21 Post-Mortem Estate Planning Techniques

Question 1

Estate Income Tax Return

Answer 1

1. During its period of administration and until the date of final distribution of the estate assets, an estate is a separate taxable entity for federal income tax purposes .
2. The executor or personal representative must report the income of the estate on IRS Form 1041. This return must be filed if:
   
   1. the estate has gross income of $600 or more for the tax year; or
   2. any beneficiary of the estate is a nonresident alien.
3. The return must be filed on or before the 15th day of the 4th month following the end of the taxable year

Question 2

Joint Income Tax Return w/ Decedent

Answer 2

Generally advantageous because of the rate schedule and closing period of the surviving spouse.

• Filing a joint return with a deceased spouse is subject to several rules and must be coordinated with the executor of the deceased spouse’s estate

A possible disadvantage may be potential tax liability because of joint and several liability

Question 3

Interest deductions

Answer 3

1. Personal interest is nondeductible
2. Trade or business interest is deductible
3. Investment interest is deductible to the extent of taxable investment income
4. Qualified residence interest is deductible in a limited manner

Question 4

Waiver of Executor Fees

Answer 4

1. Executor fees are gross income to the executor
2. A waiver of executor fees may be beneficial if the surviving spouse is the executor and all assets are left to the surviving spouse.
   
   • The surviving spouse still receives property but as bequest (income tax free) rather than as an executor fee (subject to income tax).
3. A waiver may be not beneficial if the spouse-executor’s marginal tax bracket is lower than the marginal estate tax rate.

Question 5

Medical Expenses

Answer 5

1. Medical expenses paid within one year of death are deductible on the decedent’s final income tax return (Form 1040) or as an estate tax deduction (Form 706), but the same expenses cannot be deducted on both returns.
2. If the medical expenses are deducted on the final income tax return, they are subject to 7.5% of the AGI floor.
3. If the expenses are deducted on the estate tax return, there is no limit on the deduction.
4. The estate should not claim this deduction on the estate tax return if no estate tax is otherwise due.

Question 6

Series EE Bonds

Answer 6

• If the decedent had elected to defer the recognition of Series EE bond interest during his lifetime, it is generally advisable for the estate to make the election to report any accrued interest on the decedent’s final Form 1040
• If the estate does not make this election, the accrued interest becomes IRD

Question 7

Administrative Expenses and Casualty Losses

Answer 7

Depending on relative tax brackets, deduct either on 1041 (fiduciary) or 706 (estate)

Question 8

Qualified Disclaimers

Answer 8

Qualified disclaimers after the decedent’s death may help reduce estate taxes, especially in family situations, or allow heirs to perform other post-mortem tax planning.

• Disclaimer by spouse in favor of children reduces use of marital deduction and helps avoid overqualification
• Disclaimer by children in favor of spouse increases use of marital deduction and helps avoid underqualification