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The following is provided for general information only and is not a complete discussion of all applicable IRS and state tax codes related to estates.
A return of estate or trust by fiduciary is required to be prepared annually on a Form 1041. A fiduciary must file a return if the trust has gross income of $600 or more, and there are certain deductions that are allowable against gross income. A trust is recognized as a taxable entity until trust property has been distributed to successors. Tax rates generally mirror those of individual rates. However, each rate becomes effective at a much lower taxable income level for estates and trusts than for individuals.
A form 706, U.S. Estate Tax Return, is required generally for all estates where the gross estate exceeds one million dollars. This threshold will gradually increase to 3.5 million by 2009. The return is due within nine months of a decedent’s date of death.
A gross estate includes the value of all property in which the decedent had interest at the time of death. Property is calculated at the fair market value at the date of death. Gifts made after 1976, in excess of the annual exclusion of $10,000 per donee ($11,000 in 2002 and 2003), are added back into the gross estate. There are certain rules for property gifted three years prior to a decedent’s death, which could be added back into the gross estate.
Administrative and funeral expenses, claims against the estate, unpaid mortgages, or other indebtedness, further reduce the gross estate.
The net gross estate is reduced by the Unified Credit Shelter Amount (one million dollars) and taxed at an incremental rate up to 50%.
Form 541 is used to report the tax information of estates and trusts. Tax rates for estates and trusts are the same as for individuals. California requires estimated tax payments on the income of the estate or trust.
Estates are required to file a form ET-1, with the State Controller’s Office, no later than nine months from the date of death. The State of California follows the Internal Revenue Service rules for filing requirements, i.e., for gross estates greater than one million dollars.
State estate taxes are called “pick-up” taxes, because the state simply collects a tax that would otherwise go to the federal government. The federal government provides for a state death tax credit based on the size of the estate. The amount of the credit is equal to the amount that will be due on the state return. The Additional information for California rules related to taxable estates can be found at the California State Controller’s website, www.sco.ca.gov/col/taxinfo/estate.
If a decedent’s estate is required to file income tax returns, hiring a Certified Public Accountant (CPA) to prepare the estates accounting and complete the necessary forms can help to ensure timely and accurate filing.
Fees for using a CPA are generally calculated at an hourly rate that can range from $100 on up. Proper organization of the estate or trust accounting records can largely reduce the costs associated with preparing the returns. An initial meeting with a CPA can help to establish what information is needed and who will be preparing the information.
