The 10 Most Powerful Postmortem Planning Pointers for Trusts and Estates
EXECUTIVE SUMMARY * Tax planning has just begun when Form 1040 is filed. * Choosing a fiscal year end for the estate can maximize tax deferral. * The estate should make distributions to minimize the overall tax burden. * Use of the accrual basis will allow expenses to be matched with income for lower taxes. * Be sure to update the basis of assets to date-of-death value-something stockbrokers often fail to do. * Sat aside income from assets that are destined for charity so the estate can avoid paying income taxes on those earnings. ********** After a client passes away, there is much more to do than just prepare a final Form 1040, U.S. Individual Income Tax Return. Taking control of the postmortem planning process can be a powerful way to save tax dollars for the decedent's estate and family. Postmortem planning also applies to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return; state death tax returns, if needed; and income tax returns for the estate and any revocable trusts set up during life. Although many accountants routinely handle the preparation of the final personal return, fewer accountants acting as fiduciaries are as adept at taking advantage of the alternatives available to them when preparing Form 1041, U.S. Income Tax Return for Estates and Trusts. What follows are the most important tips for doing so: 1. Select a Fiscal Year End for the Estate The assets that earned income during a client's lifetime will continue to do so after his or her death. Until the estate distributes those assets to beneficiaries, an estate income tax return will need to be filed each year, generating a Schedule K-1 to each residual beneficiary to the extent distributions are made. Using a fiscal year end can be a powerful tool to defer tax on that income and allow beneficiaries time to plan for its inclusion in their personal returns. Any of the 12 month-end dates that follow the decedent's death can be the fiscal yea>end date, but the year cannot exceed 12 months. For example, the maximum fiscal year for a decedent dying Oct. 5 is through Sept. 30 of the following year. The year can be shorter than 12 months, an effective choice if a large, income-producing transaction will occur in the months after the selected year end. Choose wisely for maximum income deferral. Estates do not have to make federal quarterly estimated tax payments for the first two years after the decedent's death. 2. Elect to Include Income Earned in the Decedent's Trust on the Estate's Income Tax Return Trusts are required to use a calendar year end. However, a tax adviser can elect to include the income from a decedent's qualified revocable trust on the estate income tax return. Doing that provides an array of benefits not normally available to trusts, the most significant of which may be the ability to use the estate's fiscal year end for trust income. This election lasts two years beyond the decedent's date of death (longer if a Form 706 is required to be filed; consult the instructions to Form 8855, Election to Treat a Qualified Revocable Trust as Part of an Estate), which is normally plenty of time to deal with closing out a trust. Known as a Sec. 645 election, it is made by filing Form 8855 with Form 1041. This election can be made even if there are no income-producing probate assets in the estate. 3. Manage Distributions to Minimize Overall Tax Estate and trust income taxes reach the highest tax bracket of 35% at $11,650 of taxable income for 2012. If residual beneficiaries are in lower brackets, it will save tax for the family overall to distribute income out of the estate to them in a timely fashion. The fiduciary has until 65 days after the end of the tax year to make distributions for that tax year. Capital gains stay at the Form 1041 level and are taxed there, except on a final return. …