Estate & Trust Administration For Dummies

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.

Introduction 1

About This Book 1

Conventions Used in This Book 2

What You’re Not to Read 3

Foolish Assumptions 3

How This Book Is Organized 3

Part 1: Getting Started with Estate and Trust Administration 4

Part 2: Administering an Estate 4

Part 3: Operating a Revocable or Irrevocable Trust 4

Part 4: Paying the Taxes 4

Part 5: The Part of Tens 5

Icons Used in This Book 5

Beyond the Book 6

Where to Go from Here 6

Part 1: Getting Started with Estate and Trust Administration 7

Chapter 1: Operating in a Fiduciary World 9

Identifying the Players 10

Determining an estate’s fiduciaries 10

Knowing who the trustees are 11

Lining up your team of advisors 13

Estate of Change: Delving into Estates 13

Altering the status quo 14

Probating an estate 14

Collecting the estate’s assets 14

Paying expenses and making distributions 15

Tying up the estate’s loose ends 15

Operating a Trust 15

Understanding your duties as trustee 16

Putting assets into trust 16

Putting the trust to work 16

Discovering the purpose of the trust 16

Compiling and organizing trust records 17

Bringing the trust to its conclusion 17

Paying Uncle Sam 17

Compiling the estate tax return 17

Figuring out the income taxes 18

Planning an income tax strategy 18

Whipping together Schedule K-1 18

Chapter 2: Exploring the Ins and Outs of Estates 19

Defining the Estate for Probate Administration Purposes 20

Will Power: Understanding How a Will (Or No Will) Affects an Estate 21

Dying testate 21

Dying intestate 22

Taking a Look at Who Can Inherit 23

Surviving spouse 23

Individuals omitted from the decedent’s will (including intentional disinheritance) 25

The other players: Devisees and legatees 26

Heirs-at-law 26

Defining the Estate for Tax Purposes 27

Transfer taxes 27

Other taxes 30

Chapter 3: Identifying Different Types of Trusts 31

Differentiating for Income Taxes: Grantor versus Non-Grantor Trusts 32

Grantor trusts 32

Non-grantor trusts 33

Intentionally defective grantor trusts 33

Creating Trusts during Lifetime and after Death 34

Trusts created during lifetime 34

Trusts created under a last will 35

Grasping Revocable Trusts 35

Still breathing: Living trusts 36

Tackling Totten Trusts 37

Going incognito: Nominee trusts 38

Understanding Irrevocable Trusts 38

Making gifts to an irrevocable trust 39

Getting the maximum tax benefit out of dying: Marital trusts 40

Protecting the estate tax exemption: Credit shelter trusts 44

Grandpa (or Grandma) knows best: Grandchildren’s trusts 45

Better safe than sorry: Insurance trusts 45

It’s only a name, not a description: Crummey trusts 47

Keeping a finger in the pie: Grantor-retained interest trusts 48

Exploring Charitable Trusts 50

Split-interest charitable trusts 51

Non-operating charitable foundations 52

Owning SubChapter S Shares in Trust 53

Qualified SubChapter S Trusts (QSSTs) 53

Electing Small Business Trusts (ESBTs) 54

Chapter 4: Assembling Your Team Members and Knowing When to Use Them 57

Finding What You Need to Go It Alone 57

Finding an Attorney 59

Knowing where to look 59

Asking the right questions 61

Discussing payment options 62

Finalizing your decision 63

Working with your attorney 63

Hiring a Tax Professional 65

Discovering where to look 65

Discussing payment options 66

Considering Help from Other Pros 66

Determining whether you need an investment advisor 67

Obtaining appraisers where necessary 69

Consulting with other miscellaneous pros 70

Recognizing Malpractice 71

Surveying why malpractice occurs 71

Covering your ass ets 72

Part 2: Administering an Estate 73

Chapter 5: Taking the First Steps after Death 75

Addressing the Immediate Concerns When Someone Dies 76

Honoring anatomical gifts 76

Having an autopsy performed 76

Arranging the Funeral 77

Making important decisions 77

Obtaining copies of the death certificate 82

Understanding How Death Changes Everything about the Decedent’s Assets 83

Bank accounts and the need for funds 83

Powers of attorney 84

Locating the Estate-Planning Documents 84

The Last Will and testament (The Will) 84

Trust agreements and amendments 85

Letters of intent 86

Other documents that dispose of property 86

Notifying Those Who Need to Be Notified 86

Creating Calendars and Files 89

Eyeing what kind of calendar to create 89

Setting up a filing system 90

Chapter 6: Navigating the Probate Process 93

Filing the Last Will with the Probate (Or Equivalent) Court 94

Figuring Out Whether Administration Is Necessary 95

Do you need a temporary executor? 95

Do you need a special administrator? 97

Determining domicile 98

Accessing ancillary administration 99

Deciding What Shape Your Probate Procedure Should Take 100

Taking small estate shortcuts 101

Traveling the traditional probate route 103

Taking Important First Steps after Your Appointment 107

Eyeing the Surviving Spouse’s Rights and Decisions Regarding Property 109

Exercising rights ahead of the provisions of the will 109

Electing against the will 109

Claiming dower 110

Chapter 7: Marshalling and Liquidating Assets 111

Understanding Why You Need to Determine What the Decedent Owned 112

Observing the Obvious: Big-Ticket Items 113

The bricks and mortar: Real estate 113

Things that move: Cars, boats, and cycles 114

Small (and closely held) businesses 114

Tracking Down All the Other Assets 115

Reading the mail 116

Perusing other personal papers 118

Finding the hiding places 118

Emptying the safe deposit box 119

Sleuthing for digital assets and info 120

Checking over prior tax returns 121

Listing Personal and Household Effects 122

Appraising the Property 123

Tangibles 124

Intangibles 125

Real estate 127

Contacting the Employer about Employee Benefits 127

Locating and Collecting Insurance Proceeds 129

Ascertaining Any Other Death Benefits 130

Preparing and Filing the Probate Inventory 132

Liquidating Assets 132

Selling stocks, bonds, and other securities 133

Disposing of real estate 134

Chapter 8: Paying the Debts, Expenses, Bequests, and Devises from the Estate 135

Determining and Paying Debts of the Decedent and Administration Expenses 136

Finding out how and when to pay claims 136

Prioritizing payment 138

Declaring the estate insolvent 140

Informing Potential Beneficiaries of Their Right to

Consider Disclaimer 140

Segregating and Distributing Specific Property 142

Treading slowly before distributing 142

Making the distributions 143

Considering tangible property 144

Looking at intangible property 144

Fulfilling bequests of specific dollar amounts 145

Dividing Other Personal Property Equitably 146

Basing division on letter of intent 146

Creating a system for heirs to choose 147

Disposing of unwanted personal property 147

Slicing Up the Residue 147

Chapter 9: Closing the Estate 149

Obtaining Tax Closing Letters 149

Acquiring Releases of Lien for Real Estate 150

Paying Final Administration Expenses 151

Making Final Distributions to Residuary Beneficiaries 152

Preparing and Filing Final Estate Income Tax Returns 153

Readying Accounts for Allowance by the Probate Court 153

Using the appropriate form of accounting 154

Following the proper probate procedures 155

Remembering filing fees 158

Appointing a guardian ad litem, if needed 158

Filing a military affidavit, if necessary 158

Notifying the surety 158

Part 3: Operating a Revocable or Irrevocable Trust 159

Chapter 10: Understanding the Trustee’s Duties 161

Getting Acquainted with the Trust Instrument 162

Creating a plan based on the trust’s terms 162

Identifying the players 163

Reforming the trust 164

Empowering the Trustee 165

Buying and selling assets 165

Determining distributions to beneficiaries 165

Hiring and firing advisors 167

Coloring Inside the Lines: Understanding Fiduciary Duty and Limitations 168

Exercising discretion 168

Obtaining errors and omissions insurance 169

Protecting the Trust’s Assets 169

Diversifying the assets 170

Asking for help 170

Preparing and Filing Annual Income Tax Returns and Accounts 171

Chapter 11: Funding the Trust 173

Putting Assets in Trust during Life 173

Signing It Over: Giving the Trust Asset Ownership 174

Cash and securities 175

Privately held stocks, promissory notes, and limited partnership interests 177

Real estate 178

Life insurance policies 180

Personal and household property in trust 183

Rolling Property into Trust after Death 185

Chapter 12: Investing the Trust’s Assets and Paying Its Expenses 187

Appreciating the Importance of Income and Principal in Trust Administration 188

Defining principal and income 188

Distinguishing between the two 189

Using Investment Advisors Effectively 191

Holding and Diversifying Assets 192

Stocks 193

Bonds 193

Mutual funds 195

Cash needs 197

Real estate 198

Small business stocks 198

Going Green in a Trust 199

Socially conscious 200

Politically aware 200

Looking to the Beneficiaries’ Needs 201

Age 202

Purpose of trust 202

Paying the Trust’s Expenses 204

Trustee’s fees 204

Investment advice 205

Accounting fees 205

Taxes 205

Chapter 13: Paying Trust Beneficiaries 207

Notifying Beneficiaries of the Trust 208

Obtaining addresses and Social Security numbers 208

Verifying dates of birth 209

Determining Scheduled Distributions 209

Figuring out how much to pay 210

Creating a payment schedule 213

Distributing When the Beneficiary Reaches a Specific Age 214

When Beneficiaries Request More Money: Paying Out Extra Distributions 215

Making the Decision to Distribute Discretionally: Eyeing the Trust’s Terms 217

Ensuring health and well-being 217

Paying for education 217

Buying a home 218

Starting a business 219

Using trustee discretion 219

Chapter 14: Creating and Keeping Trust Records 221

Creating a Filing System 221

Getting started: Organizing the right way 222

Keeping the trust instrument handy 224

Compiling correspondence 224

Filing financial records 225

Preserving annual accounts 225

Referencing tax returns 226

Preparing an Initial Inventory and Valuing the Assets 227

Arriving directly from the donor 227

Coming from the donor’s estate 228

Compiling Records of All Transactions 228

Knowing the difference between income and principal 228

Filing income tax returns annually 229

Producing Annual Trust Accounts 230

Assembling the desired information 230

Obtaining assents of beneficiaries 232

Filing with the probate court 232

Chapter 15: Terminating the Trust 235

Distributing All Assets According to the Trust Instrument 235

Calculating final income distributions 236

Holding back funds for final taxes and fees 237

Paying the remaindermen 238

Submitting the Final Income Tax Returns 240

Determining any final tax liability 241

Filing a short-year return 241

Preparing Final Accounting and Obtaining Assents of All Remaindermen 242

Finally finishing a non-probate trust 242

Polishing off a probate trust 243

Dealing with Outliers after the Trust Terminates 244

Part 4: Paying the Taxes 245

Chapter 16: Preparing the Estate Tax Return, Part 1 247

Figuring Out Which Estates Must File 248

Who must file 248

Who actually files Form 706 and when 249

Obtaining a Release from Personal Liability 250

Understanding Some of the Nitty-Gritty Rules for Filing Form 706 251

Where and how to file 251

How to pay the tax 251

Penalties for late filing, late payment, and understatement of valuation 252

Signature and verification 253

Extensions of time to file and pay tax 253

Supplemental documents 255

Completing the Form 706, Pages 1–4 257

Part 1: Decedent and Executor 257

Part 2: Tax Computation 257

Signature of executor(s) 259

Signature of preparer other than the executor 259

Part 3: Elections by the executor 259

Part 4: General Information 262

Part 5: Recapitulation 265

Part 6: Portability of Deceased Spousal Unused Exclusion (DSUE) 265

Being Ready for and Handling an Audit 266

Getting an Estate Tax Closing Letter 267

Chapter 17: Preparing the Estate Tax Return, Part 2 269

Tackling the Most Common Schedules 269

Focusing on real estate: Schedule A 270

Identifying stocks and bonds: Schedule B 271

Addressing mortgages, notes, and cash: Schedule C 276

Considering life insurance: Schedule D 277

Eyeing jointly owned property: Schedule E 278

Considering other property: Schedule F 279

Touching on funeral and administration expenses: Schedule J 281

Recording debts, mortgages, and liens: Schedule K 285

Listing net losses and such: Schedule L 286

Covering bequests to a surviving spouse: Schedule M 287

Recording charitable, public, and similar gifts and bequests: Schedule O 289

Knowing When to Ask for Help 290

Listing transfers during life: Schedule G 290

Exercising powers of appointment: Schedule H 291

Considering annuities: Schedule I 291

Claiming a credit for foreign death taxes: Schedule P 292

Getting a credit for tax on prior transfers: Schedule Q 292

Generation-Skipping Transfer tax: Schedule R 292

Electing a qualified conservation easement exclusion: Schedule U 293

Filing a protective claim for refund: Schedule PC 293

Chapter 18: Filing Income Tax Returns for a Decedent, Estate, or Trust 295

Before You Begin: What You Need to Do 296

Obtain a federal tax ID number 296

Choose a tax year-end 297

Calculating the Income 298

Interest 298

Dividends 299

Business income 299

Capital gains and losses 300

Income from rents, royalties, partnerships, and other estates and trusts 302

Farm income or loss 303

Ordinary gain or loss 303

Other income 304

Deducing Deductions 304

Interest 305

Taxes 306

Fiduciary fees 306

Charitable deductions 307

Attorney, accountant, and preparer fees 308

Miscellaneous itemized deductions 308

The Income Distribution Deduction (Schedule B) 309

The estate tax deduction 311

Taxes owed 311

Credits 315

Additional taxes 316

Answering the Questions on the Back of Page 2 (Form 1041) 317

Chapter 19: Weighing Income Tax Implications 319

Timing Payments In and Out of an Estate 320

Benefitting from the estate’s fiscal year 320

Balancing the estate’s taxable income against the beneficiary’s 321

Timing the receipt of income 323

Paying the ongoing expenses of the estate 323

Investing to Minimize Income Taxes 324

Limiting the fiduciary’s income taxes 324

Protecting the beneficiary 326

Introducing the Unearned Income Medicare Contribution (UIMC) Tax 327

Calculating the tax 328

Lessening the tax’s impact 328

Chapter 20: Reporting Tax Info on Schedule K-1 331

Understanding Schedule K-1 331

General information 332

Income items 335

Deductions and credits 336

Alternative minimum tax information 337

Allocating Types of Income on the K-1 338

Preparing Supplements to Schedule K-1 339

Showing foreign tax allocations 339

Providing state tax information 340

Creating Nominee Form 1099s 340

Part 5: The Part of Tens 343

Chapter 21: Ten Pitfalls for the Unwary 345

Failing to Terminate an Existing Real Estate Purchase and Sale Agreement 345

Taking a Lump Sum Distribution from a Pension Plan, IRA, or Deferred Compensation Plan 346

Creating a Feeding Frenzy When Splitting Personal Property 347

Missing Court Deadlines 348

Forgetting Tax Filing Deadlines 348

Failing to Communicate with the Heirs and Legatees 349

Exercising Poor Fiduciary Judgment 349

Underestimating the Devotion Required 350

Taking Nonsanctioned Shortcuts 350

Paying from the Wrong Pocket 351

Chapter 22: Ten Types of Taxes You May Have to Pay 353

Federal Gift Tax 354

Federal Estate Tax 354

Generation-Skipping Transfer Tax 354

State Inheritance or Estate Tax 355

Estate and Trust Income Taxes (Federal and State) 356

Decedent’s Final Federal and State Income Taxes 356

Local Income Taxes 357

Local Real Estate Taxes 357

State Intangibles Taxes 357

Excise Taxes 358

Appendix A: Glossary 359

Appendix B: State-By-State Rules of Intestacy and Estate or Inheritance Tax 369

Index 401