, the value of that trust on the surviving spouse’s date of death is included in his or her estate tax calculations after he or she dies.
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.
Estate Planning
There are state-specific rules regarding where you pay income tax on the income in an estate or trust. The obvious one is that you file, and pay taxes, in the state where the estate or trust is resident, meaning that:
The decedent was a resident of that state when he or she died, or the grantor was resident of that state when he or she funded the trust.
Estate Planning
As executor, you may feel that your job is primarily to write letters because you need to notify seemingly everyone and their uncle of the decedent’s death. Some entities and individuals may be more important than others, but you should notify them all as soon as possible.
You can save yourself some time by creating your own version of a form letter that can be modified easily for each recipient.
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