U.S. Tax Law and Estates and Trusts
An estate is established on the date of death.
Your tax professional should obtain an EIN for the estate
and file an estate tax return form 1041: but not so quick, if a pre-tax funded investment account such
as an IRA is part of the estate, some technical tax planning should first be considered in order to reduce
a tax bill that will probably be substantial. Such planning should include a serious look into strategic
options such as choosing to liquidate the account over five (5) years or an election for a non-calendar
Generally, it is true that an inheritance is not taxed to the heir or beneficiary; however, there are
important exceptions. Avoid being liable for taxes by giving due attention to federal and state tax
issues, even for smaller estates. While most understand that an "estate tax" is levied on an estate over
a certain value (sometimes referred to as the "death tax"), many people do not think of the ordinary
"income" tax liabilities of an estate-especially those handling smaller estates.
One common surprise is that estates consisting of an account funded by pre-tax dollars (such as an IRA
for which no beneficiary was designated) will most likely have a substantial tax liability. In such cases,
the entire IRA becomes part of the estate: if the IRA is cashed out and distributed to the heirs, a tax will
often be applied at the highest rate as ordinary income. In 2014, if the account is worth $100,000.00,
the tax would be about $40,000.00. If this tax is not paid by the estate, the IRS will demand payment
from the heirs that received this money.
Another trap for which to watch revolves around the sale of stock held in the estate. If stock is
liquidated before it is distributed, the increase in value of the stock, if any, that occurred during the
period from the date of death until it is liquidated is taxable to the estate. If a beneficiary prefers to
receive the cash value as opposed to the stock itself, it may be better to first transfer the stock to the
beneficiary and then the beneficiary can apply tax-reduction strategies that may not be available to an
Probate court in many states require that both federal and state income tax returns be filed-the final
1040 for the year in which the death occurred and a final 1041 for the estate. Do not rush into filing
these tax returns without a tax professional's assistance and without obtaining an Estate Tax Closing
Letter from the IRS and other applicable tax agencies, otherwise the IRS may be looking for payment
from the executor, administrator, trustee, heirs and beneficiaries.
Probate in General
Handling the legal issues that arise after the death of a friend or loved one can be very challenging.
To reduce the stress associated with these problems, it is best to contact an experienced attorney who
can be reached when you call upon them, and one who is responsive to you and your family's needs.
When a person dies, the chances of theft and misuse of the property that they owned increases because
often there is no one with proper authority present to protect and maintain the property. It is very
important to promptly gather together all property owned by the deceased in order to insure it is
protected, maintained, and ultimately transferred to the proper individuals.
Not just anyone can lawfully obtain possession and control of property that was owned by a deceased
person. First, the court must issue an order giving authorization to either an Administrator or Executor,
and that authorization is limited to the gathering together of the assets for safe-keeping, until later,
when the court issues an order stating what is to be done with the assets.
Additionally, issues with life insurance, retirement accounts, social security, bank and trading accounts,
and other financially-related assets, may need certain treatment outside of probate in order to have
them transferred to the proper individuals.
What is Probate?
Probate is a procedure that is designed to Protect against Improper use of the assets of the estate of a
deceased person, by insuring it is Properly distributed according to Law, or according to the Will of the
It is a court procedure whereby the distribution of a person's assets after death is supervised and
controlled. During the process, it is required that certain parties, usually family members and / or those
named in the Will (if a Will exists) receive copies of most documents filed with probate court for their
Is Probate Really Necessary?
In most cases, some sort of procedure is necessary. It depends upon the size of the estate on the date
of death. The degree of complexity of the probate procedure depends upon the value of the assets on
the date of death. The simplest procedure is allowed if the value of the assets is fairly low. Slightly more
complex procedures are required for mid-sized estates and the procedures and time required for the
process to be completed increases even more for larger estates.
How Do I Determine the Value of an Estate?
The value of an estate (for probate court purposes) is equal to the gross value of the assets owned by
the deceased. The value of non-liquid (non-cash) assets can require an appraisal or similar method of
determining value, which would be submitted to the court.
Can I Sell Property in the Estate Before Probate is Complete?
You cannot sell or otherwise dispose of estate property without first obtaining the consent of Probate
court. Of course, once the property has been distributed to the heirs and beneficiaries, those persons
have full ownership and control of the property.
What is Estate Planning?
Estate Planning is a course of action aimed at ensuring that your wishes for your personal care and for
your finances are followed in the event you are incapacitated or upon your death.
PLANNING FOR INCAPACITY:
If your physician determines that you are not able to manage your affairs, the District Court may appoint
a "guardian". Though not attractive to any of us, such a development may be unavoidable. However,
you can determine in advance who will serve as your court appointed guardian by nominating such
person in advance. You can also minimize and even eliminate the need for a court appointed guardian
by executing certain documents:
General Power of Attorney
Health Care Power of Attorney
PLANNING FOR DEATH
Upon your death your property ("estate") may be distributed in a number of ways. Your jointly-owned
accounts and real property will go to the other persons who hold title with you. Your life insurance
policies will go to the beneficiaries you have designated as will your retirement accounts. If there is
no designated beneficiary and/or no joint owner of your property, your estate may become part of a
probate proceeding and distributed by the District Court.
You can ensure that those people or organizations that are important to you will receive your assets in
accordance with your wishes in a quick, private and cost-effective manner.
A Living Trust may be your best option but you may also elect to use a Will. The trust avoids probate
while the will is "admitted to probate".
There is no set of instructions and forms that is appropriate for every person as every person's situation
is unique to some degree. I invite you to schedule a consultation with me. I will ascertain your situation
and advise you of your various options and the costs involved and you can determine which approach, if
any, is best for you.