Tax Checklists

Sometimes it is “good” to have a checklist of things to do, especially when you have been designated as the personal representative of a will or the successor trustee. For hypothetical purposes, we will assume your Aunt Clara has died, and you want to know about all of your responsibilities as the fiduciary for the estate.

Let’s begin the process by applying for a taxpayer identification number for the estate (if there is a probate) or for the trust estate or possibly for both. The application form is an SS-4, which can be obtained from the IRS, or downloaded from the government forms internet site (http://www.irs.ustreas.gov). Next, let’s locate last year’s income tax returns, and perhaps hire the accountant who prepared the return to do some or all of the tax returns. Finally, let’s wait until mid-February, after the year of Aunt Clara’s death, so that all of the 1099’s will be sent to her (or to us, if we remember to submit a change of address card to the post office).

While we are waiting, we ought to make a list of what Aunt Clara owned, and submit life insurance claims (be sure to ask the insurance company to give you a Form 712, for use in the estate tax returns). If she owned something that needs appraising (such as real estate, family businesses, closely held stock, etc.), we ought to get an appraisal from someone who is qualified to do that sort of work. During this waiting period, we should also consider whether or not to use the values of her assets on the alternate valuation date.

Now let’s go down the list of various tax return issues that should be considered:

Federal Estate Tax Return

1. Is one required?

2. Can we file the return in a timely manner, i.e., 9 months after date of death, or do we need an extension (use Form 4768 for an extension)?

3. Should we use an alternate valuation date? (i.e., six months after date of death)

4. Do we need to fund any by-pass trust within 6 months of the date of death? In that regard, have we received a taxpayer identification number for the by-pass trust, which will now be irrevocable?

5. Is there a QTIP trust involved, and if so, do we need a taxpayer identification number for that trust?

6. Are there charitable beneficiaries of the estate, and if so, can (or should) IRD (income in respect of a decedent) property be allocated to that charity?

7. Should a gift to an heir be disclaimed? If so, it needs to be disclaimed pursuant to applicable federal and state laws.

8. When the federal estate tax return was filed, was there a request for an early audit and discharge from personal liability (IRC§2204) made by the fiduciary filing the return?

9. If funds are not available to pay the estate taxes, does the estate qualify under §6166 to pay the tax over time (5-year deferral with 10-year installment payment election)? Does the estate have "reasonable cause" for deferring payment of the estate tax (IRC§§6075(a), 6151, 6161)?

10. Are there any Treasury “flower” bonds available to pay for the estate taxes?

11. Are there any foreign death taxes payable by the estate?

12. Among the assets of the estate, are there any farms or other closely held businesses, which might qualify for additional exemptions?

13. Are any generation-skipping transfer taxes due at the decedent's death?

14. Are any gift tax returns remaining to be filed?

15. If the estate is the beneficiary of a remainder interest, which will not occur for an indefinite period of time, should the estate request an extension of time to pay the tax on that interest?

Estate's Income Tax

1. Is there any income producing property or after-death income which will require the filing of a Form 1041?

2. Should the estate file for an extension of time to file the Form 1041?

3. Should the estate use a fiscal or calendar year?

4. Will administration expenses and losses be claimed as income tax deductions or estate tax deductions?

5. Will the estate redeem any corporate stock?

6. Will the estate have to make quarterly income tax deposits?

7. If the estate is subject to ancillary administration in another state, will a fiduciary income tax return be required for that state?

Decedent's taxes

1. Is a Form 1040 required to be filed?

2. If there is a surviving spouse, should a joint return be filed?

3. Did the surviving spouse file a Form 1040 without the executor’s consent?

4. Did the decedent own any unused tax credits?

5. Who is entitled to keep the tax refund, the surviving spouse or the executor (should a Form 1310 be filed)? Conversely, if there are taxes to pay, who pays for them, the estate or the spouse?

6. Who will pay the income taxes, the executor or the surviving spouse?

7. If there are any unpaid medical expenses, they can be deducted on the estate tax return or the income tax return (providing the estate pays the expenses within a year of death)

Other Things to Consider

1. A Form 56 is used to notify the IRS of the existence of a fiduciary relationship (and the termination of a fiduciary relationship).

2. In most instances, the executor will need the addresses and taxpayer identification numbers of the beneficiaries of the estate.

3. The executor will need letters of appointment, as an exhibit, to attach to the decedent’s Form 1040.

4. Will the estate have to file 1099’s for professionals it has used during the course of the estate administration?

5. If a beneficiary of the estate is a nonresident alien, will the estate have to withhold income taxes?

Finis

Sometimes these monthly columns aren’t interesting, and this is probably one of them. However, please regard this as a supplement to the other article on the duties of a trustee after the death of the settlor. Then send a letter of thanks to your Congressman, your Senators, and the Commissioner of Internal Revenue Service, for keeping the accounting industry healthy and strong.

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