1. Getting started
1.1. Need accurate list of all assets
1.1.1. Need to know how the asset was titled and the amount
1.1.2. For IRAs, need to know the beneficiary
1.1.2.1. Decide whether to do an "inherited IRA" or cash it in
1.1.2.1.1. Any account over $5,000 is usually done as "inherited IRA"
1.1.2.2. Be careful of tax ramifications of this decision
1.1.3. For Life Insurance - Need to know the beneficiary
1.1.4. CDs, Bank Accounts- Need to know how asset was titled
1.1.5. Real estate- Check titling
1.2. Are assets over $2 million?
1.2.1. Yes, then must file Form 706 within 9 months of death
1.2.2. No, then no estate tax return is needed
1.3. Is a probate needed?
1.3.1. What causes a probate?
1.3.1.1. More than $100,000.00 in deceased's own name
1.3.1.2. Real estate in own name (not trust)
1.3.1.3. No beneficiary on IRA or life insurance
1.4. Can a small estate affidavit be used?
1.4.1. If asset in deceased own name was less than $100,000.00 small estate affidavit will work
1.4.2. This is a less expensive option compared to probate
1.5. Need the following:
1.5.1. Original death certificates (as many as possible)
1.5.2. Original "pour over" will
1.5.3. Name, address, e-mail and SS# of trustee
1.5.4. Name, addresses, SS#'s, e-mail addresses of trust beneficiaries
2. "Holding" account
2.1. Trustee opens an account to hold $ during trust administration
2.1.1. Interest bearing account
2.1.1.1. Most trustees open a money market account with checkwriting
2.1.2. Non interest bearing account
2.1.2.1. If trust assets are low, it can be beneficial to open a non interest bearing account to avoid filing form 1041 (trust tax return)
2.2. Holding Account is titled, for example, "Ryan Sammons Trustee of Tom Sammons Living Trust dated 1/1/90" and uses the FEIN number
2.3. All assets that are liquidated, and house proceeds, are deposited here
2.4. When it's time to distribute, checks are written from the account, but a holdback is left in the account until tax returns are filed. The holdback amount is usually double whatever taxes we think may be due.
3. Dealing with Assets and Distribution
3.1. Most assets are liquidated and the cash put in "holding account"
3.1.1. Stocks, Mutual Funds, Brokerage accounts
3.1.2. Must first be retitled to name of successor trustee before anything can be done. Need a change of ownership form to do this. After retitling, stocks can be sold.
3.1.3. "Basis" or cost is the date of death, so capital gains taxes are minimal
3.1.4. House
3.1.5. Can be sold right away without being retitled
3.1.6. 5% is maximum commission
3.1.7. Should be sold "as is"
3.1.8. Often a neighbor will by it "by owner"
3.1.9. "Problem" assets
3.1.10. Savings bonds
3.1.10.1. Tax is due on interest earned
3.1.10.2. See web site for a calculator http://www.publicdebt.treas.gov/sav/savcalc.htm
3.1.11. IRAs
3.1.11.1. Very tricky: If a beneficiary is named then an "inherited" IRA is set up and distributions are over the beneficiary's life expectancy
3.1.12. Annuities
3.1.12.1. Income tax is due on any gain over what the decease put into the annuity originally
3.2. Assets can be distributed "in kind"
3.2.1. This means the asset is not sold, but is distributed out of the trust to beneficiaries
3.3. All debts must be paid
3.4. File deceased final 1040 tax return
3.5. Distribution
3.5.1. Trustee prepares an accounting for the beneficiaries (An accounting is a list of income into the trust and expenses paid out) Beneficiaries have right to approve the accounting.
3.5.2. Trustee can either charge a trustees fee or waive it. "Normal" fee is $1,000 to $5,000. This is "income" to the trustee.
3.5.3. Once all assets are collected, checks are written to each beneficiary and a receipt is signed
3.5.4. "Holdback" The trustee withholds funds to pay income taxes on form 1041 and any other tax due on IRAs or savings bonds
3.5.5. The "holdback" usually double the amount we think will be due
3.5.6. The "holding account" is changed to non-interest bearing after the first distribution is made
3.5.7. Once the 1041 tax return is filed, a small second distribution is made to the beneficiaries and the account is closed.
4. Taxes
4.1. Obtain FEIN for trust
4.1.1. Need death certificate to do this
4.2. Instructions for Form 1041- Brutal reading
4.3. Can't use deceased SS # anymore
4.4. Form 1041 must be filed for trust while income is earned on FEIN
4.4.1. Don't even THINK about doing a 1041 yourself
4.4.2. Hire a CPA- Rod Paquette in Palatine 847-934-8900 is a good one
4.5. Determine tax year
4.5.1. 2 Choices
4.5.2. Living trust can be taxed as an "estate" and use a fiscal year
4.5.3. Calendar year 1/1-12/31
4.6. "Simple" vs. "complex trust"
4.6.1. "Simple trust" distributes all income to beneficiaries (shown by K-1 form)
4.6.1.1. Most trusts are simple trusts if the trust "ends" and distributes to the heirs
4.6.2. "Complex trust" accumulates income in the trust (trust pays tax)
4.6.2.1. This is usually a continuing trust that goes on for years
4.7. Beware difference in tax rates
4.7.1. "Complex" trust tax rate- Trust pays tax
4.7.1.1. Trust tax rates are HIGHER than individual rates
4.7.1.2. 15% tax $0-$2050
4.7.1.3. 25% tax $2050-$4850
4.7.1.4. 28% tax $4850- $7400
4.7.1.5. 33% tax $7400-$10,050
4.7.1.6. 35% tax over $10,050
4.7.2. "Simple trust" tax rate- Individual pays at their own rate. Trust issues K-1 form and individual shows the income on 1040 personal return (always lower than trust paying)
4.7.2.1. Individual tax rates are LOWER than trust rates
4.7.2.2. 10% tax $0-$7550
4.7.2.3. 15% tax $7551- $30,650
4.7.2.4. 25% tax $30,651- $74,000