Name: An Overview of Decedent, Gift, Estate, and Trust Taxation
Uploaded: 2024-11-18T21:37:36.699Z
Duration: 1 h 4 s
Description: An Overview of Decedent, Gift, Estate, and Trust Taxation

Transcript for "An Overview of Decedent, Gift, Estate, and Trust Taxation": Hi, everyone, and thank you for joining me for an overview of decedent, gift, estate, and trust taxation. This session is intended to be an introduction of the topics presented. But first, let's look at a quote. But in this world, nothing is certain except death and taxes. That was from Benjamin Franklin. And I think that's really interesting that we're gonna talk about and look at some of these certainties, income tax for a decedent, the gift tax, estate tax, and the income taxation of estates and trusts. So my name is Eleanor Steinle. I'm a manager here at Intuit. I've been working here for 7 years. Previously, I was a corporate tax director at a publicly traded video game publisher before owning and managing a multiunit tax practice. I'm also a publisher author, and I live on Long Island, New York. Now so now that you know a little bit about me and what we're gonna talk about, let's talk about our agenda. The first topic we're going to look at is the final income tax return of a decedent. Then we'll move to take a look at gift tax. Next, we'll talk about estate tax. That's the tax on the passing of one's wealth. The next topic we'll address is the income taxation of estates and trusts, also known as fiduciary tax. Last, we'll take a look at the state tax considerations. As the topics are interrelated, they're addressed in the order that they're most likely to arise. So before we can get started though, we have to go over a few housekeeping items. You're going to see a box with 4 tabs, chat, poll, docs, and q and a. You can chat with the moderators or other participants using the chat tab. The poll tab is will you go to respond to polls by clicking on your answer. The text in the answer button will change color to indicate your answer has been submitted. Relevant documents including the presentation slides can be found in the docs tab. Please use the question and answer tab if you have any questions. We're going to do our best to answer them during the presentation. The webcast will stream audio through your computer speakers, and a recording of this webinar will be available right after the presentation using the same link you used to join us today. And lastly, at the end, a survey will pop up, and we really do appreciate your feedback. Yep. Alright. Buzz right by CPE and CE credit, which is really important to us all. This session is eligible for 1 CPE credit and 1 IRS CE credit. Alright? And to get that credit, there's gonna be interactive polling questions throughout the presentation. To receive the credit, you have to answer a minimum of half of those polling questions and attend this session for a minimum of 50 minutes. Certificates will be mailed out to you. And then if you don't get that, there is a you can request help with that by reaching out to protaxtraining@intuit.com. But give it some time. It should show up for you. And I'd also like to mention that the CPE and CE credits are only available to those people attending the live session that is not available to anybody watching the recording of the webinar. And lastly, a quick disclaimer. This session is educational in nature and should not be construed as tax advice. The information presented is believed to be accurate and up to date as of the time and date of this session. You should always keep yourself updated on any additional tax law changes. And remember, every client situation is unique. Therefore, carefully consider the facts and circumstances when applying the tax laws in your practice and to your clients. So first, let's get going with a little introduction. As a reminder, we're going to talk about decedents, gifts, estates, and trusts. This course is designed to provide an overview including filing requirements, applicable deductions, and valuation issues. You can find a lot of really good information in the IRS publication 5 59, survivors, executors and administrators. We'll also discuss state tax considerations, planning opportunities and recent developments. So let's get started with decedents. If the income of a deceased taxpayer meets the minimum filing requirements, a final form 10 40 will have to be filed. Even if a return is not required, you may want to file if the return would result in a refund. The return is due by the typical deadline for the tax year in which the taxpayer died, usually April 15th. A decedent's tax return should indicate that they are deceased and include the date of death. If the return is being filed electronically, there is usually a box in your software to check indicating that the taxpayer is deceased and to provide the date of death. If the return is paper filed, the word deceased and the decedent's name and date of death should be printed at the top of the form 10 40. All income the decedent received up to the date of death should be reported on the return. All eligible credits and deductions should be claimed. As a practical matter, you may want to confirm that all accounts, especially retirement counts, have either been closed out or transferred to the estate or beneficiary taxpayer's ID number for reporting. Often, this doesn't happen in a timely manner. The correct and accurate way to handle any income received subsequent to the decedent's passing would be to report the entire amount reported on the final 10.40, then show the amount received after death as a nominee distribution, either for the estate or beneficiary. The estate or beneficiary would then report the amount on their income tax return. If someone other than a surviving spouse or court appointed personal representative is filing the return and the return results in a refund, form 1310, statement of a person claiming a refund due a deceased taxpayer, will be required to claim the refund and indicate to whom it should be paid. And if there's a balance due on the return, the tax should be paid by the estate. Taxes should be paid before funds are distributed to beneficiaries. The person in charge of the deceased individual's estate is responsible for seeing that the decedent's final 10 40 is filed and the taxes are paid. That could be an executor, administrator, surviving spouse, or anyone else who is legally in charge. Speaking of surviving spouse, if the taxpayer was married at the time of death, the surviving spouse may file a joint return with the decedent. And now it's time for our first poll question. Okay. So our poll is asking, if a married taxpayer dies and his surviving spouse remarries before the end of the year, how would their tax returns be filed? Married joint, and then the new spouse files single, married separate and the new spouse files single, or the decedent files married separate and the surviving spouse files married joint or separate with their new spouse, or everyone just files single. Okay. So that that's a that's a good food for thought question. Again, you can look into your poll section to answer that, and this is one of our required polls for the CPE, so please make sure you do that. We'll have just give you a minute to answer that, and then we'll take a look at the answer. And, you know, as you're answering the polling questions, please remember that you can use the q and a panel to send me a question. And if you have any technical difficulties or issues during the presentation, try to refresh your browser. We found that solves a lot of issues. Okay. So just a minute here for you to do that, and then we'll go to our next screen and see what the answers are. Okay. Awesome. We had a great response just about. Everybody sent in an answer to that one. Thank you for your answers. Well, c is the correct choice. Filing status is based on a taxpayer's filing status on December 31st the tax year. On December 31st the tax year, the surviving spouse was legally married to their new spouse. Okay. So that's a little bit of interesting question. And now, let's take a look at what a 10 40 would look like for a deceased taxpayer. So this was an example of a paper filing, and you see up the top where it says deceased Joe taxpayer and 13123 as the date of death. Okay? And that would what would appear on a paper filed, final tax return. Okay? And now, we're gonna take a look at form 1310 which is the statement of a person claiming a refund to a deceased taxpayer. Depending on the attachments that may be necessary, utilizing this form often makes the 10 40 ineligible for e filing. I would like to point out that this form is undated. For this and any other undated tax forms, be sure you're using the most recent version of the form. The revision date is located directly below the form number in the upper left corner. For users of professional tax software, you can expect that the most current version of the form is being used. K. So now we're gonna shift over to gift tax. Alright. Gift tax is reported using form 709, United States gift tax return. A gift tax return is required if a taxpayer gives taxable gifts in excess of the annual excludable amount. Gift tax can be offset by the lifetime exemption, but that will affect the amount of exemption that can be taken on form 706 against estate tax. This table shows the annual exclusion amount per donee. A donor can give annual gifts up to the exclusion amount to as many donees they want each year with no effect on gift or estate tax. Okay? So those excludable gifts don't affect the the use of the lifetime exemption. Gift splitting allows a couple who is legally married under state law to give twice as much as an individual without being subject to gift tax. For example, the annual gift exclusion for married couples in 2024 is $36,000. Both spouses must be US citizens or residents during the year the gift is made and file a joint income tax return. Okay? So there's a few clauses here. In order to qualify for gift splitting, couples must both agree to the gift. To consent to split gifts, the donor must complete and file a federal gift tax return, which the non donor spouse must sign to consent to split gifts for the calendar year. The non donor spouse must also file a gift tax return. Gift tax returns are always individual. There is no option to file a joint gift tax return. It is recommended that both individual gift tax returns be mailed to the IRS in the same envelope to aid the IRS in processing the returns and to avoid correspondence. This screenshot shows the gift tax form 709. And as we said, a gift tax return must be filed if the donor gives someone more than the exclusion amount of $18,000 or if they have gift splitting. Form 709 is an annual return that must be filed no earlier than January 1st, but no later than April 15th of the year after the gift was made. An extension to extend the time to file an individual's income tax return will automatically extend the time to file the gift tax return. This does not extend the time to pay the tax. If an extension is not requested to file the income tax return, form 8892 can be used to extend form 709. Spouses may not file a joint gift tax return. Each individual is responsible to file their own form 709. And remember, as we talked about before, spouses must file gift tax returns to split gifts regardless of the amount of the gift. See line 12 of form 709, we have that marked here with the arrow. The donor is responsible for paying the gift tax. There is no tax to the beneficiary of the gift. And again, this form must be paper filed with the Kansas City IRS Center. K. Now gift tax actually affords us a lot of planning opportunities. Okay? So it's definitely, it's an overlooked area that is not often considered, but it can help parents and grandparents and it can also help some kids going to school. So this is really worth taking a look at if it might help your clients. And again, each client situation has to be looked at, to see if it works for them and if it's applicable. There are a great many planning opportunities for gift tax. Some of them are giving annual gifts. The current exclusion for 2024 is $18,000 $36,000 for married couples. Gifts before the lifetime exemption reverts to pre 2018 levels that were in effect before the 2017 tax cut and drawbacks increased the exclusion amount for tax years 2018 through 2025 to 10,000,000 plus inflation adjustments. Use trusts for gifts. If you're concerned about the beneficiary's fiscal responsibility, a trust could help. And then contributions to a 529 plan qualify for the annual gift tax exclusion. 529 plans offer a unique feature that allows for super funding. That's where a donor can contribute up to 5 times the annual gift tax exclusion in a single year and be applied against the annual gift tax exclusion equally over a 5 year period. That's currently $90,000 for individuals or $180,000 for married couples for tax year 24. It's crucial to carefully document these contributions and ensure that no additional gifts are made to the same beneficiary within the 5 year period to avoid gift tax complications. Death of the investor, the gift the person who gave the gift, prior to the end of the 5 year period may result in a portion of the contribution being included in the investor's estate. Payments made directly to an educational institution for an individual's tuition are excluded from gift tax even if the amount exceeds the annual exclusion amount. Gift tax does not apply to amounts paid on behalf of an individual to a person or institution that provided medical care for the individual. The payment must be made to the care provider and not be reimbursed by medical insurance. Okay? So there's a lot of things you can do with gift tax and tuition and medical bills and and help people out and also save some taxes. Right? So now we're gonna take a look at gift and estate tax because they they're they're interrelated. Alright? There's a unified limit when we discuss gift and estate tax. The lifetime exemption allows a certain amount of lifetime gifts to be exempt from the taxable estate, thereby unifying the gift and estate taxes. The amount of exemption is indexed to inflation and changes annually. There's also a unified rate schedule that applies to both gift and estate tax. So when we're talking about gifts, we're talking about when they have taxable gifts. Okay? So this table shows the basic exclusion amount and the equivalent credit based on the exclusion amount. Alright? And like we said, you know, it's pretty high right now, but those exclusion amounts could decrease after 2024. So this is a good time to be giving those gifts and taking advantage of those increased exclusion amounts. Alright. And then there's also a unified rate schedule for gift and estate tax with the top rate being 40%. Okay. And this table shows the graduated rate schedule that's applicable to both gift and estate tax. So now, we're gonna take a look at estates. There are 2 types of returns that may be needed to be filed by an estate. Form 706 is for estate tax, which is the tax on the passing of a taxpayer's wealth. Filing requirements are based on the value of the estate. It's important to note that states may have different filing requirements than federal. Form 1041 is the income tax return for the estate. Income in respect of a decedent is gross income the deceased individual would have received if he or she had not died. Income in respect of a decedent, also called IRD, creates both estate and income tax liabilities. There is a code section 691c which mitigates the double taxation by allowing IRD's ultimate recipient to reduce the amount of taxes owed through an income tax deduction for estate taxes paid. But first, we're gonna take a look at estate tax before we look at the income tax of the estate. So the actual estate tax requires that form 706 be filed by the executor of the estate of every US citizen or resident whose gross estate plus adjusted taxable gifts and specific exemption is more than $12,920,000. That's the current threshold for decedents dying in 2024. Or whose executor elects to transfer the deceased spousal unused exclusion to the surviving spouse regardless of the size of the decedent's estate. Estate tax is levied on the gross estate, which includes all property in which the decedent had an interest, and that includes property outside of the United States. Estate tax is paid by the estate before the estate distributes assets to the beneficiaries. The beneficiaries do not pay tax on their inheritances. Since 2013, the top tax rate has remained at 40%. The 2017 tax cut and jobs acts increased the exclusion amount for tax years 2018 to 2025 to $10,000,000 plus inflation adjustments. So the inflation adjustments is how we got to the $12,920,000 we just talked about. The exclusion amount is scheduled to return to pre-twenty 18 levels in 2026. This amount is an estimated $7,000,000 That's a $3,000,000 difference. So that's a big number that a lot more people are going to be subject to the estate tax and the gift tax too is gonna kick in at a lower rate after 2025. This screen shows the first page of form 706, United States estate tax return. Form 706 must be paper filed as the IRS does not currently support electronic filing of this form. Note that this is another undated form. Be sure you're using the correct version based upon the year the decedent died. Next, we're going to take a closer look at some items that affect the calculation of estate tax. Estate tax is generally based on the fair market value of the property on the date of death. Fair market value is the price that the property would change hands between a willing buyer and a willing seller, neither under a compulsion to sell. There are special valuation rules that may save on estate tax. The most commonly used special valuation rule is the alternative valuation date. If the alternative valuation date is elected, assets are generally valued as of 6 months after the date of death. Making this election could reduce the value of the gross estate and thereby reduce the amount of federal estate tax that's due. Years ago, I had a client whose aunt died. The client was an unassuming postal worker. True story. Okay? He was the sole beneficiary of his aunt's estate. Imagine his surprise when he found 1,000 of Gillette stock certificates in his aunt's hall closet. She was a frugal woman who worked as for Gillette as a secretary for many years, and she gathered and put all her money into her company stock. And now my client was a multimillionaire. But in the time between his aunt's step and the discovery of the stock certificates approximately 6 months later, Gillette's stock value had declined quite a bit. By using the alternative valuation date, tens of 1,000 of dollars in estate tax was saved. Special so that was, by that alternative valuation date, you really wanna always take a look at. Another valuation method is special use valuation, which allows the value of real property to be based on its current use as opposed to its highest and best use. Real property may qualify for this election if it's located in the United States and is used as a farm for farming purposes or in a closely held trade or business other than farming. The decedent or family member must have used the property for that purpose at least 5 of the 8 years before the decedent's death, disability, or retirement. And while we're talking about valuation and basis, I want to parse out the difference between gift basis and inherited basis. The beneficiary of a gift always uses the basis that the donor would have in determining gain or loss, But the beneficiary of an estate uses the fair market value of the asset at the date of death, which usually results in a step up in basis. And a step up in basis does occur even if an estate tax return is not filed. So certain transfers made during the decedent's life are viewed as having been made to avoid estate tax. The IRS states that the value of property involved in one of these transfers must be included in the decedent's gross estate. Any property that is transferred while still alive, as long as a beneficial interest is retained, will be included in the gross estate. Beneficial interests can include possession, enjoyment, or the right to income from the property. Transfers taking place at death are included in a gross estate unless the transfer was a bona fide sale for adequate and full consideration made before October 8, 1949. That's not a typo, 1949. Or possession or enjoyment of the property could have been obtained by the beneficiary during the decedent's life. Revocable transfers include property transferred by a decedent that's subject to the power of alteration, amendment, revocation, or termination. This power is considered to have existed at the time of the decedent's death. An example would be a revocable living trust. Also, certain gifts made within 3 years of the donor's death are included in the donor's gross estate. Gifts that are subject to a retained interest or power over the gifted asset will be included at full value in the estate. This rule discourages transfers of property shortly before death with the intent of reducing estate tax. If property is transferred for less than the fair market value, the excess of the fair market value of the property over the price received is included in the gross estate. So we also have some allowable deductions against estate tax and there's a number of them and they help to reduce the gross estate's taxable value. We're just gonna discuss a few of the more common ones here. The marital deduction is an unlimited deduction for transfers to a surviving spouse. Almost all property transferred qualifies for this deduction. This deduction does not completely avoid estate tax. The spouse receiving the property will eventually pay estate tax on their estate. A charitable deduction is available for gifts made at death as long as the recipient is a qualified 501 subchapter C3 organization. There's no limitation on the amount that can be donated. Debts and estate expenses that are paid by the estate can also be deducted. These can include mortgage, credit cards and funeral expenses. Estate administration expenses such as legal, accounting and executor fees can also be deducted. Property losses as a result of casualty or theft that occurred during the settlement of the estate are deductible to the extent they are not compensated by insurance. So estate planning opportunities. We have some planning opportunities here too. Well, the best and most simple one is simply having and maintaining a will. It's the most important and often looked estate planning tool. Even with a simple estate that has a house and a bank account, it's crucial to have a will that's valid. Even a basic will that designates beneficiaries will protect your client's assets. If an estate includes a home, it may be beneficial to sell the home through the estate as opposed to distributing it to the beneficiaries. Probate can be a complex and lengthy process. It can also be costly with fees for attorneys, appraisers and the courts. Selling a home through an estate can make it easier for the executor to manage and settle the estate. Potential disagreements among beneficiaries regarding the distribution of property can be avoided. So that's another, like a planning technique in keeping everybody on the same page. But now, it's time for our second polling question. Okay. So an estate liability can be quite large. The IRS has a limit on how large of an amount they can accept in a single check. What's that amount? Is it $10,000,000, $25,000,000, $50,000,000, or $100,000,000? So please take a few minutes to answer this question. Again, you can just go to the poll in the chat and select your answer. And when the color changes, that's how you'll know that your answer's been accepted. And, again, like, I appreciate your your attention thus far. I hope you're using the q and a and you can continue to do that and put in some questions for me. And we'll just take a moment here and let those answers roll in before we find out how big of a check is too big for the IRS. Okay. Great answers. Okay. That was a that was kind of a fun one, I thought. Okay. Well, the correct answer is d, $10,000,000. The IRS cannot accept a single check, including a cashier's check, for amounts of a 100,000,000 or more. So if your client is sending more than a 100,000,000 by check, you'll need to spread the payments over 2 or more checks with each check made out for an amount less than $100,000,000 The $100,000,000 limit does not apply to other payment message such as ACH and electronic fund transfers. So now let's get back to our content. We're gonna take a look at the income tax of estates and trusts. Okay, so, so far we had the income tax of the decedent. We had gift tax. We had estate tax on the estate. And now we're gonna look at as income tax for estates and trusts. Form 1041 is the US income tax return for estates and trusts. There are significantly different filing requirements for estates and trusts. We'll discuss them shortly. Beneficiaries will receive schedule k1, which will report their share of income and expense to be reported on their personal income tax returns. Form 1041 is used to report the income tax for a decedent's estate or for a trust. An appropriate box in section A, that's on the left hand side where the arrow is, should be checked to indicate that the 1041 is being filed for a decedent's estate or a trust. There are selections for different types of trusts. Calendar year estates and trusts must file form 1041 by April 15th. An extension of time to file can be requested using form 7004. Form 1041 can be electronically filed. A best practice is to review a copy of the will or trust documents prior to preparing the estate or trust's income tax return. This is especially important for trusts. There are many different type of trusts and just as many different type of tax treatments. The legal document will also provide information regarding beneficiaries and distribution percentages and those are gonna come into play on your schedule k ones. And talking of schedule k one, here is a little copy of a schedule k one for form 1041. Alright? And it's used to report the income tax for decedent's estate or trust that a beneficiary must include on their return, their share of the income from the estate or trust. The first box in section a should be checked to indicate that the 1041 is being filed for a decedent's estate or for a trust. So they'll always know what it's coming from. Okay? And then we have fiduciary tax for an estate. Form 1041 for a decedent's estate must be filed if the estate has gross income for the tax year of $600 or more. A beneficiary who's a non resident alien or if a qualified investment in a qualified opportunity fund was held at any time during the year. So be careful of that. That's a $600 gross income. Okay? Not taxable, gross income. That's a really low filing threshold. So you wanna keep an eye on that if that applies to any of your clients. And then trusts. There are different types of trusts and they can provide many benefits for decedents and their beneficiaries. Trusts can avoid probate, which can save time and court fees. Trusts can reduce estate tax liabilities. The terms of a trust can be specified precisely, including when and to whom distributions are made. A testamentary trust can name minors as beneficiaries and the assets can be paid out when they reach a specified age. Professional management of trusts can ensure management of the assets. 2 or more common trusts you may encounter are testamentary and AB trusts. Testamentary trusts are established after a person passes away and contain a portion of all of the decedent's assets. AB trusts are joint trusts for married couples, which split into 2 trusts after the first spouse dies. The a trust is for the surviving spouse and the b trust contains assets for the heirs. A recent development in revenue ruling 2023 dash 2 Completed gifts to an irrevocable grantor trust do not receive a step up in basis upon the death of the guarantor unless the asset in question is included in the estate of the guarantor upon their death. Okay? So that's a change and that could affect the beneficiaries quite a bit and that's a relatively new, revenue ruling from the tax year 2023. Alright. Form 1041 for a trust. So now we're talking about the filing request requirements for a trust versus an estate. File 1041 for a trust must be filed if the trust has any taxable income for the year and gross income for the tax year of $600 or more, regardless of taxable income. A beneficiary who's a nonresident alien or if a qualified investment and a qualified opportunity fund was held at any time during the year. An exception would be a guarantor trust. Income from a guarantor trust is generally reported directly on the beneficiary's form 10 40. So that's when I said that, you know, it's very important to get the trust document to determine exactly what type of trust it is so you'll know when and which type of tax filing would be required. So now we're gonna take a little look at state tax considerations. So as I stated early, our state filing requirements for state tax can be very different than the federal amounts. It's very possible that a taxpayer could have, an estate whose size does not meet the requirement for filing for federal purposes, but their state may require an estate tax filing. So you wanna be very careful to see what the state requirements are. Each state has its own exemption thresholds for taxable estates and their own tax rate. And in most states, the tax estate tax rate is progressive. That is, it increases with the value of the estate. 12 states and the District of Columbia impose estate taxes. Six states impose inheritance taxes. Maryland is the only state to impose both a state and inheritance tax. Connecticut and Vermont also have a flat single rate. Income tax, generally, if you file a federal income tax return, a 10.40 for a decedent or a 10.41 for an estate or trust, in general, you'll also need to file a state income tax return. This slide, it shows a great map that's from the tax foundation.org. You can just look that up yourself. And it shows which states have estate tax, which states have inheritance tax, and gives you some idea of the rates. So that's a really nice summary that you could take a look at. Okay. So now we're gonna turn to our conclusion. Estate planning is an area of opportunity for practice development. It would be beneficial for you to find an estate attorney to align with. An accountant can play a vital role in estate planning due to their ongoing relationship with their client and knowledge of their finances. Trust administration and accounting could generate an additional stream of income for accountants. One of my first positions as an accountant included preparing monthly financials for a large trust. The owner of the CPA firm I worked for was the trustee. The firm collected accounting fees, and the trustee CPA collected trustee fees. This was an opportunity for multiple streams of income. This is about all I have to share with you today, and I really hope it provided you with some insight into the basics of the very complex areas of tax practice that surround decedents, including gift, estate, fiduciary, and final income tax returns. So in closing, we're just gonna drop our survey here. And if you would please fill that out, we'd really appreciate it. We'd love to hear your feedback, and we appreciate your attending today. And if you want more training, be sure to check out our education resource center. We have a lot of great webinars coming up, both live and recorded. And then we also have a support community. So I encourage you to look at the Intuit accountant support and explore the community. There's a lot of great information there for you that Intuit has out there for you. And I just wanna give you a final thank you for your time. I appreciate the time you took to attend this presentation today. And as I mentioned at the beginning, we had a lot of information to absorb in this short time. So don't forget the slides are available for your reference in the docs tab. And thank you again for being here with me today.