All About Death & Taxes Beyond Estate Taxes
- From: Ablang <ron916@xxxxxxxxx>
- Date: Sun, 18 Jan 2009 10:06:53 -0800 (PST)
All About Death & Taxes Beyond Estate Taxes
Martin Shenkman, Esq., CPA
Ben Franklin said that nothing is certain, except death and taxes --
and in this day and age, death and important tax decisions come
together, whether or not estate tax is owed.
Tax filings must be made and important tax decisions taken soon after
an individual’s death. At an emotional time, planning may be
difficult, so here’s what to know in advance.
FINAL INCOME TAX RETURN
When an individual dies, a final income tax return must be filed for
him/her reporting all income he/she received during the year until the
date of death. The return follows normal rules and is due on April 15
of the year following death (in 2009 for an individual who dies in
2008). The return can be prepared by...
A surviving spouse filing a joint return.
A court-authorized representative of the deceased, such as the
executor or administrator of the deceased's estate.
A person placed in charge of the decedent's property who signs the
return as the deceased's "personal representative," if there is no
surviving spouse or court-authorized representative. This often
happens when an estate is very small and simple and doesn't require
probate.
Important: If you prepare a final return for a decedent who is not
your spouse, file IRS Form 56, Notice Concerning Fiduciary
Relationship, so that the IRS will send correspondence relating to the
return to you.
The final return should have the word "Deceased" the decedent's name,
and the date of death written across the top of it.
Planning opportunities...
A surviving spouse's ability to file a joint return with a deceased
spouse for the year of the latter's death (providing the surviving
spouse has not remarried) is an exception to the normal rule that year-
end marital status determines filing status for the year.
The joint return will cover only a part year for the deceased spouse,
but a full year for the surviving spouse, so a special opportunity may
exist for the surviving spouse to make tax-saving moves during the
latter part of the year.
Example: If the deceased spouse had sold assets in the year of his
death, the surviving spouse can realize offsetting losses (or gains)
during the rest of the year in the most tax-beneficial manner.
Medical expenses incurred by the decedent and paid off up until a year
after death can be deducted on the final return as "paid when
incurred," if an election to do so is made on the return. See Code
Section 213(c).
Series EE and I savings bonds owned by the decedent under the cash
accounting method (with interest on them not realized until they are
redeemed) may either have their accumulated interest reported and
taxed on the deceased's final return, or be distributed to heirs with
all accumulated interest to be taxed to these heirs in the future when
they redeem or sell the bonds.
Best: Pick the option that produces the lower tax rate on bond
interest.
"Passive losses" accumulated in past years from real estate
investments may be deductible against ordinary income on a final tax
return -- providing a potentially large deduction to the extent that
it’s not reduced by basis step-up at death.
Rules are complicated, so consult a real estate tax expert.
The final tax return of an individual can be more complicated than
those filed while he lived -- especially if such items as realized
passive losses and other complex investment tax matters will affect
the tax planning of a surviving spouse. So, consider these issues with
an expert.
ESTATE INCOME TAX RETURN
An estate must file an income tax return, IRS Form 1041, US Income Tax
Return for Estates and Trusts, and pay estate income taxes, even if it
doesn't owe federal estate tax because its assets don't exceed $2
million in 2009 -- even if the surviving spouse is going to file a
joint return for the death year. The estate’s income tax return
generally reports income paid to the deceased after his date of death
and before the estate is distributed to heirs, if any.
Examples: An accrued bonus from an employer, income from investment
accounts, business receivables.
Corresponding deductions are also allowed.
If an estate's income does not exceed $600, no income tax return is
due. But if an estate is large or complex, it may incur income tax for
a significant time as income continues to come in. Executors are
personally liable for any estate tax owed by an estate that goes
unpaid, so they often are slow to distribute an estate to heirs until
the IRS "signs off" on its tax status.
Deferral strategy: The estate may select a fiscal year rather than a
calendar year to postpone the payment of income tax as long as
possible. Example: If the decedent died on November 30, 2008, the
estate’s income for December would be required to be reported on April
15, 2009, if a calendar year were selected. If, instead, a fiscal year
with a November year-end were selected, the December 2008 income
wouldn't be reported until March 15, 2010.
BASIS DETERMINATIONS
It's vital that the executor of an estate determine the market value
of all assets in the estate at the date of the deceased’s death, and
report these values in writing to the heirs who inherit the assets.
Why: Heirs receive assets bequeathed to them with a tax basis that is
"stepped up" to this market value. If, at a later time -- perhaps
years later -- they sell the assets, but don't know this value, they
may not be able to reliably calculate their gain or loss (as gain
equals sale price minus basis). In the worst case, the IRS may then
deem the entire sale price to be gain. This can be a special problem
with collectibles, heirlooms, and other items that don't have a
published market value.
Problem: Valuing all the items in an estate is what an executor does
when preparing an estate tax return -- so even if no estate tax is
due, he may have to do most of the work of preparing an estate tax
return (and charge corresponding fees).
Note: When estate tax is due, the lowest reasonable valuation of the
estate’s assets is desired to minimize tax. But when no estate tax is
due, the highest reasonable valuations will be desired to maximize
"stepped-up basis" and reduce future income tax on the gain.
DISCLAIMING A BEQUEST
A relative who dies may leave you a bequest you don’t want.
Example: A parent may leave you assets you don’t need that generate
income that will be taxed at a high rate to you. You may prefer that
the bequest go to your children if the will so provides.
By electing to "disclaim" a bequest, you can have it pass as though
you weren't alive to receive it -- avoiding gift taxes otherwise due
if you were to accept the bequest and then give it to your children.
Important: The IRS says that you must execute a disclaimer within nine
months of the date of death and cannot make any beneficial use of the
disclaimed property in the meantime.
INCOME IN RESPECT OF A DECEDENT
Wages, retirement distributions, and other items that include income
that had never been subject to income tax may be included in the
estate. These items are called income in respect of a decedent (IRD).
The estate may pay estate tax on the value of these IRD assets. The
beneficiary of such items (a child, the estate, etc.) may qualify to
claim an income tax deduction for the amount of estate tax paid on
this IRD component. This deduction provides tax relief since this item
is getting taxed both on the estate tax return and an income tax
return.
Example: $100,000 of estate tax was allocated to an inherited
traditional IRA worth $300,000. As the IRA is distributed to the heir
(the IRA's owner), up to $100,000 of IRD deductions can be taken to
shelter the otherwise fully taxable IRA distributions from tax.
Important: All the information needed to support future IRD deductions
must be generated by the executor and provided to heirs, or the
deduction will be lost. But this is often overlooked. Rules are
complex, but the deduction can be very valuable, so consult an expert.
Tax Hotline interviewed Martin Shenkman, Esq., CPA, a New York City
attorney who specializes in trusts and estates, www.laweasy.com
.. He is author of 34 books, including The Complete Book of Trusts
(Wiley).
.
- Prev by Date: Re: Reconciliation of 1098-T and 1098-Q
- Next by Date: Capital gains question
- Previous by thread: Reconciliation of 1098-T and 1098-Q
- Next by thread: Capital gains question
- Index(es):
Relevant Pages
|
Loading
