The Expert in Tax Education
Decedent’s
Final and Fiduciary Returns
The Expert in Tax Education
2
Decedent’s
Final and Fiduciary Returns
Presented by XXXX
Developed by Kathy Hubbard, EA
Summer 2014
The Expert in Tax Education
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.
4
The Final 1040
•Final Tax Year is January 1 - DOD
•Final 1040 Year ends December 31
•NO ES 2210 penalties, but full pay 4/15
•Return due 4/15, extendable to 10/15
•Full amount, no proration for
standard, over age 65 and/or blind deductions
exemption, incl if decedent was a dependent
5
1040 Filing Requirements
Depend Upon
Gross Income
Age
Filing Status
Other Tax or Filing Obligations
6
Gross Income
•Controlled by both age and filing
status,
•Ranges from
$950 (dependent under age 65) to
$21,800 (married couple, both over
age 65)
•Measured from January 1 to midnight
on DOD
7
Age
For tax purposes, one reaches
age 65 on the day before one’s
65th birthday
8
Filing Status
There are exceptions to
the customary status
and income
filing rules.
9
Filing Status
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.
10
Filing Status
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.

11
Filing Status
If the decedent normally filed head
of household,
but passed away less than 181 days
into the year,
Status reverts to single (or mfs):
 The qualifying relatives were not
in the decedent’s care for over half
the year.

12
Filing Status
If Decedent is a Qualifying Child:
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.
13
Other Tax or Filing
Obligations
•Taxes!
•AMT
•Uncollected SS, Medicare, RRTA
•Recapture taxes
•Self employment or church wages
14
Other Tax or Filing Obligations
•If 1040 not otherwise required, can file
standalone:
Form 5329 additional tax on a qualified
plan
Schedule H, household employment
taxes
Form 8606 for non-deductible IRA
contributions.
15
Other Tax or Filing Obligations
•Credits Require Filed Claim
Earned Income, child, prior year
minimum tax, education and fuel credits
Withholdings and estimated tax
payments.

16
Never Overlook
Special Tax Forgiveness Provisions
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.

17
Never Overlook
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.

18
Never Overlook
Certain death benefits paid to survivors
of public safety officers IF
Killed due to traumatic injuries
sustained in the line of duty
After September 10, 2001
Which are excluded from both income
and estate taxes.

19
Who Signs the
Return?
The Personal
Representative!
20
Who is a Personal Representative?
 Executor named in the will*
 Administrator appointed by the
court*
 Trustee of decedent’s trust*
 Surviving spouse
 Successor in possession of property*
* File form 56, required, § 6903
21
Decedent’s and Successor's Income
Passed Without Probate
Pass Under LWT
Ownership styles
Testamentary transfer
Community
Joint
Joint with surv’ship rights
Life estate
Specific bequests
Residual bequests
Beneficiary designations
Pay on Death
Remainder
Will can “pour over” to a
“living” trust
Will can create trusts
Trust property
22
Income Documents
W2s & 1099s issued through
end of year or end of account:
Request reissued 1099, or
Issue 1099 for nominee’s share
Review monthly detail on bank
and brokerage statements
23
Income Documents
On Decedent’s Return
Sch B Interest and Dividends in
full, less nominee portion
reduction
Sch C,E,F Income and Expense to
DOD (may need to report full 1099
and deduct nominee portion)
Sch D True or 1099B gross, code Nnominee
Pension/IRA/Other Reported
portion on correct return line, “Post
Mortem Income” is subtracted on
Line 21.
con’t
On Beneficiary’s Return
Sch B Nominee portion
Schs C,E,F Post mortem
income and expenses
Sch D Nominee portion,
long term usually DOD
cost basis § 1014
Report on correct return
line, if known, or line 21.
24
Income In Respect of a
Decedent
IRD Arises From Certain
Assets or Rights, and
Retains the Decedent’s
“Tax Character”
25
§691 IRD Earned Before, Paid After





Interest, Dividends, Rents and Royalties,
Uncollected salaries, wages, vacation, bonus
and sick pay,
Certain deferred compensation and stock
option plans,
Annuity and retirement plans in excess of
basis (ROTH IRA’s excepted,)
Difference between the face amount and
decedent’s basis in an installment plan
26
Expenses in Respect of a Decedent
Mortgage Interest
Investment Interest
Property & state income taxes
Medical Expenses paid within a year of
death
Business and Investment Expenses

Review rules for depreciation, depletion and
installment sales
27
Beware the HSA
Pre Mortem
Post Mortem
Contributions
Unless spouse is
Deductible
beneficiary,
Distributions for
FMV of Accounts
Medical Expenses
Subject to Income Tax
not Taxable
Less amounts used to
pay decedent’s
medical expenses
within 1 year of death.
The Fiduciary's Expenses
•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).
•Miscellaneous expenses which exceed 2%
of the estate adjusted gross income.
29
Expenses Subject to 2% AGI
Reduction
Preparation fees for forms 709 (gift) or
1040,
Maintenance, utilities and insurance to
protect the value of the non-trade or
business property,
Non unique portfolio management and
advisory fees.

30
Pub 559: Table B
Source
A
B
Enter total
from 1099
C
D
Amount
Enter portion reportable on
reportable on
estate's or
decedent's
beneficiary's
final return
return
Part of
column C
that is IRD*
Interest:
Bank XYZ
500
350
150
12
Credit Union
300
200
100
10
20,000
9,000
11,000
Gross Proceeds
ETC Stock
* Required for Form 706
31
Form 1041 Returns:
Due Dates
On the 15th day of the 4th month after the
tax year ends
Extend for 5 months on Form 7004
FYE established by initial return filed
32
Fiduciary Returns:
Filing Requirements §6012
Gross Income
Any Taxable Income
Beneficiaries
Other Tax or Filing Obligations

33
Gross Income
At least $600, or
Any taxable income;
Generally, uses same rules as
individual income
determination §641(b)
34
Beneficiaries
Income notwithstanding, filing required if
any beneficiaries are non resident aliens
[Reg. 1.641(a)(2) and 1.61-1(a).]
For an estate (or trust) to claim a
“distribution deduction” for funds paid to a
beneficiary, Forms K1 must be attached to
the return
35
Other Tax or Filing Situations
Claiming and having refunded income
taxes withheld by payers
Distributing final year excess deductions
and losses to beneficiaries
Owing taxes on wages paid to the
decedents domestic employees by the estate

36
Post Mortem Planning
Claiming accrued interest income from
Series EE Bonds on the decedent’s
final lower tax bracket return,
Selecting fiscal or cash accounting
method,
Selecting a fiscal year,
Redeeming income and paying
expenses within a fiscal year.

37
Estimated Tax Payments
No ES payments due on decedent’s
 final return or estate’s tax years
ending before 2 years following DOD
No ES payments due if tax for current
year <$1,000
No ES payments due if prior year tax
on a full 12 month year was $0
Otherwise, follow the 100/110%
individual safe harbor regime under
 §6654(I)

38
Estate vs. Trust
Estate
Trust
Special ES rules
Only §6654(I) rules for ES
Standard Deduction $600*
Standard Deduction either
$300 or $100*
S-Corps are qualified
shareholders
S-Corps are only allowable
partners for 2 years
* No standard deduction allowed in the fiduciary return’s
final year
39
Estate vs. Trust
Estate
con’t
Trust
Can select fiscal year
end,
Must use calendar
year,
May allocate ES
payments to
beneficiaries in final
year by filing form
1041-T by the 65th
day of the calendar
tax year.
May allocate ES
payments to
beneficiaries any
year by filing form
1041-T
40
Active Rental Participation
Estates
Trusts
Only active if the
For 2 years post DOD,
trust is actively
if the decedent
participating -qualified for active
participation, the estate IRS says this means
the trustee, but
qualifies, § 469(i)(4)
some courts have
After 2 years, same
said this means the
rules as trust
beneficiaries …!
41
Qualified Revocable Trusts
can Elect to be Taxed as
Estates §645
Treats QRT as an estate, or QRT and Estate
as the estate,
File Form 8855 – review election due date
variables, and
Check the “estate” and “645 election”
boxes on 1041

42
The 65 Day Rule §663(b)
Available to both trusts and estates:
Allows 65 days after the close of the tax
year to determine and distribute
income to beneficiaries
43
Example 1
Estate Inflows & Outflows
Total
On Final 1041
IRA
$ 5,000
$ 5,000
Checking acct cash
$ 30,000
0
Reportable Income
Inflows marshaled
$ 5,000
$ 35,000
Court and Attorney Fees -$ 4,000
Taxable Income
$ 1,000
Net cash on hand
$ 31,000
Estate Distributes All
-$ 31,000
Form K-1 Box 5 Income
-$ 4,000
$ 1,000
44
Example 2
Estate Inflows & Outflows
Total
On Final 1041
IRA
$ 5,000
$ 5,000
Checking acct cash
$ 30,000
0
Reportable Income
Inflows marshaled
$ 5,000
$ 35,000
Court and Attorney Fees -$ 8,000
-$ 8,000
Taxable Income
- $ 3,000
Net cash on hand
$ 28,000
Estate Distributes All
-$ 28,000
Form K-1 Box 11 A
- $ 3,000
45
The Decedent’s Home
The personal residence gets the step up in
basis § 1014, and
If sold, closing expenses would generate
a loss -- non deductible for a personal
loss, thus not deductible;
If occupied by one or more beneficiary,
-that use is considered a distribution.
46
The Decedent’s Stuff
•If will says the kids (people) get the rest,
and
•If the executor/ heirs donate the stuff to a
charity,
•Then each heir donated a 1/X undivided
interest in the stuff, and
• The rules for individual non-cash donation
documentation apply.
47
Distributable Net Income
(DNI) §643 & the
Distribution Deduction § 651
48
What is DNI?
Amount of income of the estate or trust for
the taxable year determined under:
the terms of the governing instrument, and
applicable local law §643(b), but NOT
The Internal Revenue Code
49
Terms of the
Governing Instrument
How many wills or trusts say that the
executor or trustee should use the Internal
Revenue Code and not local UPIA for
preparing the 1041 returns and determining
principal and income?!!
50
Now What?
READ THE ENTIRE WILL AND / OR TRUST!

Be familiar with the Uniform Principal and
Income Act and the Uniform Prudent
Investor Act.

51
Trust vs Estate?
Trusts have extended lifetimes and more
conditional beneficiary structures; the UPIAs
were designed to govern their asset
preservation and management.

Decedent’s estates are generally short lived &
designed to distribute all assets,
but still come under § 643(b).

52
Fiduciary Income
Derived from each states’ adoption of some form
of the Uniform Principal and Income Act;
Classifies receipts as “principal” and “income”
(without regard to the IRC), for instance:
Municipal interest and corporate bond interest
are interest income
Equities are principal; when stock is sold, the
type of principal is exchanged from equity
to cash, and remains classified as
principal.
53
Net Exempt Income
If an estate has $8,000 in taxable interest income,
And $2,000 in municipal interest income,
Thus total income of $10,000, of which 20% is
tax exempt,
And it has $1,000 in administration expenses,
Then it cannot deduct 20% of the administration
expense from taxable income;
Its NEI is $1,800 ($2,000 - $200);
Similar perorations of expense required where
some beneficiaries are exempt organizations.
54
DNI Formula § 643
Starts with taxable income,
Adds back the exemption amount
Removes capital gain, and
Adds in Net Exempt Income.
55
The Distribution Deduction
The lower of the amount distributed § 661(a)(2)
or
The amount deductible under the DNI rules,
§ 651(b),
and
Income is carried out first.
56
Texas Property Code
Title 9, Trusts
Chapter 116, Uniform Principal and
Income Act
116.005 Allocation Powers: Trustee may
allocate between principal and income
Chapter 117, Uniform Prudent Investor
Act
57
Fiduciary Tax Rates for 2013
If Taxable Income Is:
The Tax Is:
Not over $2,450
15% of the taxable income
Over $2,450 but not over $5,700
$367.50 plus 25% of the excess
over $2,450
Over $5,700 but not over $8,750
$1,180 plus 28% of the excess
over $5,700
Over $8,750 but not over $11,950
$2,034 plus 33% of the excess
over $8,750
Over $11,950
$3,090 plus 39.6% of the excess
over $11,950
58
2013 Exemption Amounts for
AMT
Under § 55(b)(1) the excess taxable income
above which the 28% tax rate applies is
$179,500
The amounts used under § 55(d)(3) to
determine the phase out of the
exemption amounts is $ 76,950
59
Net Investment Income Tax
Beginning 2013:
NIIT is 3.8% on the lesser of
Net investment income, or
The excess of the MAGI over
the threshold amount
60
When are Trusts and Estates
Liable for NIIT?
When they have undistributed Net
Investment Income, and
Have AGI over the dollar amount at
which the highest tax bracket for
an estate or trust begins for such
taxable year (for tax year 2013,
$11,950).
61
Any Special Circumstances?
There are special computational rules
for certain unique types of trusts, such
as Charitable Remainder Trusts and
Electing Small Business Trusts,
which can be found in the proposed
regulations.
62
Any Exceptions?





Grantor Trusts
Charitable Trusts
Retirement Trusts
Real Estate Investment Trusts
Common Trust Funds
63
NII Includes
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).

64
What Type of Gains?
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:
Gains from the sale of stocks, bonds, and
mutual funds, and
Capital gain distributions from mutual funds.
65
And NON Investment
Income Is?
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)).

66
What Expenses Reduce NII?
Deductions that are properly allocable to items of
Gross Investment Income, such as:
•
•
•
•
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.
NIIT Thresholds for 1040 and 1041
• 1040
• MFJ, QW $250,000
• HoH, S $200,000
• MFS
$125,000
• NOT indexed
• for inflation
• 1041
•
•
•
•
Dollar amount of the
highest income tax
bracket for such taxable
year, for 2013 =
$11,950
• THUS, indexed
• for inflation
A New Form for NIIT?
• One New Form for both Forms 1040 &
1041
• Computes the NII Base in the first section,
• Carries to different tax computation
sections for individuals and fiduciaries.
They Moved The Cheese!
The inheritance tax was the main estate
planning obstacle for the middle class,
before the indexed $5M exemption & the
portable spousal exemption became law.
The challenge now is the NIIT!!!
70
Net Investment Income Tax
Avoidance
Distribute Income
Decant Assets
Disclaim Assets within 9 months, if
possible and practical

71
Appendix
72
Documents Needed to Prepare 1041
Will and Order Admitting Will to Probate
Letters Testamentary / of Administration
Inventory of Property (If from the probate
records, will not include non-probate
property nor liabilities)
Bank and brokerage statements with detail
-- mandatory for determining pre and
post mortem transactions (including
those passing outside probate)

73
Documents Needed to Prepare 1041 con't
Roster of Name, address and SSN (or EIN) of
each named beneficiary, with amounts, dates &
descriptions of all distributions to each
Copy of Form 706 if filed
All income forms (W2, 1099)
Prepare: A DOD Balance Sheet at FMV, unless a
706 is filed with alternate date is elected)
Prepare: Table B

74
Workpapers to Prepare for Form1041
A DOD Balance Sheet at FMV, (unless a 706 is
filed with alternate date is elected)

Table B or Equivalent

75
Governing Documents Analysis
N/A
Personal Representative?
Alternative Representative?
Independent?
Bonded?
Fee or Payment Allowed to Fiduciary?
Specific Bequests?
--Name Each
76
No
Yes
Governing Documents Analysis
N/A
Establishment of Trusts?
-- Name Each Trust, Trustee & Beneficiary
--Distributions required? Otherwise allowed? For?
--Dissolution Determined by?
Methods for Determining Income & Principal Named?
Charitable Beneficiaries?
Remainder & Income Beneficiaries?
Residual Beneficiaries?
77
No
Yes
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