Tax Considerations

About this page: Circular 230 Notice

This website is for informational purposes only. The information on this website  contains advice concerning any federal tax issue or submission, please be advised that it was not intended or written to be used, and that it cannot be used, for the purpose of avoiding federal tax penalties unless otherwise expressly indicated.

Trust and Estate Income Tax Issues

Even small trusts and estates that are not subject to estate or transfer taxes need to consider tax filing and reporting requirements.  Also, the deceased person may be subject to tax reporting and filing requirements.  Fiduciary accounting income, and allocation of the income to trust principal or distributable net income can raise many complications.   The taxation of trusts and estates, primarily addressed in Subchapter J of the Internal Revenue Code, is a complicated and important set of rules.  Be certain to consult with an attorney in determining trust administration tax consequences and before filing fiduciary tax returns.

A-B Trusts Basis Issues and Administration Burdens

A number of tax issues can arise with some types of trusts.   Particularly trusts that are irrevocable and where the gift to the beneficiaries is completed and final.  A very common example of this occurs with married couples who have an A-B Trust.  With many A-B trusts, the assets of the first spouse to die are set aside in an irrevocable trust that does not allow control or access by the surviving spouse.  While this plan may be necessary where the spouses have divergent interests, it is often the case that A-B trusts are unnecessary remnants of an older trust.  Often, the A-B trust was built into a trust for tax planning, but is no longer necessary due to tax law changes.  Exercise care if you haven't reviewed or restated your trust for some time.  Not only could an unwanted A-B trust cost thousands in unnecessary taxes, but managing an A-B trust also requires additional work.  Once an A-B trust is implemented, following the death of a spouse, the trust often requires the separate maintenance of assets and separate accounting.  Consult with an attorney to determine what to do with an A-B trust or to ensure that an estate plan has been updated to remove an unnecessary A-B trust.

Real Estate Capital Gains

If a deceased person transferred real property to someone or put their name on the property as a joint tenant with rights of survivorship, you will need to consider taxes.  Under Internal Revenue Code 1014, property acquired from a deceased person receives a step-up in basis.  However, where a property owner adds someone to the deed before they die, IRC 1015 provides that the added party receive carry-over basis from the gifting party.  This means taxes could be due if the property has appreciated beyond the purchase price plus appreciation.  Discuss any previously transferred properties with your attorney.

Estate and Transfer Taxes

 For larger estates with values in the millions, tax filings are necessary and post-mortem tax planning can make a tremendous difference to the estate.  Planning ahead of time with trusts and gifts is the most effective way to address taxes, though a number of options are available after death as well. 

Closely Held Business Taxes

Closely held businesses might need to be reorganized for integration with planning, or sold or liquidated to cover estate taxes in other instances.  Unless full understanding of the business tax consequences and careful planning is put into place ahead of time, extremely costly mistakes can be made.  Fortunately, business structuring techniques, compensation and buy-sell planning, estate planning strategies, as post-mortem planning and tax elections can be helpful in business succession planning.