Post Death Tax Returns

Post Death Tax Returns

Federal Estate Tax (Form 706)

 

A Federal Estate Tax Return (Form 706) must be filed for the estate of each decedent whose “gross estate” exceeds $2,000,000 (for 2006). A decedent’s “gross estate” consists of all property that the decedent owned or had an interest in as of the date of death, including real estate, joint interests, life insurance, personal property, annuities, and property subject to the decedent’s power of appointment.

 

After calculating the gross estate, the estate may deduct funeral expenses, debts of the decedent, administration expenses (including attorney and executor fees), qualified charitable gifts and qualified bequests to a surviving spouse (“marital deduction”).

 

The marital deduction is unlimited, meaning that you can leave $1,000,000,000 (or more) all to your surviving spouse without paying a penny of estate tax (until your surviving spouse dies, of course). This is good news for married couples, but also presents a trap that many fall into by failing to utilize each spouse’s “unified credit” (described below).

 

After calculating the gross estate and subtracting deductions, there are several credits that the estate will use. The first is the “unified credit” also known as the “exemption equivalent.” This is currently (in 2006) the $2,000,000 threshold that I mentioned above – meaning that the first $2,000,000 is not subject to estate tax.

 

The Credit for Tax on Prior Transfers comes into play when your estate includes assets that you received by inheritance from an estate that paid estate taxes. The previous transferor must have died within 10 years of your date of death and the credit ranges from 20% to 100%.

 

The estate tax return also includes the generation-skipping transfer tax. In a nutshell, this is only applicable if your estate gifts more than $2,000,000 to a “skip person” (e.g. grandchildren, others more than 37.5 years younger).

 

Additionally, many states now have their own separate estate tax requirements. Some require filing and payments with an exemption that is less than the federal exemption. State estate tax applies in the decedent’s state of residence as well as in each state where the decedent owned real property.

 

The above only scratches the surface of issues that may arise in preparing estate tax returns. The estate tax return is not a simple return, and not all accountants or attorneys have experience with them. This office has significant experience in preparing estate tax returns with complex issues. Proper post-mortem estate tax planning and preparation can help save significant tax liabilities in many instances.

 

Fiduciary Tax (Form 1041)

 

After an individual’s death, but before distribution to a beneficiary, either the decedent’s estate or trust may earn on income on its assets. If so, that estate or trust itself becomes a taxpayer that must apply for and receive a Tax ID#, and file applicable income tax returns.

 

However, fiduciary income tax returns are quite different from individual income returns. The marginal rates are far more compressed and it reaches the highest marginal rate at less than $9,000. Further, there are deductions and credits that are unique to fiduciary returns. For this reason, form 1041’s should always be professionally prepared.

 

While we generally do not prepare the 1041 for an estate/trust, we work closely with the estate’s accountant to ensure that the returns are planned and prepared in the most advantageous manner and that the returns are well coordinated with the estate tax return(s), if necessary.

 

Federal Income Tax (Form 1040)

 

The estate’s fiduciary must also file the decedent’s final 1040 showing all income earned up to the decedent’s date of death. This return should be prepared in conjunction with any 1041’s and the 706 so as to bifurcate the taxable year and various and allocate deductions between the entities.

 

While we generally do not prepare the 1041 for an estate/trust, we work closely with the estate’s accountant to ensure that the returns are planned and prepared in the most advantageous manner and that the returns are well coordinated with the estate tax return(s), if necessary.