ACCOUNTANTS’ HANDBOOK VOLUM phần 9 pot

heirs or devisees must be reimbursed if any assets are subsequently discovered from which the debts could have been paid. In many instances, if the decedent was an owner of a closely held business, he may have en- tered into some form of a buy sell agreement with his co-owners. The agreement usually provides that the executor shall sell the decedent’s interest in the business to one or more co-owners, or to the business entity itself, at the price set forth therein in exchange for cash. Depending on the arrangement, the buy-sell agreement will be referred to as either a cross purchase or entity redemption (or corporate stock redemption) agreement. The decedent’s agreement to be bound by the terms of the agreement contractually binds the executor to sell the decedent’s interest in the business pursuant to the terms of the agreement. This sales price also works to establish the estate tax value of the business interest in the gross estate. The decedent, anticipating his need to provide liquidity for the estate, may have established and funded an irrevocable life insurance trust. In this arrangement, the trust applies for a life insurance policy on the decedent’s life. The trustee is both the owner and beneficiary of the policy. Upon the decedent’s death, the trustee collects the insurance proceeds. While neither the trustee nor the executor is contractually bound to do so, the trustee usually purchases assets from the estate, hence providing the needed liquidity. This technique also eliminates the need for the executor to sell assets in a rush at liquidation, or “estate sale,” prices. The executor should be sure to review the decedent’s personal papers thoroughly, and interview the surviving spouse and business associates or partners, to determine the existence of a buy-sell agreement or irrevocable life insurance trust. (xvi) Administration Expenses. Reasonable and necessary outlays made by the representative in collecting and distributing assets will be allowed by the court. The representative is personally liable for amounts disallowed. The compensation of the representative, court costs, and an allowance for preparing the accounting are allowed specifically when an accounting is made. Attorney’s fees, ac- countant’s fees, fire insurance premiums, necessary repairs to property, collection costs, and other ordinary expenses will be allowed. The character and amount of the estate and the complications of the particular situation will govern the decisions of the courts as to the reasonableness or necessity of a particular expenditure. Most states statutorily regulate attorney’s fees by prescribing a set fee schedule based on the size of the probate estate. Should an attorney’s fee exceed the statutory maximum, he or she will need to seek the court’s approval. In many instances, the estate’s attorney may also be one of the executors, or the sole executor. This may entitle the attorney/executor to both a fee and a commission; however, the attorney/executor will have to keep detailed records of time spent and duties performed in order to sustain dual compensation. (xvii) Distribution of Estate Assets. After making appropriate provisions for the payment of all claims against the estate, the personal representative proceeds to distribute the remaining assets according to the instructions in the will or in compliance with the laws of descent and distribution. (xviii) Payment of Legacies. Legacies are usually payable one year after the death of the testator. General legacies ordinarily draw interest after that date and should be charged with interest for payments prior to the due date. General legacies to the testator’s dependent children usually bear interest from the date of death. If the estate appears to be solvent, the executor may pay or deliver legacies at any time but should, for his own protection, take a bond from the legatee providing for a refund to the estate in case the assets prove to be inadequate to meet the prior claims. Otherwise a suit in equity may be necessary to recover the improper payments. (xix) Abatement of Legacies. If there are insufficient assets to meet the debts and other prior claims, the legacies are reduced or abated. A complete revocation is referred to as an ademption. The four rules governing priority in the abatement of legacies are as follows: 41 • 10 ESTATES AND TRUSTS 1. A specific legacy takes priority over a general legacy. If the testator bequeaths specific shares of stock to A and $5,000 in cash to B, B’s legacy will be diminished or, if necessary, entirely wiped out before the stock left to A is resorted to. 2. A legacy for the support of the testator’s widow or children, who are not otherwise adequately provided for, takes priority over legacies to strangers or more distant relatives. 3. In most states, the personal assets of the estate will be used for the payment of debts before re- sorting to the real estate. As a result, the bequests of money or personal property may be diminished or wiped out, although the devisees of the real property are not affected. 4. Subject to the foregoing rules, all legacies are reduced pro rata in case of a deficiency. If the will directs that real estate be sold to pay debts, the sale will take place before any legacies are abated. (xx) Deductions from Legacies. There may be certain required deductions from legacies, the most common one being state inheritance taxes. A debt due by a legatee to the testator should be de- ducted, but a debtor who becomes a legatee is not entitled to retain funds applicable to the payment of all charges and legacies. (xxi) Lapsed Legacies. A legacy is said to have “lapsed” if the legatee dies before the testator, and the assets involved revert to the undistributed or residuary portion of the estate. An exception is sometimes made when the deceased legatee is a child or other near relative who has left surviving children; the children then receive the legacy. The children would receive the legacy on either a per stripes or per capita basis. “Per stripes” means that the children of a deceased parent receive an equal share of the deceased parents’ share. “Per capita” means that the children of a deceased parent receive their own share. For example: A’s will leaves everything to spouse or A’s children should spouse predecease. A’s spouse and one adult child predecease A. A is survived by a second adult child (B) and the predeceased child’s two children (C and D). A per stripes distribution would leave 50% to B and 25% to each of C and D. A per capita distribution would leave 33 1 ⁄3% to B, C, and D. (xxii) Advancement and Hotchpot. An advancement is a transfer of property by a parent to a child in anticipation of the share of the estate the child would receive if the parent died intestate. If a person indicates in his will that the advances are to be part of the child’s legacy, these advances are considered as part of the corpus of the estate and must be taken into account in making the final distribution. An allowance to a widow for the support of the family is not an advance, nor is it a direct charge against items devised or bequeathed to her. If there is no will and the advancement exceeds the child’s distributable shares of the estate, the legatee is entitled to no further distribution but is not required to return the excess; if the advancement is less than the child’s share, he is entitled to the difference. Hotchpot or collation is the bring- ing together of all the estate of an intestate with the advancements made to the children in order that it may be divided in accordance with the statutes of distribution. (xxiii) Surviving Spouse’s Right of Election against the Will. Should a decedent’s will com- pletely disinherit a surviving spouse or provide less than a certain percentage of the estate to her, the spouse may petition the court to elect to receive a specified percentage of the estate, normally ranging between 30% to 50%, “against the will” (e.g., in lieu of the existing dispositive will provisions). The right to make this election will vary among the states depending on whether the pro- bated will was executed before the marriage or during the marriage between the decedent and surviving spouse. (xxiv) Disclaimers. It is often recommended that an intended legatee or beneficiary forfeit, give up, or disclaim, an estate distribution. In other words, the legatee or beneficiary waives his or her right to receive all or part of their interest in an estate asset or distribution of assets. The effect of a 41.1 ESTATES—LEGAL BACKGROUND 41 • 11 proper disclaimer is that the intended legatee or beneficiary is presumed to have predeceased the decedent, and the asset is distributed to the contingent legatee or beneficiary. Disclaimers are gov- erned both by state statute and the Internal Revenue Code (IRC) in Sections 2046 and 2518. The requirements of both must be carefully observed in order to obtain the desired result. In general, the following four steps must be observed: 1. The disclaimer must be made in writing. 2. It must be received by the executor and filed with the surrogate or probate court that has jurisdiction of the estate within nine months of the date of death. 3. The intended legatee or beneficiary must renounce all right, title, and interest in the item(s) and must not have received, or be deemed to have received, any economic benefit of the assets being disclaimed. 4. The disclaimed interest must pass to someone other than the disclaiming legatee or beneficiary, and he may not direct to whom the asset will pass in lieu of himself. (xxv) Decree of Distribution and Postdecree Procedure. The principal distribution of estate properties is made after the issuance by the court of a decree of distribution. Upon the filing of an acceptable final accounting (see below) and the expiration of the time for objections by interested parties, the court approves the accounting, allows the expenses of preparing the accounting and the representative’s commission, and issues a decree that disposes of the balance of the estate according to the will or according to the statutes of descent and distribution in that jurisdiction. The representative distributes the estate assets according to the decree, pays his commission, settles any other expenses allowed in the decree, closes his books, presents his vouchers to the court, and asks for a discharge from his responsibilities and for the cancellation of his bond. (xxvi) Funding of Trusts. I t is not uncommon for part of the estate to be distributed to a testamentary trust or to a preexisting intervivos trust. The distribution to the trust may make up part of a marital, residuary, or charitable bequest. A testamentary trust may also be funded to hold assets for a minor beneficiary. The appointment and approval of the trustee(s), and the distribution of the estate assets to the trust would be included in the courts’ decree described above. (j) POWERS OF ESTATE REPRESENTATIVE (i) Executor versus Administrator. The personal representative’s powers, as distinguished from duties, are those acts that he is authorized, rather than required, to perform. As previously mentioned, the powers of an executor or administrator CTA are outlined in the will and are often broader than those allowed to an administrator of an intestate, who must look solely to statutory authority. The most common statutory and will clause powers of the personal representative are to invest and reinvest estate assets, to collect income and manage the estate property, to sell estate property as he sees fit, to mortgage property (in some states), and to deliver and execute agreements, contracts, deeds, and other instruments necessary to administer the estate. Most properly drawn wills reproduce the statutory powers and add additional desired powers not granted by statute. (ii) Will Powers Not Conferred by Statute. Using New York State law as outlined by Harris as an example, the powers listed below, when included in a will of a New York decedent, would grant additional powers not conferred by statute. 2 These 10 powers would not be available to an executor unless enumerated in the will (and are never available to an administrator of an intestate): 41 • 12 ESTATES AND TRUSTS 2 Homer I. Harris, Estates Practice Guide, 4th ed. (Lawyer’s Co-Operative Publishing, Rochester, NY, 1984), Nov. 1994 Suppl. 1. To distribute the estate immediately after death. Many states require the executor to delay any distribution for as much as one year after letters testamentary are issued. 2. To hold property without regard to the limitations imposed by law on the proper investment of estate assets. 3. To make “extraordinary repairs” to estate assets. New York allows the representative to make only “ordinary repairs”; he has to secure the permission of all beneficiaries and possi- bly of the court to make “extraordinary repairs” such as replacing a heating system on real estate administered by the estate. 4. To charge the cost of agents such as attorneys, accountants, and investment advisors as estate expenses. 5. To continue a business of decedent. 6. To keep funds uninvested or invested in nonincome-producing assets. 7. To abandon, alter, or demolish real estate. 8. To borrow on behalf of the estate and give notes or bonds for the sums borrowed, and to pledge or mortgage any property as security for the borrowing. 9. To pay all necessary or proper expenses and charges from income or principal, or partly from each as the fiduciary deems advisable. (This important power will be expanded on in the discussion of income and principal of trusts.) 10. To do all acts not specifically mentioned as if the fiduciary were the absolute owner of the property. (iii) Will Powers versus Statutory Powers. It is important to remember that state law is looked to only where the will is silent. Any will provision will be adhered to, even if it is broader or more re- strictive than statutory powers, unless such provision is contrary to law or public policy. (k) COMMISSIONS OF REPRESENTATIVES. Many states make executors’ and administrators’ commissions statutory. However, with an executor, the first step is to look to the will. Testators may specifically provide the amount of commission or prohibit commissions for fiduciaries. These will provisions will be adhered to, although several states allow an executor to renounce the will provisions and receive statutory commissions. Other states force the executor to renounce the appointment and petition to be appointed administrator, thereby becoming eligible for the statutory commissions of an administrator. Some states do not have statutory commission rates, leaving the awarding of commissions to the court’s discretion. It is important to bear in mind that commissions are allowed only on the probate assets, that is, assets that come under the administration of the personal representative. As previously mentioned, real property does not generally come under the control of the representative and thus is not usually a probate asset. When real property is a probate asset, the representative is entitled to commissions. In several states, specific bequests and the income thereon are treated as nonprobate and thus noncom- missionable assets. In addition, if an asset is secured by a liability, only the net equity should enter into the commission base. Sometimes a will provides for more than one executor. State law must then be examined to determine whether each is entitled to statutory commission or whether one such commission must be shared. (l) TAXATION OF ESTATES (i) Final Individual Income Taxes. One of the responsibilities of the personal representative is to file any unfiled federal and state income tax returns, as well as final income tax returns for the short taxable year that ends on the date of death of the decedent. If the deceased left a surviving spouse, the personal representative can elect to file a joint federal tax return for the year of death. A joint return will normally be prepared on the cash basis for the calendar year, 41.1 ESTATES—LEGAL BACKGROUND 41 • 13 in cluding the decedent’s income only through the date of death, and the income of the surviving spouse for the full calendar year. An election in the final return to accrue medical expenses unpaid at death that are paid within one year of death may be made. Accrued interest on U.S. Government Series E Bonds owned by the decedent may be included as income in the final federal income tax return. Expert tax advice should be secured by the representative before making these or various other available elections. Unused capital loss carryforwards and unused charitable contribution carryforwards of decedent are no longer deductible after the final year. Unused passive activity losses are allowed on the final return to the extent they exceed the estate tax value over the decedent’s adjusted basis. If a joint return is being filed, the tax shown on the return must be allocated between the decedent and the surviving spouse. The allocation will take into account the decedent’s withholding tax and his actual payments of estimated tax, leaving the estate of the decedent with either an asset (representing overpayment of taxes) or a liability (representing underpayment of taxes). If the surviving spouse had income or paid some portion of the tax, she would owe the estate or be entitled to reimbursement from it, depending on the relationship of her tax payments to the separate tax liability on her income. (ii) Federal Estate Tax. Decedents with gross estates valued at over $1 million 3 are required to file a Federal Estate Tax Return, Form 706, regardless of the fact that there may be no federal estate tax liability. The federal estate tax is a tax on the value of the decedent’s gross estate less certain deductions. Generally, the tax is paid from the estate property and reduces the amount otherwise available to the beneficiaries. Therefore, in the absence of specific directions in a will or trust, taxes are generally apportioned to the property that causes a tax. If property passes without tax because of a marital or charitable deduction, no taxes are chargeable to the property. The gross estate for tax purposes includes all of the decedent’s property as defined in the IRC, not merely probate property. The following are seven examples of property that is part of the gross estate for estate tax purposes, though not part of the probate estate and thus not accounted for in the representative’s accounting: 1. Specifically devised real property 2. Jointly owned property passing to the survivor by operation of law 3. Life insurance not payable to the estate when the decedent possessed “incidents of ownership” such as the right to borrow or change the beneficiary of the policy, and policies transferred within three years of death 4. Lump-sum distributions from retirement plans paid to someone as a result of surviving the decedent 5. Gift taxes paid by the decedent within three years of death 6. Fair market value of the principal of any revocable “living” trust of which the decedent was the grantor or settlor 7. Fair market value of the principal of any irrevocable trust in which the decedent, as grantor or settlor, had retained any rights to income, or over the beneficiaries’ rights to the use, enjoy- ment, or possession of the trust principal In putting a value on the gross estate for estate tax purposes, the representative has an election to value the estate as of the date of death or an alternative date. The alternative date is either six months 41 • 14 ESTATES AND TRUSTS 3 This is the filling threshold effective for decedents dying on or after January 1, 2002. This threshold is scheduled to increase as follows: in 2004, increases to $1.5 million; in 2006, increases to $2 million; in 2009, increases to $3,500,000; in 2010 the estate tax is repealed, hence no filing requirement; in 2011, the estate repeal “sunsets” and the pre-2002 rules become effective once again, hence the filing threshold is reduced to $675,000 [see Internal Revenue Service Publication 950 (Rev. March 2002), “ Introduction to Es- tate and Gift Taxes”]. See discussion of these changes made by EGTRRA later. after the date of death or at disposition of an asset if sooner. If the election to use the alternative date is not made, all property must be valued as of the date of death; if the alternative date is elected, all property must be valued at the alternative valuation date or dates. Alternate valuation is available only if there is a reduction in estate taxes. Deductions from the gross estate to arrive at the taxable estate include administration expenses (if an election has not been made to deduct them on estate income tax returns), funeral expenses, debts of the decedent, bequests to charitable organizations, and a marital deduction for property passing to a surviving spouse. The 1976 Tax Reform Act unified estate and gift tax rates by provisions for a unified table to be applied both to taxable gifts made after 1976 and to taxable estates for persons dying after 1976. In computing estate taxes on the taxable estate, gifts made after 1976 are added to the taxable estate and the unified tax is recomputed with credit given for the gift tax previously paid on such gifts. This computation has the effect of treating gift taxes paid as only payments on account of future estate and gift tax brackets. A marital deduction is now available for 100% of property passing to the surviving spouse. The property may be left in trust with income to the spouse for life, together with either a general power of appointment, or limited power of appointment. The latter may qualify for the marital deduction if the representative makes a Qualified Terminable Interest Property (QTIP) election with the return. Eventually, the property would be taxable in the surviving spouse’s estate and the tax thereon would be payable from the property. Estates are also allowed an unlimited charitable deduction for bequests left directly to charities. A prorated charitable deduction is allowed for a split-interest bequest to charity either in the form of a remainder interest or an income interest. The Tax Reform Act of 1997 added a new exclusion or deduction. Effective for decedents dying after December 31, 1997, decedents who owned a “qualified family owned business interest” or family farm may be eligible for this new estate tax exclusion. The amount of the exclusion is correlated with the unified credit, so that in any one year the combination of the taxable estate equivalent of the unified credit and the family owned business exclusion total $1,300,000. The eligibility rules to qualify for this new exclusion are complex and extensive; therefore, they must be closely reviewed before assuming that an estate will be able to avail itself of this exclusion. A unified credit is allowed against the computed estate tax. The unified credit is subtracted from the taxpayer’s estate or gift tax liability. However, the amount of the credit available at death will be reduced to the extent that any portion of the credit is used to offset gift taxes on lifetime transfers. The amount of the credit is equivalent to a taxable estate of $600,000. Therefore, a decedent can have a taxable estate of up to $600,000 before any estate tax is due. The Tax Reform Act of 1997 increased the unified credit over a period of years. Beginning in 1998, the taxable estate equivalent to the credit was increased to $625,000; and will increase as follows through 2006: 1999, $650,000; 2000 and 2001, $675,000; 2002 and 2003, $700,000; 2004, $850,000; 2005, $950,000; and 2006, $1,000,000. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), signed into law June 7, 2001, made broad, sweeping changes to several areas of the tax law including the estate, generation-skipping transfer, and gift taxes. In short, the estate and generation-skipping transfer taxes are phased out from 2002 to 2009 and eventually repealed in 2010. The current law, however, “sunsets” on December 31, 2010, and becomes effective again as it did back in 2001. The gift tax is not repealed; however, the rates decrease to 35% by 2010. The following is a brief description of the changes made by EGTRRA while they last. The highest tax rate for all three transfer taxes will reduce as follows from 2002 through 2009: 2002—50%, 2003—49%, 2004—48%, 2005—47%, 2006—46%, and 2007–2009— 45%. In 2010, the gift tax is cut to 35% while the other two transfer taxes are 0% (i.e., repealed). In 2011, the rates return to the 2001 level of 55% when the law sunsets. The unified tax credit, or applicable exclusion amount, for the estate tax increases from 2002 through 2009 as follows: 2002–2003—$1 million, 2004–2005—$1.5 million, 2006–2008—$2 million, 41.1 ESTATES—LEGAL BACKGROUND 41 • 15 2009—$3.5 million. The unified credit, or applicable exclusion amount, returns to the 2001 level of $675,000 in 2011. The unified credit, or applicable exclusion amount, is increased to and remains at $1 million in 2002. This remains constant through 2010, until it returns to the 2001 level of $675,000. The qualified family-owned business deduction that was added to the law by the Tax Reform Act of 1997 (discussed above) is repealed in its entirety in 2004. It reappears, however, in 2011 when the law sunsets. 4 Several other credits may be allowed against the computed estate tax. Most common is a credit for state estate and inheritance taxes (described next). Depending upon the nature, situs, and other as- pects of certain assets included in the gross estate, the following other credits may be allowed against the computed estate tax: prior transfers, foreign death taxes, death taxes on remainders, and recovery of taxes claimed as credits. Filing of the Form 706 is due nine months after the decedents’ date of death. The executor or administrator may request a six-month extension of time to file the return. If any tax is due with the return, an estimated payment of said tax is due six months from the date of death, with any balance due with the filing of the return. While payment of the estate tax cannot normally be extended, IRC Section 6166 provides relief for certain estates. Should the estate assets include an interest in a closely held business that exceeds 35% of the adjusted gross estate, an election by the executor or administrator would permit the de- ferral and payment of the estate tax, that is attributable to the inclusion of the closely held business interest in the estate, in installments over several years. The requirements of this code section are strict; therefore, the executor or administrator should carefully consider all available options, advan- tages, and consequences of making this election. One of these options, available to closely held corporations, is an IRC Section 303 stock redemption. If funds are available, the corporation may redeem stock held by the executor or administrator equal to an amount that may not exceed the sum of the estate taxes, outstanding debts, and administration expenses. While this option does not serve to defer the payment of estate taxes, it is an option that may be used in conjunction with or in lieu of the deferred payments under Section 6166 described above. (iii) State Estate and Inheritance Taxes. The estate tax in some states, such as New York, take the form of a tax on the right to transmit wealth that is similar to the federal estate tax. In other states, like New Jersey, an inheritance tax is applied to one’s right to receive a portion of a decedent’s estate. The state inheritance taxes are paid from estate funds by the representative, who will therefore withhold an appropriate amount from each legacy or establish a claim against those beneficiaries responsible for the tax by the terms of the will or by state law. Kinship of the beneficiary to the decedent is usually the controlling factor in determining exemptions and tax rates, with close relatives being favored. Other states, such as Florida, assess an estate tax based on the amount of credit for state death taxes claimed on the federal estate tax return. Almost all states provide for the tax to be at least equal to the federal credit for state death taxes if total inheritance taxes are less. EGTRRA reduces the state death tax credit by 25% in 2002, 50% in 2003, and 75% in 2004. In 2005, the credit is repealed and replaced with a deduction for state death taxes actually paid. This will require almost every state to enact some form of conforming legislation to coordinate its statute with the federal changes. The timing of the state’s estate or inheritance tax return and payment of any taxes may differ from the federal rules. An executor or administrator should be acquainted with these rules to avoid penalty 41 • 16 ESTATES AND TRUSTS 4 For a more detailed discussion of EGTRRA, see Alan D. Kahn, Mark H. Levin, and Robert H. Col- son, “The 2001 Tax Act, Estate Tax Repeal?” The CPA Journal, September 2001, p. 26. and interest assessments. A state return may be required to be filed even though no federal return is required if the gross estate is less than $1,000,000, and even if no state tax is due. (iv) Generation Skipping Transfer Tax. The Tax Reform Act of 1986 revised and imposes a new generation skipping transfer tax on most transfers made to individuals two generations (i.e., grandchildren) down from the donor or decedent. Most transfers prior to 1987 are exempt. Direct transfers or distributions from trusts to individuals two generations down will be subject to the tax if the transfer exceeds the allowable exemption. A donor/decedent has a lifetime exemption of $1,000,000. Effective for decedents dying after De- cember 31, 1998, the Taxpayer Relief Act of 1997 provides that the $1,000,000 exemption amount will be indexed for cost-of-living adjustments in $10,000 increments. Transfers in excess of this amount to grandchildren are subject to a flat tax in addition to the estate and gift tax. This flat tax is imposed at the highest marginal estate and gift tax rate, which is currently 55%. Consequently, it is conceivable that transferring $100 could cost $110 in estate/gift and generation skipping taxes. The law is relatively new and complex. Therefore, knowledge of the law and planning is important in order to minimize the impact of the tax. In 2001, the lifetime exemption was indexed up to $1,060,000. It will continue to be indexed for inflation in 2002 (it is currently $1,100,000) and 2003. For 2004 through 2009, the lifetime exemption is equal to the unified credit or applicable exclusion amount. The tax is repealed for 2010 and then returns to the 2001 levels. The tax rate is changed in the same manner as the estate tax rates discussed above. In addition, some of the substantive rules were liberalized effective for transfers made after December 31, 2000. (v) Estate Income Taxes. The representative may be responsible for filing annual federal income tax returns for the estate for the period beginning the day after the date of death and ending when the estate assets are fully distributed. The returns are generally prepared on a cash basis and can be prepared on a fiscal year, rather than a calendar year, basis. Such an election is made with the filing of the initial return and is often done to cut off taxable income in the first year of the estate. Mainte- nance of books on a fiscal year basis and filing the request for an extension of time to file the return will also establish the fiscal year. If returns are not timely filed, the estate will then be required to file on a calendar year basis. A federal income tax return is due if the estate earns gross income of $600 or more per year. A $600 exemption is allowed in computing the income subject to federal income taxes. Administration expenses, such as executor’s commission and legal and accounting fees may be de ducted if the representative does not elect to take these expenses on the federal estate tax return. If the estate distributes net income (gross income less expenses), such distributable net income is taxed to the recipient and the estate is allowed a corresponding deduction in computing its taxable income. Any remaining taxable income after deductions for exemption, expenses, and distributions is taxed at a rate specified in a table to be used exclusively for estates and trusts. The income tax basis of estate assets are stepped up to their estate tax value. Therefore, should the executor or administrator sell any assets to raise cash, the assets’ estate tax value is used to determine whether any gain or loss is realized upon the sale. There are, however, certain assets includable in the estate whose income tax basis carries over from the decedent. These assets are called income in respect of a decedent, or IRD, and are described in IRC Sec- tion 691. The following are examples of IRD: proceeds of U.S. savings bonds in excess of dece dent’s purchase price, IRAs, tax sheltered annuities and regular annuities, deferred compensation, and final paychecks and other remittances of compensation. Certain IRD give rise to income taxation upon receipt, while others do not cause taxation until they are redeemed or otherwise liquidated. Should an item of IRD be paid directly to an estate beneficiary or be distributed to the beneficiary from the estate, the same rules regarding income tax basis apply. An offsetting deduction is available to the executor or beneficiary who must recognize IRD in his gross income. The deduction is equal to that item’s attributable share of the estate tax its inclusion in the estate has caused. 41.1 ESTATES—LEGAL BACKGROUND 41 • 17 EGTRRA has modified the income tax rules relating to the step-up in basis discussed above beginning in 2010. To make up for the loss of revenue from the estate tax repeal, a new “carryover basis” regime will become effective. Under this regime, property acquired from a decedent will have a basis equal to the lesser of the decedent’s basis or the fair market value of the property on the date of the decedent’s death. A total $4.3 million of property may, however, still qualify to use the current step-up in basis rules. Up to $3 million of property passing to a surviving spouse, plus up to an ag- gregate of $1,300,000 of property passing to any beneficiaries will qualify for a step-up in basis. These new rules sunset after 2010, resulting in the modified carryover basis rules ending and the current step-up in basis rules being reinstated in 2011. So just in case, we should all start keeping better records in order to accurately reflect our tax basis in the assets we hold currently. Estates must now make quarterly estimated tax payments in the same manner as individuals, ex- cept that an estate is exempt from making such payments during its first two taxable years. Accord- ingly, the penalties for underpayment of income tax are applicable to fiduciaries. Some states also tax the income of estates, and the representative must see to it that such state statutes are complied with. 41.2 ACCOUNTING FOR ESTATES (a) GOVERNING CONCEPTS. The general concepts governing the accounting for decedent’s estates are for the most part similar to those applicable to trusts, but there are some differences. The un- derlying equation expressing the accounting relationship is assets ϭ accountability. However, the representative is concerned not with the long-term management of property for beneficiaries, but rather with the payment of debts and the orderly realization and distribution of the estate properties. The collection and the distribution of income are incidental to the main function of the estate’s fiduciary. Whenever an estate accounting is prepared, a reconciliation of the gross estate as finally determined for estate tax purposes should be made with the schedule of principal received at the date by the representative. Every difference should be explainable. (i) Accounting Period. The accounting period of the estate is determined by the dates set by the fiduciary or by the court for intermediate and final accountings; nevertheless, the books must be closed at least once a year for income tax purposes. (ii) Principal and Income. Unless otherwise provided for, the rules outlined below for the trustee should generally be followed by the representative in the allocation of receipts and disbursements to principal and income. Such distinctions, although not called for under the will, are frequently mandated by requirements of estate, inheritance, and income tax laws and regulations. (iii) Treatment of Liabilities. The representative picks up only the inventory of assets of the decedent at the inception of the estate. Claims against the estate, after presentation and review, are paid by the representative and are recorded as “debts paid.” The payment of such debts reduces in proportion the accountability of the representative. (b) RECORD-KEEPING SYSTEM. No special type of bookkeeping system is prescribed by law, but a complete record of all transactions must be kept with sufficient detail to meet the requirements of the courts and of the estate, inheritance, and income tax returns. Much of the information may be in memorandum form outside of the formal accounting system. The federal estate tax law requires information regarding assets beyond those ordinarily under the control of the representative (e.g., real estate). Such information must be assembled in appropriate form by the representative, who has responsibility for the estate tax return. (i) Journals. A single multicolumn journal is usually sufficient. It should incorporate cash receipts, cash disbursements, and asset inventory adjustments. Further, it is important to note and keep track of the distinction between principal and income. 41 • 18 ESTATES AND TRUSTS (ii) Operation of a Going Business. If the decedent was the individual proprietor of a going business and if the court or the will instructs the administrator or executor to continue the operation of the business, the bookkeeping procedure becomes somewhat complicated. The books of the business may be continued as distinct from the general estate books, or the transactions of the business may be combined with other estate transactions in one set of records. The best procedure, if the business is of at least moderate size, is to keep the operations of the business in a separate set of books and to set up a controlling accounting in the general books of the executor or administrator. As soon as the representative takes charge of the business, the assets should be inventoried and the books closed, normally as of the date of death. The liabilities should be transferred to the list of debts to be paid by the representative, leaving the assets, the operating expenses and income, and the subsequently incurred liabilities to be recorded in the books of the company. An account should be opened in the books of the business for the representative that will show the same amount as the controlling account for the business in the books of the representative. (iii) Final Accounting. The “final” accounting is the report to the court of the handling of the estate affairs by the representative, if required. It presents, among other things, a plan for the distribution of the remainder of the assets of the estate and a computation of the commission due the representative for his services. If the court approves the report, it issues a decree putting the propos- als into effect. (c) REPORTS OF EXECUTOR OR ADMINISTRATOR. The form of the reports of the fiduciary will vary according to the requirements of the court and to the character of the estate. In general, however, the representative “charges” himself with all of the property received and subsequently discovered plus gains on realizations, and “credits” (or discharges) himself with all disbursements for debts paid, expenses paid, legacies distributed, and realization losses. Each major item in the charge and discharge statement should be supported by a schedule showing detailed information. At any time during the administration of the estate, the excess of “charges” over “credits” should be repre- sented by property in the custody of the fiduciary. It may be necessary to show the market value of property delivered to a legatee or trustee at the date of delivery, in which case the investment schedule will show the increase or decrease on distribution of assets, as well as from sales. The income schedule, when needed, should be organized to show the total income from each investment, the expenses chargeable against income, and the distribution of the remainder. Exhibit 41.2 is typical of the charge-and-discharge statement, each item being supported by a schedule. 41.3 TRUSTS AND TRUSTEES—LEGAL BACKGROUND (a) NATURE AND TYPES OF TRUSTS. The trust relationship exists whenever one person holds property for the benefit of another. The trustee holds legal title to the property for the benefit of the beneficiary, or cestui que trust. The person from whom trust property is received is known as the grantor, donor, settler, creator, or trustor. An express trust is one in which the trustee, beneficiary, subject matter, and method of administration have been explicitly indicated. An implied trust may be created whether language of an instrument indicates the desirability of a trust but does not specify the details or when the trust relationship is as- sumed in order to prevent the results of fraud, breach of trust, or undue influence. The terms “con- structive,” “resulting,” and “involuntary” trust are sometimes applied to such situations. A testamentary trust is one created by a will. A living trust, or trust inter vivos, is created to take effect during the grantor’s lifetime. Trusts are sometimes created by court order, as in the case of a guardianship. A private trust is created for the benefit of particular individuals, while a public or charitable trust is for the benefit of an indefinite class of persons. Charitable trusts are discussed in Chapter 33. 41.3 TRUSTS AND TRUSTEES—LEGAL BACKGROUND 41 • 19 [...]... Grantors and Beneficiaries, 2nd ed Warren, Gorham & Lamont, New York, 198 9, 199 5 Cum Suppl Restatement 3rd Trusts (Prudent Investor Rule) §§ 227-2 29 American Law Institute, 199 0 Restatement, Second, Trusts American Law Institute, 195 9 Sages, Ronald A., “The Prudent Investor Rule and the Duty Not to Delegate,” Trust & Estates, May 199 5 Schlesinger, Sanford J., and Weingast, Fran Tolins, “Income Taxation... New York, 199 1, 199 5 Cum Suppl No 3 Stephenson, G T., and Wiggins, Norman, Estates and Trusts, 5th ed Appleton-Century-Crofts, New York, 197 3 Tractenberg, Beth D., “Transferee Liability Can Reach Trustee as Well as a Beneficiary,” Estate Planning, September/October 199 4 Warren Gorham & Lamont Trusts & Estates Staff, “Uniform Laws Provide a Road Map for Estate Planners,” Trust & Estates, May 199 4 Trusts,... Cooperative Publishing, Rochester, NY, 199 2, April 199 5 Cum Suppl Turner, George M., Trust Administration and Fiduciary Responsibility, Shephards McGraw-Hill, New York, 199 4 Uniform Principal and Income Act American Laws Annotated, Vol 7 Uniform Probate Code American Laws Annotated, Vol 8, 8A and 8B Waggoner, Lawrence W., “The Revised Uniform Probate Code,” Trust & Estates, May 199 4 CHAPTER 42 VALUATION OF NONPUBLIC... Englewood Cliffs, NJ, 197 7 Denhardt, J.G., Jr., and Grider, John D., Complete Guide to Estate Accounting and Taxes, 4th ed Prentice-Hall, Englewood Cliffs, NJ, 198 8 41 34 • ESTATES AND TRUSTS ———, Complete Guide to Fiduciary Accounting Prentice-Hall, Englewood Cliffs, NJ, 198 1 Executors and Administrators, 31 Am Jur 2d (rev.), Lawyer’s Cooperative Publishing Rochester, NY, 198 9, April 199 5 Cum Suppl Federal... “Income Taxation of Estates and Trust: New Planning Ideas,” Estate Planning, May/June 199 5 Warren Gorham & Lamont Scott, Austin Wakeman, The Law of Trusts, 4th ed Little, Brown, Boston, 198 7, 199 5 Suppl Share, Leslie A., “Domicile Is Key in Determining Transfer Tax of Non-Citizens,” Estate Planning, January/ February 199 5 Warren Gorham & Lamont Stephens, Richard B., Maxfield, Guy B., Lind, Stephen A., and... IRD Items Can Produce Tax Savings,” Estate Planning, September/ October 199 4 Warren Gorham & Lamont Harris, Homer I., Estates Practice Guide, 4th ed Lawyer’s Cooperative Publishing, Rochester, NY, 198 4, November 199 4 Suppl Harrison, Louis S., “Coordinating Buy-Outs and Installment Payment of Estate Tax,” Estate Planning, May/June 199 5 Warren Gorham & Lamont Herr, Philip M., and Etkind, Steven M., “When... Disposed of Before Death,” Estate Planning, September/October 199 0 Warren Gorham & Lamont Larsen, E J., and Mosich, A N., Modern Advanced Accounting, 6th ed Shephards McGraw-Hill, New York, 199 4 Nossman, Walter L., Wyatt, Joseph L., Jr and McDaniel, James R., Trust Administration and Taxation, rev 2nd ed Matthew Bender, New York, 198 8, August 199 5 Cum Suppl Peschel, John L and Spurgeon, Edward D., Federal... from this requirement, but only for their first two tax years The impact of RRA 93 (the Revenue Reconciliation Act of 199 3) substantially compressed the income tax rates applicable to trusts and estates Indexed from its original level effective for tax years beginning in 199 3, trusts reach the top 38.6% marginal bracket at $9, 200 of taxable income in 2002 Compare this to married individuals filing jointly,... Income Tax Attributes, November 16, 199 5 Practice Alert, Research Institute of America Ferguson, M Carr, Freeland, James J., and Ascher, Mark L., Federal Income Taxation of Estates, Trusts and Beneficiaries, 2nd ed Little, Brown, Boston, 199 3 Gillett, Mark R., and Stafford, Joel D., “Steps to Prepare and File Estate Tax Returns Effectively,” Estate Planning, May/June 199 5 Warren Gorham & Lamont Harris,... the New 4% Unitrust Option.” 41.3 TRUSTS AND TRUSTEES—LEGAL BACKGROUND 41 27 • The following describes the principal and income rules under the UPAIA of 196 2 Trustees are advised to seek to professional counseling to determine whether the 196 2 or 199 7 revised rules are in effect in their respective state (i) Receipts of Principal The following ten receipts of cash or other property have been held to . interest or an income interest. The Tax Reform Act of 199 7 added a new exclusion or deduction. Effective for decedents dying after December 31, 199 7, decedents who owned a “qualified family owned business. $600,000 before any estate tax is due. The Tax Reform Act of 199 7 increased the unified credit over a period of years. Beginning in 199 8, the taxable estate equivalent to the credit was increased. $625,000; and will increase as follows through 2006: 199 9, $650,000; 2000 and 2001, $675,000; 2002 and 2003, $700,000; 2004, $850,000; 2005, $95 0,000; and 2006, $1,000,000. The Economic Growth and

Định dạng
Số trang	85
Dung lượng	323,17 KB