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Table of Contents
Introduction
About This Book
Conventions Used in This Book
What You’re Not to Read
Foolish Assumptions
How This Book Is Organized
Part I: Getting Started with Estate and Trust Administration
Part II: Administering an Estate
Part III: Operating a Revocable or Irrevocable Trust
Part IV: Paying the Taxes
Part V: The Part of Tens
Icons Used in This Book
Where to Go from Here
Part I: Getting Started with Estate and Trust Administration
Chapter 1: Operating in a Fiduciary World
Identifying the Players
Determining an estate’s fiduciaries
Knowing who the trustees are
Lining up your team of advisors
Estate of Change: Delving into Estates
Altering the status quo
Probating an estate
Collecting the estate’s assets
Paying expenses and making distributions
Tying up the estate’s loose ends
Operating a Trust
Understanding your duties as trustee
Putting assets into trust
Putting the trust to work
Discovering the purpose of the trust
Compiling and organizing trust records
Bringing the trust to its conclusion
Paying Uncle Sam
Compiling the estate tax return
Figuring out the income taxes
Planning an income tax strategy
Whipping together Schedule K-1
Chapter 2: Exploring the Ins and Outs of Estates
Defining the Estate for Probate Administration Purposes
Will Power: Understanding How a Will (Or No Will) Affects an Estate
Dying testate
Dying intestate
Taking a Look at Who Can Inherit
Surviving spouse
Individuals omitted from the decedent’s will (including intentional disinheritance)
The other players: Devisees and legatees
Heirs-at-law
Defining the Estate for Tax Purposes
Transfer taxes
Other taxes
Chapter 3: Identifying Different Types of Trusts
Differentiating for Income Taxes: Grantor versus Non-Grantor Trusts
Grantor trusts
Non-grantor trusts
Intentionally defective grantor trusts
Creating Trusts during Lifetime and after Death
Trusts created during lifetime
Trusts created under a last will
Grasping Revocable Trusts
Still breathing: Living trusts
Tackling Totten Trusts
Going incognito: Nominee trusts
Understanding Irrevocable Trusts
Making gifts to an irrevocable trust
Getting the maximum tax benefit out of dying: Marital trusts
Protecting the estate tax exemption: Credit shelter trusts
Grandpa (or Grandma) knows best: Grandchildren’s trusts
Better safe than sorry: Insurance trusts
It’s only a name, not a description: Crummey trusts
Keeping a finger in the pie: Grantor-retained interest trusts
Exploring Charitable Trusts
Split-interest charitable trusts
Non-operating charitable foundations
Owning Subchapter S Shares in Trust
Qualified Subchapter S Trusts (QSSTs)
Electing Small Business Trusts (ESBTs)
Chapter 4: Assembling Your Team Members and Knowing When to Use Them
Finding What You Need to Go It Alone
Finding an Attorney
Knowing where to look
Asking the right questions
Discussing payment options
Finalizing your decision
Working with your attorney
Hiring a Tax Professional
Discovering where to look
Discussing payment options
Considering Help from Other Pros
Determining whether you need an investment advisor
Obtaining appraisers where necessary
Consulting with other miscellaneous pros
Recognizing Malpractice
Surveying why malpractice occurs
Covering your ass . . . ets
Part II: Administering an Estate
Chapter 5: Taking the First Steps after Death
Addressing the Immediate Concerns When Someone Dies
Honoring anatomical gifts
Having an autopsy performed
Arranging the Funeral
Making important decisions
Obtaining copies of the death certificate
Understanding How Death Changes Everything about the Decedent’s Assets
Bank accounts and the need for funds
Powers of attorney
Locating the Estate-Planning Documents
The Last Will and testament (The Will)
Trust agreements and amendments
Letters of intent
Other documents that dispose of property
Notifying Those Who Need to Be Notified
Creating Calendars and Files
Eyeing what kind of calendar to create
Setting up a filing system
Chapter 6: Navigating the Probate Process
Filing the Last Will with the Probate (Or Equivalent) Court
Figuring Out Whether Administration Is Necessary
Do you need a temporary executor?
Do you need a special administrator?
Determining domicile
Accessing ancillary administration
Deciding What Shape Your Probate Procedure Should Take
Taking small estate shortcuts
Traveling the traditional probate route
Taking Important First Steps after Your Appointment
Eyeing the Surviving Spouse’s Rights and Decisions Regarding Property
Exercising rights ahead of the provisions of the will
Electing against the will
Claiming dower
Chapter 7: Marshalling and Liquidating Assets
Understanding Why You Need to Determine What the Decedent Owned
Observing the Obvious: Big-Ticket Items
The bricks and mortar: Real estate
Things that move: Cars, boats, and cycles
Small (and closely held) businesses
Tracking Down All the Other Assets
Reading the mail
Perusing other personal papers
Finding the hiding places
Emptying the safe deposit box
Sleuthing for digital assets and info
Checking over prior tax returns
Listing Personal and Household Effects
Appraising the Property
Tangibles
Intangibles
Real estate
Contacting the Employer about Employee Benefits
Locating and Collecting Insurance Proceeds
Ascertaining Any Other Death Benefits
Preparing and Filing the Probate Inventory
Liquidating Assets
Selling stocks, bonds, and other securities
Disposing of real estate
Chapter 8: Paying the Debts, Expenses, Bequests, and Devises from the Estate
Determining and Paying Debts of the Decedent and Administration Expenses
Finding out how and when to pay claims
Prioritizing payment
Declaring the estate insolvent
Informing Potential Beneficiaries of Their Right to Consider Disclaimer
Segregating and Distributing Specific Property
Treading slowly before distributing
Making the distributions
Considering tangible property
Looking at intangible property
Fulfilling bequests of specific dollar amounts
Dividing Other Personal Property Equitably
Basing division on letter of intent
Creating a system for heirs to choose
Disposing of unwanted personal property
Slicing Up the Residue
Chapter 9: Closing the Estate
Obtaining Tax Closing Letters
Acquiring Releases of Lien for Real Estate
Paying Final Administration Expenses
Making Final Distributions to Residuary Beneficiaries
Preparing and Filing Final Estate Income Tax Returns
Readying Accounts for Allowance by the Probate Court
Using the appropriate form of accounting
Following the proper probate procedures
Remembering filing fees
Appointing a guardian ad litem, if needed
Filing a military affidavit, if necessary
Notifying the surety
Part III: Operating a Revocable or Irrevocable Trust
Chapter 10: Understanding the Trustee’s Duties
Getting Acquainted with the Trust Instrument
Creating a plan based on the trust’s terms
Identifying the players
Reforming the trust
Empowering the Trustee
Buying and selling assets
Determining distributions to beneficiaries
Hiring and firing advisors
Coloring Inside the Lines: Understanding Fiduciary Duty and Limitations
Exercising discretion
Obtaining errors and omissions insurance
Protecting the Trust’s Assets
Diversifying the assets
Asking for help
Preparing and Filing Annual Income Tax Returns and Accounts
Chapter 11: Funding the Trust
Putting Assets in Trust during Life
Signing It Over: Giving the Trust Asset Ownership
Cash and securities
Privately held stocks, promissory notes, and limited partnership interests
Real estate
Life insurance policies
Personal and household property in trust
Rolling Property into Trust after Death
Chapter 12: Investing the Trust’s Assets and Paying Its Expenses
Appreciating the Importance of Income and Principal in Trust Administration
Defining principal and income
Distinguishing between the two
Using Investment Advisors Effectively
Holding and Diversifying Assets
Stocks
Bonds
Mutual funds
Cash needs
Real estate
Small business stocks
Going Green in a Trust
Socially conscious
Politically aware
Looking to the Beneficiaries’ Needs
Age
Purpose of trust
Paying the Trust’s Expenses
Trustee’s fees
Investment advice
Accounting fees
Taxes
Chapter 13: Paying Trust Beneficiaries
Notifying Beneficiaries of the Trust
Obtaining addresses and Social Security numbers
Verifying dates of birth
Determining Scheduled Distributions
Figuring out how much to pay
Creating a payment schedule
Distributing When the Beneficiary Reaches a Specific Age
When Beneficiaries Request More Money: Paying Out Extra Distributions
Making the Decision to Distribute Discretionally: Eyeing the Trust’s Terms
Ensuring health and well-being
Paying for education
Buying a home
Starting a business
Using trustee discretion
Chapter 14: Creating and Keeping Trust Records
Creating a Filing System
Getting started: Organizing the right way
Keeping the trust instrument handy
Compiling correspondence
Filing financial records
Preserving annual accounts
Referencing tax returns
Preparing an Initial Inventory and Valuing the Assets
Arriving directly from the donor
Coming from the donor’s estate
Compiling Records of All Transactions
Knowing the difference between income and principal
Filing income tax returns annually
Producing Annual Trust Accounts
Assembling the desired information
Obtaining assents of beneficiaries
Filing with the probate court
Chapter 15: Terminating the Trust
Distributing All Assets According to the Trust Instrument
Calculating final income distributions
Holding back funds for final taxes and fees
Paying the remaindermen
Submitting the Final Income Tax Returns
Determining any final tax liability
Filing a short-year return
Preparing Final Accounting and Obtaining Assents of All Remaindermen
Finally finishing a non-probate trust
Polishing off a probate trust
Dealing with Outliers after the Trust Terminates
Part IV: Paying the Taxes
Chapter 16: Preparing the Estate Tax Return, Part 1
Figuring Out Which Estates Must File
Who must file
Who actually files Form 706 and when
Obtaining a Release from Personal Liability
Understanding Some of the Nitty-Gritty Rules for Filing Form 706
Where and how to file
How to pay the tax
Penalties for late filing, late payment, and understatement of valuation
Signature and verification
Extensions of time to file and pay tax
Supplemental documents
Completing the Form 706, Pages 1–4
Part 1: Decedent and Executor
Part 2: Tax Computation
Signature of executor(s)
Signature of preparer other than the executor
Part 3: Elections by the executor
Part 4: General Information
Part 5: Recapitulation
Part 6: Portability of Deceased Spousal Unused Exclusion (DSUE)
Being Ready for and Handling an Audit
Getting an Estate Tax Closing Letter
Chapter 17: Preparing the Estate Tax Return, Part 2
Tackling the Most Common Schedules
Focusing on real estate: Schedule A
Identifying stocks and bonds: Schedule B
Addressing mortgages, notes, and cash: Schedule C
Considering life insurance: Schedule D
Eyeing jointly owned property: Schedule E
Considering other property: Schedule F
Touching on funeral and administration expenses: Schedule J
Recording debts, mortgages, and liens: Schedule K
Listing net losses and such: Schedule L
Covering bequests to a surviving spouse: Schedule M
Recording charitable, public, and similar gifts and bequests: Schedule O
Knowing When to Ask for Help
Listing transfers during life: Schedule G
Exercising powers of appointment: Schedule H
Considering annuities: Schedule I
Claiming a credit for foreign death taxes: Schedule P
Getting a credit for tax on prior transfers: Schedule Q
Generation-Skipping Transfer tax: Schedule R
Electing a qualified conservation easement exclusion: Schedule U
Filing a protective claim for refund: Schedule PC
Chapter 18: Filing Income Tax Returns for a Decedent, Estate, or Trust
Before You Begin: What You Need to Do
Obtain a federal tax ID number
Choose a tax year-end
Calculating the Income
Interest
Dividends
Business income
Capital gains and losses
Income from rents, royalties, partnerships, and other estates and trusts
Farm income or loss
Ordinary gain or loss
Other income
Deducing Deductions
Interest
Taxes
Fiduciary fees
Charitable deductions
Attorney, accountant, and preparer fees
Miscellaneous itemized deductions
The Income Distribution Deduction (Schedule B)
The estate tax deduction
Taxes owed
Credits
Additional taxes
Answering the Questions on the Back of Page 2 (Form 1041)
Chapter 19: Weighing Income Tax Implications
Timing Payments In and Out of an Estate
Benefitting from the estate’s fiscal year
Balancing the estate’s taxable income against the beneficiary’s
Timing the receipt of income
Paying the ongoing expenses of the estate
Investing to Minimize Income Taxes
Limiting the fiduciary’s income taxes
Protecting the beneficiary
Introducing the Unearned Income Medicare Contribution (UIMC) Tax
Calculating the tax
Lessening the tax’s impact
Chapter 20: Reporting Tax Info on Schedule K-1
Understanding Schedule K-1
General information
Income items
Deductions and credits
Alternative minimum tax information
Allocating Types of Income on the K-1
Preparing Supplements to Schedule K-1
Showing foreign tax allocations
Providing state tax information
Creating Nominee Form 1099s
Part V: The Part of Tens
Chapter 21: Ten Pitfalls for the Unwary
Failing to Terminate an Existing Real Estate Purchase and Sale Agreement
Taking a Lump Sum Distribution from a Pension Plan, IRA, or Deferred Compensation Plan
Creating a Feeding Frenzy When Splitting Personal Property
Missing Court Deadlines
Forgetting Tax Filing Deadlines
Failing to Communicate with the Heirs and Legatees
Exercising Poor Fiduciary Judgment
Underestimating the Devotion Required
Taking Nonsanctioned Shortcuts
Paying from the Wrong Pocket
Chapter 22: Ten Types of Taxes You May Have to Pay
Federal Gift Tax
Federal Estate Tax
Generation-Skipping Transfer Tax
State Inheritance or Estate Tax
Estate and Trust Income Taxes (Federal and State)
Decedent’s Final Federal and State Income Taxes
Local Income Taxes
Local Real Estate Taxes
State Intangibles Taxes
Excise Taxes
Appendix A: Glossary
Appendix B: State-by-State Rules of Intestacy and Estate or Inheritance Tax
Cheat Sheet
Estate & Trust Administration For Dummies®, 2nd Edition
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About the Authors
Margaret Atkins Munro, EA, is a tax consultant, advisor, writer, and lecturer with more than 30 years of experience in various areas of finance and taxation. She’s an Enrolled Agent, licensed by the federal government to represent clients in the areas of tax and tax-related issues, and currently operates a widely diverse private practice that specializes in trust and estate accounting and income taxation, among other areas. A classic example of living a life that doesn’t follow the plan set out in college, Peggy received a BA in history from The Johns Hopkins University, in addition to attending University College in Cork, Ireland, and the Pontifical Institute of Mediaeval Studies in Toronto, Canada. She resides with her family in Vermont.
Peggy is the author of 529 & Other College Savings Plans For Dummies and the coauthor of Taxes (2005, 2006, 2007, 2008, and 2009) For Dummies. She writes a biweekly column on anything and everything to do with money for The Montpelier [Vermont] Bridge and has lectured extensively about taxes and tax-related issues. She’s been interviewed on numerous financial and tax-related topics by a variety of national media outlets, including CNN Radio, Fox Business, The Wall Street Journal, Family Circle Magazine, U.S. News and World Report, USA Today, Parents Magazine, and the Associated Press.
Kathryn A. Murphy, Esq., is an attorney with more than 20 years’ experience in the fields of estate planning and administration, including drafting of sophisticated estate plans and prenuptial agreements for high net worth individuals. She has also administered many estates and trusts, both large and small, and prepared more than her fair share of estate and gift tax returns.
She graduated from The University of Michigan with an AB in English Language and Literature, received her Juris Doctor from Harvard Law School, and is a member of the Massachusetts Bar. Kathy, her daughter, Ana, and their poodle, Danny Boy, have recently returned to her home state of Michigan after more than 20 years in New England. Kathy is the coauthor of Taxation of Estates and Trusts (Michigan Continuing Legal Education) and Estate and Trust Administration (Michigan Continuing Legal Education). She has also lectured on these topics for Michigan Continuing Legal Education. She’s been interviewed by the national media on financial and trust topics. Her writing is an outgrowth of two of her loves: literature and the law.
Dedication
To my dear friend Howard, who gave me the idea for this book, even though he didn’t know it at the time, and to the memory of his parents, Harry and Molly. And to Colin and Jacob, who supported me wholeheartedly as I worked on it.
—Margaret Atkins Munro
To my daughter, Ana, who inspires me in many ways. And to my friend, Peggy, for asking me to join her in this adventure.
—Kathryn A. Murphy
Authors’ Acknowledgments
First and foremost, our thanks to Mike Baker, Joyce Pepple, and Diane Steele at Wiley, who really listened to this idea one afternoon at lunch and then ran with it. Without them, this book would still be a figment of our imaginations. And many thanks as well to our technical editor Diane Hubbard Kennedy, our copy editor Nancy Reinhardt, and, most especially, to our project editors, Alissa Schwipps and Jennifer Tebbe, and assistant editor David Lutton, who were patience personified as we had to tell them, repeatedly, that we still really needed to see the results of the “fiscal cliff” negotiations in order to finalize this edition of the book.
We’ve both had many mentors over the years, among them Palmer Worthen and Frederick R. Keydel, who were responsible for steering us into our careers in trust and estate administration and planning. And we must, of course, thank all our friends in the Private Client and Trust Group and the Trust Administration & Investment Services Department at Goulston & Storrs, PC, where the two of us met 23 years ago and began our long friendship.
Last, but certainly not least, our gratitude to Melinda Haskins and Sean Siemen, who assisted us in so many important ways. This book is as much a testament to their efforts as it is to our own.
Publisher’s Acknowledgments
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So much to remember, so little time: This icon alerts you to important information you really don’t want to ignore.
Of course, you want to manage all the administration tasks yourself. But some you’re just not qualified for, and others — take our word for it — you really do want to have someone who knows cast a hairy eyeball over. When you see this icon, you’ve just come across an item we suggest you don’t attempt without assistance.
Estate and trust administration can get pretty technical. This icon points out specific information regarding rules, regulations, and especially Internal Revenue Code references.
We’ve picked up lots of techniques through hard experience, and we’re happy to share them with you. This icon points out administration gems that will make your life easier. Remember, though, that not every trust or estate will need every tip that comes your way; make sure that a tip applies to your situation before you use it.
