Decedent’s Final and Fiduciary Returns
Summer 2014
Developed by Kathy Hubbard, EA
Presented by XXXX
Objectives:
 To address common scenarios that small tax practitioners encounter with decedents' final
and fiduciary returns,
 To provide a quality fact base with ample references, worksheets and examples for the
tax professional
 To provide information specific to Texas.
The following presenters from the Texas Society of Enrolled Agents are involved
with the 2013 Regional Practitioner Meetings:
Anna Dunson EA
Kathy Hubbard EA
Ricardo V. Rivas EA
John M. Stanley EA
This presentation is made courtesy of The Texas Society of Enrolled Agents.
Material is covered by copyright law and is used with the permission of the author.
Table of Contents
The Final 1040 ................................................................................................................................ 1
Who Signs the Return? The Personal Representative! ................................................................... 2
Decedent’s and Successor’s Income ............................................................................................... 3
Income Documents ......................................................................................................................... 3
Income In Respect of a Decedent (IRD) §691 ................................................................................ 5
Expenses In Respect of Decedents (DIRD) .................................................................................... 6
Fiduciary Returns ............................................................................................................................ 6
Form 1041 Due Dates ..................................................................................................................... 6
1041 Filing Requirements IRC §6012: ........................................................................................... 7
Gross Income .............................................................................................................................. 7
Beneficiaries ............................................................................................................................... 7
Taxes ........................................................................................................................................... 7
Qualified Revocable Trusts can Elect to be Taxed as Estates §645 ............................................... 8
Expenses in Respect of a Decedent ................................................................................................ 9
The Fiduciary's Expenses................................................................................................................ 9
Expenses Subject to 2% AGI Reduction ........................................................................................ 9
Estate vs Trust Recap .................................................................................................................... 10
Distributable Net Income (DNI) IRC §643 and the Distribution Deduction IRC §651 ............... 11
Fiduciary Tax Rates for 2013 ....................................................................................................... 13
Exemption Amounts for Alternative Minimum Tax .................................................................... 13
Net Investment Income Tax (NIIT) .............................................................................................. 13
What Estates and Trusts are subject to the Net Investment Income Tax? ................................ 14
What is included in Net Investment Income? ........................................................................... 14
What kinds of gains are included in Net Investment Income? ................................................. 14
What are some common types of income that are not Net Investment Income? ...................... 14
What investment expenses are deductible in computing NII? .................................................. 14
APPENDIX ................................................................................................................................... 15
i
The Final 1040
The date of death generally establishes the last day of income attributing to the decedent. It
closes the decedent's tax year, but not the 1040 filing year. No matter when one dies in a tax
year, a 1040 return, if due, is due on April 15 of the following year. It may be extended.
The standard deduction (if not itemizing), additional standard deductions for being over age 64
and/or blind, plus the exemption for oneself, are claimed in full. They are not prorated. If the
decedent was a dependent, the full exemption amount is used.

1040 Filing Requirements Depend Upon:
o Gross Income
o Age
o Filing Status
o Other Tax or Filing Obligations

Gross Income
o Gross Income in an amount sufficient to require return filing is itself a function of
age and status variables. In general, for 2012, it ranged from a low of $950 for a
dependent under age 65 to a high of $21,800 for a married couple filing jointly
when both are age 65 or older.
o Income is measured from the January 1 up to midnight of the date of death.

Age
o One is considered to have reached age 65 on the day before one’s 65th birthday.

Filing Status
o There are exceptions to the customary status and income filing rules. If a married
couple normally files jointly, even though they live apart, and one of them dies, a
return must be filed if gross income is at least $3,800. Where a couple files
jointly, and one dies, and the surviving spouse remarries, the decedent must file
married separately! This is a post-mortem impact on filing status.
o So too where one filed head of household, but passed away less than 181 days
into the year. The qualifying relatives were not in the decedent’s care for over half
the year.
o If the decedent is a child, s/he qualified the relative with whom she spent the
majority of her days that final year for HOH.

Other Filing Situations
o Special Taxes with Form 1040:
 AMT,
1
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Social Security and Medicare tax on unreported tips, or on wages from a
non-withholding employer,
Uncollected Social Security, Medicare or RRTA on reported tips, or on
group term life insurance,
Recapture taxes, such as first-time home buyer tax, forgiven to decedent;
spouse continues paying his or her half.
Self-employment tax, if net self-employment earnings were $400 or more,
or,
Wages from services performed as a church employee were $108.25 or
more.
o Special Taxes on a Stand-Alone Form if the 1040 not otherwise required:
 Additional tax on a qualified plan reported on Form 5329
 Household employment taxes reported on Schedule H
 Non-deductible IRA contributions can be reported on a standalone Form
8606 if the Form 1040 is not required.
o Refundable Credits, Payments of Tax or to a non-deductible IRA
 Earned Income, child, prior year minimum tax, education and fuel credits
 Withholdings and estimated tax payments,
o Never Overlook:
 Mortally wounded warriors or civilians serving in combat zones, injured
and/or deceased victims and families of victims harmed by terrorist attacks
and astronauts who perish in the line of duty have special tax forgiveness
provisions. Carefully review the particulars surrounding the passing of
these military and civilian persons, and the discreet types of tax relief
applicable to their tax accounts and sometimes those of their families.
 Similarly, certain death benefits paid to survivors of public safety officers
killed due to traumatic injuries sustained in the line of duty after
September 10, 2001are excluded from both income and estate taxes.
Public safety officers include police, fire, rescue, and medical emergency
staff, and chaplains responding to emergencies as a member of the police
or fire crew.
Who Signs the Return? The Personal Representative!
A personal representative is an executor, administrator, or anyone in charge of the decedents’
property. An executor or executrix is some named in the decedent’s will to administer the estate
and distribute properties as the decedent directed. An administrator is someone usually appointed
by the court if the decedent was intestate (died without a will,) or if no executor was named in
the will, or if no named executor can or will serve. Once appointed, the representative files form
56, Notice Concerning Fiduciary Relationship with the IRS.
2
Sometimes, no will exists, or the existing will bequeaths all to trust set up in the will, or to a
preexisting trust which had been a revocable trust when the decedent lived. When the trustor
dies, revocable trusts become irrevocable. (Remember, powers of attorney expire on death.) Now
it is the trustee who is the personal representative.
On a joint return, if no representative has been appointed, the surviving spouse can file and sign.
Note--a court-appointed personal representative may revoke an election to file a joint return
previously made by the surviving spouse alone. This is done by filing a separate return for the
decedent within one year from the due date of the return including extensions.
Decedent’s and Successor’s Income
Revenue received prior to and including death belong on the decedent’s final return. Income
received afterwards (unless the taxpayer was using the accrual method) belongs on the return of
the next legal owner. Ownership is first determined based on how an asset is “styled,” that is
“titled” or “named.” Common types of ownership are separate property, joint property, joint
property with right of survivorship, payable on death property, life estates, revocable or “living”
trusts, community property, and community with rights of survivorship. At this point the
practitioner pulls out Pub559’s Table B: Worksheet to Reconcile Amounts Reported In Name of
Decedent on Information Returns.
Joint ownership does not automatically go to the survivor, whereas joint ownership with right of
survivorship does transfer. JTROS is a written agreement between (among) the two (several)
owners. It must be created at the inception of the ownership. Disposition of assets owned solely
by the decedent is determined according to the last will and testament. If the will says “give my
TI stock to Joe,” then Joe has a specific gift and specific, post mortem income from its dividends.
If the will says “after paying (special gifts and expenses) give everything to Joe,” then the
fiduciary income return reports the income on its form 1041, if it isn't distributed. More detail on
that process comes a bit later in this paper. If no will exists or is probated (filed in the court for
the purpose of transferring title,) property passes according the state probate code. The attorney
for the estate should be consulted for resolving any title uncertainties.
In cases where a married couple’s income producing assets are owned jointly with community
and /or survivorship rights, or have wills bequeathing all to the other spouse, the final joint return
typically has no breakout of premortem and postmortem income. In other cases, the practitioner
will need to allocate the income.
Income Documents
Interest, dividends and other proceeds payers may be convinced to issue 1099s showing only the
decedents portion, and issuing a second 1099 to the beneficiary for the remaining portion. Most
often it falls to the personal representative to file nominee 1099s. Practitioners often receive the
tax information well after the 1099 filing due dates.
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Retirement income payments are sometimes predictable. Social Security “prepays” a person for
the month ahead; when they die during that month, the payment is taken back by the
administration. The 1099-SSA will only include the amount taxable to the decedent. Many other
state and private retirement pensions pay “after” the month in question, and some pay two or
more months after death, so that these decedent’s estates will have at least one post postmortem
payment.
Partnerships have the burden of figuring the distributive share of income and expense reportable
on the date of the partner’s death, and reporting the remainder share on a separate K-1. S
Corporation income is also reportable through the date of death on the shareholder’s final return.
Capital gains and losses reported to the decedent but occurring post mortem should still be
reported on the final 1040 (unless the reporting party agrees to revise their 1099) for income
document matching purposes. However, an adjustment will need to be made on the form 8949
with an amount (column g) sufficient to produce no gain or loss (column h;) use adjustment code
N (for Nominee.)
Losses, both net operating and capital, if not absorbed on the decedent’s final return, do not carry
over to the estate. A net operating loss incurred by the decedent can be carried back to prior
years. Capital losses on the decedent’s final 1040, if married filing jointly, may carry forward to
the spouse’s subsequent returns for her portion only for her separate property; for community
property s/he carries forward half of the loss.
Passive activity losses accumulated and unused prior to death are allowed against the decedent’s
income on the final return to the extent that they are greater than the difference between the
beneficiary’s’ basis and the decedent’s adjusted basis. Thus, a rent house with a depreciated basis
of $30,000 in the decedent’s hands, and a fair market value of $40,000 provides a $10,000
maximum of passive activity losses deductible on the decedent’s final return. If the decedent had
$12,000 in unused passive losses, the remaining $2,000 is not deductible.
Credits come with their own parameters. For instance, unused business tax credits are carried
back one year and forward for 20 years (15 years if arising before 1998). Any such unused
credits available in the year of death are deductible on the final return.
Basis in excess of the return in an annuity can be claimed on the final return of the decedent
§72(b)(3)(A) or the beneficiary §72(b)(3)(B). The same holds true claiming the loss on a ROTH
or a non-deductible IRA which is under basis when the account is closed.
With an Archer MSA or its successor, the HSA, if the spouse is the designated beneficiary, is
"rolls over" and is treated as the spouse's. Otherwise, the fair market value of the account on the
DOD becomes taxable to the beneficiary. Unless the beneficiary is the estate, taxability is
reduced by any qualified medical expenses for the decedent that are paid by the beneficiary
within 1 year of the date of death.
4
Withheld and estimated tax payments are reported and claimed on the decedent’s final return. So,
if Tim’s retirement check was $1,000 per month, and had $200 withheld, and if Tim died on
March 1, and the retirement checks were paid on March, April and May 3, Tim personal
representative would report the 1099R income total of $5,000 on the “pension income” line of
Tim’s final return and the five months of $200 withheld tax, or $1,000 on the “federal income
tax withheld” line of the return. Then, on line 21 of form 1040, a line item of “post postmortem
income” in the amount of ($3,000) is reported.
Income In Respect of a Decedent (IRD) §691
IRD is that part of postmortem income on which, had the decedent lived, s/he would have
collected and paid income tax. Tim’s pension payments from March to May in the example
above is IRD These are income assets on which, if the estate exceeds certain dollar limits, will be
subject to both estate income and inheritance tax. This character of income is determined by
reference to the decedent. (With today’s generous estate exclusions -- $5.12 million for 2012-most families will no longer pay the inheritance tax.) The IRD assets do not receive the “stepped
up” basis under IRC §1014. The income retains the same character in the beneficiary’s hands. A
partial list includes:
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Interest, dividends, rents and royalties accrued pre mortem but paid post mortem,
Uncollected salaries, wages, bonuses, vacation and sick pay,
Certain deferred compensation and stock option plans,
Annuity payments in excess of the decedent’s investment in the contract,
Qualified pension plans, profit sharing plans, SEP, Keogh and IRA accounts –
save for nondeductible amounts, like ROTHs,
Accounts receivable in the hands of a sole proprietor,
Gain on the sale of property sold pre-postmortem but collected post postmortem,
Structured settlements and structured attorney payment plans,
Difference between the face amount and the decedent’s basis in an installment
sales obligation,
Interest accrued through the date of death on Series EE bonds, unless either the
decedent elected to report interest annually or the interest was reported on the
decedent’s final form 1040.
Perhaps the most frequent complaint a practitioner hears from the beneficiary who cashed in an
inherited IRA is “but I thought inheritances were tax free!” Another frequent surprise for
beneficiaries comes when they learn that funeral expenses are not deductible against either the
decedent’s or the estate’s income. (They are only deductible from the estate’s balance sheet -that is on the inheritance return, form 706. Inheritance tax is an excise, or transaction, tax.)
5
Expenses In Respect of Decedents (DIRD)
Expenses paid by the decedent go on the final return; these include itemized expenses, business
and investment expenses, along with interest and taxes.
Expenses of the fiduciary go on its’ form 1041 return, such as administration expenses, interest
and taxes, along with business, rental and royalty expenses. Persons who acquire an interest in
the property subject to obligations which the estate is not required to pay must pay the
obligations. An example here would be a non-recourse mortgage, one secured only by the
property itself, and not by the decedent.
Many expense types have unique reporting regimes and schemes for the decedent and/or the
successor. The practitioner should carefully review these transition requirements by asset or
expense type, such as with royalty income and depletion. The same holds true for the transfer of
a right to income. For instance, review the particulars around installment sales, should these be
sold by the estate.
Income and deductions in respect of a decedent play a big role in completing inheritance Form
706. Communication with and between the estate’s attorneys and the tax practitioner is vital for
accurate returns with the correct interplay of elections and other matters. For example, medical
and dental expenses of a decedent paid post-postmortem for a year following the date of death
may be deducted either on the 706 or on the final 1040.
Fiduciary Returns
The practitioner has now sorted the income and expenses to the date of death, then from the day
after to the end of the year, and reconciled it to the forms 1099. Furthermore, the postmortem
income has been allocated to its postmortem owners or to the estate, completing Table B’s
Worksheet.
The most common estate planning the small tax practitioner encounters is the Last Will and
Testament (LWT). Next in frequency is the revocable trust where the decedent was the trustor
and the trustee. On death it becomes irrevocable, and a successor trustee takes over. The third
type usually arises from language in the LWT or the trust, and it establishes a trust for the
surviving spouse, who receives income and support; the children are the remainder beneficiaries.
Form 1041 Due Dates
On the 15th Day of the 4th month of the tax year;
Extend for 5 months on form 7004.
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1041 Filing Requirements IRC §6012:
Gross Income
Beneficiaries
Other Tax or Filing Obligations
Gross Income
All income that flows in to the estate from the deceased’s assets and rights continues to be
reported on the fiduciary’s return. Interest, dividends, pensions, business income and
cancellation of debt are taxed. Refunds of items previously deducted are taxed. The same income
rules that govern individual reporting cover the fiduciary IRC §641(b).
Notably excluded from income taxation (but not inheritance tax inclusion) are life insurance
proceeds. Interest paid in addition to the policy amount is taxable.
Beneficiaries
Even if the estate has under $600 in income per year, if any beneficiaries are non-resident aliens,
the estate needs to file a 1041 [Reg. 1.641(a)(2) and 1.61-1(a).]
Fiduciaries are conduits. The purpose of the return is to specify who pays the tax – fiduciary or
beneficiary.
In order for the fiduciary to claim a beneficiary “distribution deduction,” forms K1 must be
attached to the return.
Taxes
o Withheld income tax from income received by or reported to the estate is claimed on
form 1041;
o Wages paid to the decedents domestic employees by the estate, along with taxes payable
are reported on Sch H;
o Let the Planning Begin!
o There are a host of opportunities for post postmortem tax planning. Many arise from the
special rules affecting the fiduciary estate return. Here are the main tools for the
practitioner’s planning chest. And, while the date of death is the beginning date of the
first estate tax year, income paid up until midnight of the decedent’s date of death
belongs on the final 1040, and the estate’s income and expenses begin the following day.
7
o Accounting method – cash or accrual? Some estates need to match income and expenses
very precisely.
o Decedent’s estates can select their fiscal year end.
o For their 1041 ES requirements, estates follow individual estimated tax payment rules,
except for IRC §6654(I):
 for any tax year ending before two (2) years after the decedent’s date of
death,
 if the tax for the current year is less than $1,000, or
 if the estate had no tax liability for the proceeding 12 month year;
 Otherwise estimated tax payments are based on 100% of the prior years’
tax, or 110% if the fiduciary’s’ AGI is more than $150,000.
o
Estates are qualified S-Corporation shareholders;
o Although only individuals can actively participate in rental real estate activities, a
decedent's estate is treated as actively participating for its tax years ending less than 2
years after the decedent's death, if the decedent would have satisfied the active
participation requirement for the activity for the tax year the decedent died;
o Estates have a standard deduction of $600, whereas trusts have $300 or $100, type
depending (except in the final year, when fiduciary returns have no standard deduction.)
o Trusts can allocate their estimated tax payments to the beneficiaries, In the case of a
taxable year reasonably expected to be the last taxable year of an estate, it too can elect
this allocation. It must be done by filing form 1041-T by the 65th day after the close of the
tax year. The amounts shall be treated as a payment of estimated tax made by such
beneficiary on January 15 following the taxable year IRC §643(g).
Qualified Revocable Trusts can Elect to be Taxed as Estates §645
Qualified Revocable Trusts may elect to treat the trust as part of the estate for Income Tax filing
(and Generation Skipping Tax purposes) IRC §645. They do this by filing form 8855 to make the
election, and check decedent’s estate for type of fiduciary on the 1041. Once they elect, qualify
for the above estate opportunities that are not otherwise available to trusts.
The 65 Day Rule, an election under §663(b) is available to both trusts and estates. Use this to pay
income from the trust to beneficiaries within 65 days after the close of the tax year.
8
Expenses in Respect of a Decedent
o
o
o
o
o
Mortgage Interest
Investment Interest
Property & state income taxes
Medical Expenses paid within a year of death
Business and Investment Expenses
o Review rules for depreciation, depletion and installment sales
The Fiduciary's Expenses
o
o
o
o
o
o
Attorney Fees
Fiduciary and Estate Return Fees
Court Costs
Fiduciary Fees
Fiduciary Premium Bond Fees
Certain investment management fees and other costs incurred because of the entity’s
status as an estate or trust § 67(e)(1).
o Miscellaneous expenses which exceed 2% of the estate adjusted gross income.
Expenses Subject to 2% AGI Reduction
o Preparation fees for forms 709 (gift) or 1040
o Maintenance, utilities and insurance to protect the value of the non-trade or business
property,
o Non unique portfolio management and advisory fees.
Estates often pay more in expenses early in their lives, and have taxable income later. If the
estates’ expenses exceed taxable income, they do not carry forward. Thus, where manageable,
the practitioner assists the personal representative in timing matters. These can include using
retirement assets to cover attorney fees, or electing a fiscal year beyond the end of the calendar
year.
Example 1
In the simplest of circumstances, an estate could receive all its’ income – say $5,000 from an
IRA; pay its expenses and close in one fiscal year. For discussion sake, assume the estate also
received $30,000 from a non interest bearing checking account. If A dies on December 15th, the
estate year can close as late as November 30. If the court and attorney fees paid were $4,000, the
remaining taxable income flowing out to the beneficiaries on form K-1 is $1,000, while the
distribution itself is $31,000.
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Estate Inflows & Outflows
IRA
Checking acct cash
Reportable Income
Inflows marshaled
Court and Attorney Fees
Taxable Income
Net cash on hand
Estate Distributes All
Form K-1 Box 5 Income
Total
$ 5,000
$ 30,000
$ 35,000
- $4,000
On Final 1041
$ 5,000
0
$ 5,000
-$4,000
$1,000
$31,000
-$31,000
$ 1,000
Example 2
To revise the example, were the administration expenses $8,000, beneficiaries would receive a
K-1 with closeout expenses of $3,000, deductible on their own Schedules A -- without AGI
limitations.
Estate Inflows & Outflows
IRA
Checking acct cash
Reportable Income
Inflows marshaled
Court and Attorney Fees
Taxable Income
Net cash on hand
Estate Distributes All
Form K-1 Box 5 Income
Total
$ 5,000
$ 30,000
$ 35,000
- $8,000
On Final 1041
$ 5,000
0
$ 5,000
-$ 4,000
- $ 3,000
$28,000
-$28,000
-$ 3,000
Estate vs Trust Recap
ESTATE
Special ES Rules
Standard Deduction $600*
S-Corps are qualified shareholders
Can select fiscal year end,
TRUST
Only prior year look-back rules
Standard Deduction either $300 or $100*
S-Corps are only allowable partners for 2 years
Must use calendar year
10
May allocate ES payments to beneficiaries in
May allocate ES payments to beneficiaries any
final year by filing form 1041-T by the 65th
year by filing form 1041-T
day of the calendar tax year.
*No standard deduction allowed in either type of fiduciary return’s final year
ACTIVE RENTAL PARTICIPATION
For 2 years post DOD, if the decedent qualified Only active if the trust is actively participating
for active participation, the estate qualifies, §
469(i)(4)
After 2 years, same rules as trust
-- IRS says this means the trustee
-- Some courts have said this means the
beneficiaries
Distributable Net Income (DNI) IRC §643 and the Distribution Deduction
IRC §651
Unfortunately, the rules get a bit esoteric around this deduction. The practitioner is accustomed
to using a tax accounting system with the taxpayer’s individual schedule B,C,D,E and F income.
The DNI rules start with taxable income, and step it back towards fiduciary or trust accounting
income.
Example 3
Let’s start with “net exempt income.” Say your estate has $8,000 of ordinary interest income,
$2,000 of municipal interest income, and $1,000 in administration expenses. That means 20% of
its income is exempt. So, look to the expenses, and remove 20%, or $200, from the amount
allowed for taxable income calculations.
Income and Expense
Ordinary Interest Income
Municipal Interest Income
Total Income
Amounts
Ratios
$ 8,000
$ 2,000
$ 10,000
80%
20%
100%
Administration Expense Total
Tax Deductible Portion
Non-Deductible Portion
$ 1,000
$ 800
$ 200
100%
80%
20%
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So, DNI is a calculated figure that begins with the taxable income, adds back the exemption
amount, removes capital gain, and adds in net exempt income.
DNI presumes for tax purposes that all income is distributed first, before principal. In the
above example where the administration expenses were $4,000 and the taxable income was
$5,000, assume now that the estate did not close that first year. The executor decides to distribute
$10,000 to the heirs. So, there was $31,000 in the bank, including $1,000 of taxable income.
Neither the heirs nor the estate can argue that the $10,000 distribution was all or prorate
principal. The heirs are taxed on the $1,000. Had the estate distributed $400 to the heirs, its
return would take a distribution deduction for the $400, claim the standard deduction of $600,
and thus have zero taxable income. If the fiduciary does not distribute to the heirs, it pays tax on
the $400 which remains after its standard deduction.
The Distribution Deduction is the lower of the amount distributed or the deductible amount
under the DNI rules.
Trusts differ from estates in that estates exist to transfer probate assets to the beneficiaries. Trusts
have current and future beneficiaries, which bifurcates the trustees' obligation into sometimes
contradictory needs. A typical testamentary trust small tax practice firms encounter is for the
surviving spouse to enjoy all the income, and their children to inherit the corpus on his or her
death. In another common type, the beneficiary doesn’t change, but must attain a certain age in
order to claim the principle.
Trust law is a "one size fits all" model, and it covers practice standards for those serving high net
worth families. Income, when not modified by terms such as “taxable” or “gross” or
“un/distributable,” is defined in IRC §643(b) as “the amount of income of an estate or trust for
the taxable year determined under the terms of the governing instrument and applicable law.”
The governing instrument is of course the will or trust. Local applicable law Texas Property Tax
Code, Title 9, Trusts, Chapter 116, Uniform Principal and Income Act. (UPIA) (Chapter 117
weighs heavily on the prudent management by the trustee.) Corporate trustees take these matters
very seriously.
Small business has models exempting say, corporations grossing under five million annually
from being required to use an accrual accounting. Historically, there was no such easing of
standards for small trusts and estates, unless the trust document addressed that matter. UPIA
produced a set of rules such that interest, dividend, pension or IRA income is 10% income and
90% principal. These were to protect principal, but caused tax headaches. If the fiduciary was
required under the governing document to distribute all income, and only 10% counted as
income under fiduciary accounting income (FIA) rules, then the fiduciary paid income tax on the
remaining income, at a much higher rate than the beneficiaries.
A classic opposition between UPIA’s income and principal categorization and income tax
categorization is with capital gains and losses. Be it gain or loss, an asset sold has just changed
form from, say, stock to cash. For income taxation, the difference between its purchase price and
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sales price is reportable income. Picture the estate selling the stock and distributing the profit to
the heirs. Unless permitted under the rules in the trust or will, this generally was taxed to the
fiduciary. The beneficiaries were considered to be receiving a payment from principal. Expenses
also have their presumptions, often half each allocated to income and principal.
Most small family trusts have never agonized about the law's renaming of income as principal
and the tax impact. Until 2008, the Texas UPIA had less flexibility than it does now. Now, the
trustee may re-allocate between principal and income under the allocation powers of 116.005.
This is a relief to the trustees of these family trusts. The small tax practitioner is not likely to be
dealing with the larger trusts needing principal and income allocations, but we have provided
enough information to act as a springboard should it be needed.
Estates and trusts do have to make pro rata allocations of their deductible expenses when some of
the income is not taxable, as shown in Example 3, or where one or more beneficiaries are exempt
entities.
Fiduciary Tax Rates for 2013
If Taxable Income Is:
The Tax Is:
Not over $2,450
Over $2,450 but not over $5,700
Over $5,700 but not over $8,750
Over $8,750 but not over $11,950
15% of the taxable income
$367.50 plus 25% of the excess over $2,450
$1,180 plus 28% of the excess over $5,700
$2,034 plus 33% of the excess over $8,750
Over $11,950
$3,090 plus 39.6% of the excess over $11,950
Exemption Amounts for Alternative Minimum Tax
For taxable years beginning in 2013, under § 55(b)(1), the excess taxable income above which
the 28 percent tax rate applies , for Estates and Trusts, is $179,500
For taxable years beginning in 2013, the amounts used under § 55(d)(3) to determine the
phaseout of the exemption amounts for Estates and Trusts is $76,950
Net Investment Income Tax (NIIT)
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For tax years beginning after December 31, 2012, fiduciaries may be subject to Net Investment
Income Tax (NIIT). NIIT is a 3.8% tax on the lesser of net investment income or the excess of
the modified adjusted gross income (MAGI) over the threshold amount. NIIT may need to be
included when figuring estimated tax.
What Estates and Trusts are subject to the Net Investment Income Tax?
Estates and Trusts will be subject to the Net Investment Income Tax if they have undistributed
Net Investment Income and also have adjusted gross income over the dollar amount at which the
highest tax bracket for an estate or trust begins for such taxable year (for tax year 2013, this
threshold amount is $11,950). There are special computational rules for certain unique types of
trusts, such a Charitable Remainder Trusts and Electing Small Business Trusts, which can be
found in the proposed regulations.
What is included in Net Investment Income?
In general, investment income includes, but is not limited to: interest, dividends, capital gains,
rental and royalty income, non-qualified annuities, income from businesses involved in trading
of financial instruments or commodities, and businesses that are passive activities to the taxpayer
(within the meaning of IRC § 469).
What kinds of gains are included in Net Investment Income?
To the extent that gains are not otherwise offset by capital losses, the following gains are
common examples of items taken into account in computing Net Investment Income:
1. Gains from the sale of stocks, bonds, and mutual funds.
2. Capital gain distributions from mutual funds.
What are some common types of income that are not Net Investment Income?
Wages, unemployment compensation; operating income from a non-passive business, Social
Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent
Fund Dividends (see Rev. Rul. 90-56, 1990-2 CB 102) and distributions from certain Qualified
Plans (those described in IRC §§ 401(a), 403(a), 403(b), 408, 408A, or 457(b)).
►To calculate Net Investment Income, the investment income is reduced by certain expenses
properly allocable to the income.
What investment expenses are deductible in computing NII?
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In order to arrive at Net Investment Income, Gross Investment Income (items described above) is
reduced by deductions that are properly allocable to items of Gross Investment Income.
Examples of properly allocable deductions include investment interest expense, investment
advisory and brokerage fees, expenses related to rental and royalty income, and state and local
income taxes properly allocable to items included in Net Investment Income.
APPENDIX
I. Punch List of Must-Have Items
o Will and Order Admitting Will to Probate
o Letters Testamentary / of Administration
o Inventory of Property (If from the probate records, will not include non-probate property
nor liabilities)
o Bank and brokerage statements with detail -- mandatory for determining pre and post
mortem transactions
o Roster of Name, address and SSN (or EIN) of each named beneficiary, sometimes their
dates of birth, and amounts, dates and descriptions of all distributions to each
o Copy of Form 706 if filed
o All income forms (W2, 1099)
o Prepare: A DOD Balance Sheet at FMV, unless a 706 is filed with alternate date is
elected)
o Prepare: Table B
II. Additional Resources:
o IRS Publication 559: Survivors, Executors and Administrators
o How Property Can Be Owned in Texas to Minimize the Need for Probate, Publication
Number 405, Texas Legal Services Center
III. IF ONE DIES INTESTATE, THIS IS THE LAW:
TEXAS PROBATE CODE
CHAPTER II. DESCENT AND DISTRIBUTION
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Sec. 38. PERSONS WHO TAKE UPON INTESTACY.
(a)
Intestate Leaving No
Husband or Wife. Where any person, having title to any estate, real, personal
or mixed, shall die intestate, leaving no husband or wife, it shall descend
and pass in parcenary to his kindred, male and female, in the following
course:
1. To his children and their descendants.
2. If there be no children nor their descendants, then to his father
and mother, in equal portions.
But if only the father or mother survive the
intestate, then his estate shall be divided into two equal portions, one of
which shall pass to such survivor, and the other half shall pass to the
brothers and sisters of the deceased, and to their descendants; but if there
be none such, then the whole estate shall be inherited by the surviving
father or mother.
3. If there be neither father nor mother, then the whole of such
estate shall pass to the brothers and sisters of the intestate, and to their
descendants.
4. If there be none of the kindred aforesaid, then the inheritance
shall be divided into two moieties, one of which shall go to the paternal and
the other to the maternal kindred, in the following course:
To the
grandfather and grandmother in equal portions, but if only one of these be
living, then the estate shall be divided into two equal parts, one of which
shall go to such survivor, and the other shall go to the descendant or
descendants of such deceased grandfather or grandmother.
If there be no such
descendants, then the whole estate shall be inherited by the surviving
grandfather or grandmother.
If there be no surviving grandfather or
grandmother, then the whole of such estate shall go to their descendants, and
so on without end, passing in like manner to the nearest lineal ancestors and
their descendants.
(b) Intestate Leaving Husband or Wife. Where any person having title
to any estate, real, personal or mixed, other than a community estate, shall
die intestate as to such estate, and shall leave a surviving husband or wife,
such estate of such intestate shall descend and pass as follows:
1. If the deceased have a child or children, or their descendants, the
surviving husband or wife shall take one-third of the personal estate, and
the balance of such personal estate shall go to the child or children of the
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deceased and their descendants.
The surviving husband or wife shall also be
entitled to an estate for life, in one-third of the land of the intestate,
with remainder to the child or children of the intestate and their
descendants.
2. If the deceased have no child or children, or their descendants,
then the surviving husband or wife shall be entitled to all the personal
estate, and to one-half of the lands of the intestate, without remainder to
any person, and the other half shall pass and be inherited according to the
rules of descent and distribution;
provided, however, that if the deceased
has neither surviving father nor mother nor surviving brothers or sisters, or
their descendants, then the surviving husband or wife shall be entitled to
the whole of the estate of such intestate.
Sec. 43. DETERMINATION OF PER CAPITA AND PER STIRPES DISTRIBUTION.
When the intestate's children, descendants, brothers, sisters, uncles, aunts,
or any other relatives of the deceased standing in the first or same degree
alone come into the distribution upon intestacy, they shall take per capita,
namely:
by persons;
and, when a part of them being dead and a part living,
the descendants of those dead shall have right to distribution upon
intestacy, such descendants shall inherit only such portion of said property
as the parent through whom they inherit would be entitled to if alive.
Sec. 45. COMMUNITY ESTATE.
(a)
On the intestate death of one of the
spouses to a marriage, the community property estate of the deceased spouse
passes to the surviving spouse if:
(1) no child or other descendant of the deceased spouse survives the
deceased spouse; or
(2) all surviving children and descendants of the deceased spouse are
also children or descendants of the surviving spouse.
(b) On the intestate death of one of the spouses to a marriage, if a
child or other descendant of the deceased spouse survives the deceased spouse
and the child or descendant is not a child or descendant of the surviving
spouse, one-half of the community estate is retained by the surviving spouse
and the other one-half passes to the children or descendants of the deceased
spouse.
The descendants shall inherit only such portion of said property to
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which they would be entitled under Section 43 of this code.
In every case,
the community estate passes charged with the debts against it.
Sec. 46. JOINT TENANCIES.
(a)
If two or more persons hold an
interest in property jointly, and one joint owner dies before severance, the
interest of the decedent in the joint estate shall not survive to the
remaining joint owner or owners but shall pass by will or intestacy from the
decedent as if the decedent's interest had been severed.
The joint owners
may agree in writing, however, that the interest of any joint owner who dies
shall survive to the surviving joint owner or owners, but no such agreement
shall be inferred from the mere fact that the property is held in joint
ownership.
(b) Subsection (a) does not apply to agreements between spouses
regarding their community property.
Agreements between spouses regarding
rights of survivorship in community property are governed by Part 3 of
Chapter XI of this code.
Sec. 47. REQUIREMENT OF SURVIVAL BY 120 HOURS.
Heirs.
(a)
Survival of
A person who fails to survive the decedent by 120 hours is deemed to
have predeceased the decedent for purposes of homestead allowance, exempt
property, and intestate succession, and the decedent's heirs are determined
accordingly, except as otherwise provided in this section.
If the time of
death of the decedent or of the person who would otherwise be an heir, or the
times of death of both, cannot be determined, and it cannot be established
that the person who would otherwise be an heir has survived the decedent by
120 hours, it is deemed that the person failed to survive for the required
period.
This subsection does not apply where its application would result in
the escheat of an intestate estate.
(b) Disposal of Community Property.
When a husband and wife have
died, leaving community property, and neither the husband nor wife survived
the other by 120 hours, one-half of all community property shall be
distributed as if the husband had survived, and the other one-half thereof
shall be distributed as if the wife had survived.
The provisions of this
subsection apply to proceeds of life or accident insurance which are
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community property and become payable to the estate of either the husband or
the wife, as well as to other kinds of community property.
(c) Survival of Devisees or Beneficiaries.
A devisee who does not
survive the testator by 120 hours is treated as if he predeceased the
testator, unless the will of the decedent contains some language dealing
explicitly with simultaneous death or deaths in a common disaster, or
requiring that the devisee survive the testator or survive the testator for a
stated period in order to take under the will.
If property is so disposed of
that the right of a beneficiary to succeed to any interest therein is
conditional upon his surviving another person, the beneficiary shall be
deemed not to have survived unless he or she survives the person by 120
hours.
However, if any interest in property is given alternatively to one of
two or more beneficiaries, with the right of each to take being dependent
upon his surviving the other or others, and all shall die within a period of
less than 120 hours, the property shall be divided into as many equal
portions as there are beneficiaries, and those portions shall be distributed
respectively to those who would have taken in the event that each beneficiary
had survived.
(d) Joint Owners.
If any real or personal property, including
community property with a right of survivorship, shall be so owned that one
of two joint owners is entitled to the whole on the death of the other, and
neither survives the other by 120 hours, these assets shall be distributed
one-half as if one joint owner had survived and the other one-half as if the
other joint owner had survived.
If there are more than two joint owners and
all have died within a period of less than 120 hours, these assets shall be
divided into as many equal portions as there are joint owners and these
portions shall be distributed respectively to those who would have taken in
the event that each joint owner survived.
(e) Insured and Beneficiary.
When the insured and a beneficiary in a
policy of life or accident insurance have died within a period of less than
120 hours, the insured shall be deemed to have survived the beneficiary for
the purpose of determining the rights under the policy of the beneficiary or
beneficiaries as such.
The provisions of this subsection shall not prevent
the application of subsection (b) above to the proceeds of life or accident
insurance which are community property.
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(f) Instruments Providing Different Disposition.
When provision has
been made in the case of wills, living trusts, deeds, or contracts of
insurance, or any other situation, for disposition of property different from
the provisions of this Section, this Section shall not apply.
§§§
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convenient continuing education that focuses on the issues that members identify as top
priorities. Members are invited to suggest further areas of study or to submit presentations by
contacting hjones@naea.org. .
National Association of Enrolled Agents
1730 Rhode Island Ave, NW Ste 400
Washington, DC 20036
www.naea.org
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