Checklist for Trust Administration – Part 5

Paying the Estate and Income Taxes
by Julie Garber with Steve Beede

Once the successor Trustee has paid the final bills and has the ongoing trust expenses under control, the next step in settling the trust is to pay any income taxes, estate taxes and inheritance taxes that may be due.

Income Tax – The successor Trustee will need to prepare and file the decedent’s final federal and/or state income tax returns and pay any taxes that may be due in a timely manner. The final federal income tax return will be due on April 15 of the year after the decedent’s year of death.

Aside from filing the decedent’s final income tax return, if the estate earns income during the course of administration, then the successor Trustee will need to prepare and file all required federal estate income tax returns (IRS Form 1041) as well as any required state estate income tax returns. If the decedent’s estate is taxable for federal and/or state estate tax purposes, then the successor Trustee will be responsible for preparing and filing the federal estate tax return (IRS Form 706) and/or a state estate tax and/or a state inheritance tax return, and then paying the tax bill(s).

Estate Tax – The federal estate tax is collected on the transfer of a person’s assets to his or her loved ones after death, and the total tax due is calculated by adding up the fair market values of all of the decedent’s assets on the date of death and then applying estate tax credits and subtracting out allowable estate tax deductions.

The estates of each and every U.S. citizen are subject to the federal estate tax, but not every estate actually has to pay the tax. Why? Because the Internal Revenue Code gives each U.S. citizen a “coupon” that can be applied against their estate tax bill. In 2014 the “coupon” is $5,340,000. Thus, in 2014 if the value of the net estate – meaning the gross estate reduced by allowable estate tax credits and deductions – does not exceed $5,340,000, then the estate will pass to the heirs free from federal estate taxes.

And aside from federal estate taxes, many states collect state estate taxes and/or inheritance taxes but there is no State estate tax in California.

Once all of the income tax and estate tax issues have been resolved, the final step to settling the estate is to make distributions of what’s left to the trust beneficiaries. That comes next week in Part 6 – Distributing the Remainder to the Trust Beneficiaries.

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The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.