Probate Law

1. Duties Of Personal Representative
2. Steps Prior To Formal Administration Of Estate
3. Claims Against Estate
4. Estate Inventory, Appraisal And Record Keeping
5. Estate Taxes
6. Estate Expenses And Compensation
7. Estate Allowances And Distributions
8. Conclusion

Return to: Introduction to the Process of Probate


Section 5 - Estate Taxes

Notices of Fiduciary Relationship

The federal and California tax laws require that personal representatives notify the respective taxing authorities of their appointment and of their discharge. The effect of these notices is to establish the place where the taxing authorities must send communications. For example, filing of notices of fiduciary relationship will require the taxing authorities to send any notice of a proposed deficiency in the decedent's or the estate's income tax to the personal representative rather than to a beneficiary.

Our office prepares Notices of Fiduciary Relationship addressed to the Internal Revenue Service and the Franchise Tax Board for signature by the personal representative.

Taxpayer Account Numbers

The use of electronic data processing for federal income tax returns has resulted in the enactment of laws and regulations requiring the use of identifying numbers on tax returns. Every estate that is required to file any federal tax returns must apply for an employer identification number, which is the estate's tax account number. Our office obtains such numbers for the personal representative. When asked by a payor of income for a tax number for the estate, the personal representative should furnish the estate's employer identification number.

Federal Estate Tax

The United States government levies an estate tax based on the decedent's right to transmit property at death. The estate tax is normally paid by the estate, but may be allocated and charged to the beneficiaries of the estate under certain circumstances. A return must be filed for the estate of a decedent if the estate has a "gross value" in excess of the current exemption amount. Because the exemption amount is subject to frequent change, please ask us what the exemption amount is for the current year. "Gross value" includes the assets in the probate estate (listed in the inventory) and may also include certain assets that are not distributed by the decedent's ill, such as life insurance proceeds, jointly-owned property, and assets previously transferred by the decedent in trust or otherwise. The federal estate tax is based upon the value of the assets included in the estate for tax purposes as of the date of death, or at the estate's option, as of the date six months after the date of death. The latter date is called the "alternate valuation date." The federal rule for calculating the value of an estate's assets on the alternate valuation date has exceptions, however. If the alternate valuation date is elected and any asset is sold or distributed during the first six months following the date of death, the estate's assets are valued as follows: all assets not sold or distributed are valued as of the alternate date, but any assets sold or distributed within the first six months are valued as of the date of sale or distribution. Therefore, if alternate valuation is elected, the sale or distribution of estate assets can affect the federal estate tax due.

Certain United States Treasury Bonds may be redeemed at par in satisfaction of the estate tax, even if the market value is less than par. If the estate holds any of these eligible bonds, they should not be sold until the federal estate taxes have been finally determined by audit and paid.

California Estate Tax

California no longer imposes an inheritance tax. However, there is still a California estate tax, which is equal to the amount of the state death tax credit allowable with respect to property situated in California that is included on the federal estate tax return. The California estate tax return is due and the estate tax must be paid within nine months after the date of death. You must sign the return as the personal representative. If the estate is not large enough to require a federal estate tax return, no California estate tax will be due either, and no California estate tax return will be required.

Gift Taxes

If the decedent made any gifts in the year prior to his or her death, it may be necessary to file federal and state gift tax returns. California no longer imposes a gift tax, but some other states still do. Please supply the estate attorney with copies of any gift tax returns filed by the decedent in prior years, as well as any information you have about any recent gifts. It may also be necessary to file delinquent gift tax returns for unreported gifts made by the decedent in recent years.

Gift taxes paid after death are deductible on the estate tax return, but any federal gift tax paid or payable with respect to gifts made within three years of the decedent's death must be included as an asset on the federal estate tax return.

Income Taxes

We strongly advise retention of a certified public accountant with significant experience in preparation of Decedent's income tax returns. Final income tax returns must be filed for the portion of the year prior to the decedent's death and are due by April 15th of the following year. Extensions of time to prepare such returns can be obtained if necessary. The personal representative may select a fiscal year for the estate. Selection of a fiscal year may permit some reduction of total tax liability or at least a deferral of some tax liability. Given sufficient information, we can recommend the choice of a fiscal year for the estate.

Unlike an individual, an estate is entitled to an income tax deduction for amounts of income or principal paid or distributed to certain beneficiaries during the year, who must in turn include those amounts in their income tax returns for that year. Significant income tax savings may be possible by proper planning.

Real Property Taxes

The personal representative must plan to pay all real property taxes when due. The first installment of taxes on California real property is delinquent on December 11th, and the second installment on April 11th.

The county assessor of each county in which the decedent held real property must be notified first of the change of ownership from the decedent to the estate; and then upon distribution of the real property from the estate to the beneficiary. The change of ownership may result in a reassessment for property tax purposes, depending on the relationship of the transferee. We will prepare the necessary change of ownership forms.

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

Copyright 2011 © by Jacqueline M. Skay. All rights reserved. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include this copyright statement.

Estate and Trust Law
A Professional Law Corporation

Jacqueline Skay - Attorney at Law

760.745.7576
jskay@estateandtrustlaw.com

Probate Law

1. Duties Of Personal Representative
2. Steps Prior To Formal Administration Of Estate
3. Claims Against Estate
4. Estate Inventory, Appraisal And Record Keeping
5. Estate Taxes
6. Estate Expenses And Compensation
7. Estate Allowances And Distributions
8. Conclusion

Return to: Introduction to the Process of Probate

Section 5 - Estate Taxes

Notices of Fiduciary Relationship

The federal and California tax laws require that personal representatives notify the respective taxing authorities of their appointment and of their discharge. The effect of these notices is to establish the place where the taxing authorities must send communications. For example, filing of notices of fiduciary relationship will require the taxing authorities to send any notice of a proposed deficiency in the decedent's or the estate's income tax to the personal representative rather than to a beneficiary.

Our office prepares Notices of Fiduciary Relationship addressed to the Internal Revenue Service and the Franchise Tax Board for signature by the personal representative.

Taxpayer Account Numbers

The use of electronic data processing for federal income tax returns has resulted in the enactment of laws and regulations requiring the use of identifying numbers on tax returns. Every estate that is required to file any federal tax returns must apply for an employer identification number, which is the estate's tax account number. Our office obtains such numbers for the personal representative. When asked by a payor of income for a tax number for the estate, the personal representative should furnish the estate's employer identification number.

Federal Estate Tax

The United States government levies an estate tax based on the decedent's right to transmit property at death. The estate tax is normally paid by the estate, but may be allocated and charged to the beneficiaries of the estate under certain circumstances. A return must be filed for the estate of a decedent if the estate has a "gross value" in excess of the current exemption amount. Because the exemption amount is subject to frequent change, please ask us what the exemption amount is for the current year. "Gross value" includes the assets in the probate estate (listed in the inventory) and may also include certain assets that are not distributed by the decedent's ill, such as life insurance proceeds, jointly-owned property, and assets previously transferred by the decedent in trust or otherwise. The federal estate tax is based upon the value of the assets included in the estate for tax purposes as of the date of death, or at the estate's option, as of the date six months after the date of death. The latter date is called the "alternate valuation date." The federal rule for calculating the value of an estate's assets on the alternate valuation date has exceptions, however. If the alternate valuation date is elected and any asset is sold or distributed during the first six months following the date of death, the estate's assets are valued as follows: all assets not sold or distributed are valued as of the alternate date, but any assets sold or distributed within the first six months are valued as of the date of sale or distribution. Therefore, if alternate valuation is elected, the sale or distribution of estate assets can affect the federal estate tax due.

Certain United States Treasury Bonds may be redeemed at par in satisfaction of the estate tax, even if the market value is less than par. If the estate holds any of these eligible bonds, they should not be sold until the federal estate taxes have been finally determined by audit and paid.

California Estate Tax

California no longer imposes an inheritance tax. However, there is still a California estate tax, which is equal to the amount of the state death tax credit allowable with respect to property situated in California that is included on the federal estate tax return. The California estate tax return is due and the estate tax must be paid within nine months after the date of death. You must sign the return as the personal representative. If the estate is not large enough to require a federal estate tax return, no California estate tax will be due either, and no California estate tax return will be required.

Gift Taxes

If the decedent made any gifts in the year prior to his or her death, it may be necessary to file federal and state gift tax returns. California no longer imposes a gift tax, but some other states still do. Please supply the estate attorney with copies of any gift tax returns filed by the decedent in prior years, as well as any information you have about any recent gifts. It may also be necessary to file delinquent gift tax returns for unreported gifts made by the decedent in recent years.

Gift taxes paid after death are deductible on the estate tax return, but any federal gift tax paid or payable with respect to gifts made within three years of the decedent's death must be included as an asset on the federal estate tax return.

Income Taxes

We strongly advise retention of a certified public accountant with significant experience in preparation of Decedent's income tax returns. Final income tax returns must be filed for the portion of the year prior to the decedent's death and are due by April 15th of the following year. Extensions of time to prepare such returns can be obtained if necessary. The personal representative may select a fiscal year for the estate. Selection of a fiscal year may permit some reduction of total tax liability or at least a deferral of some tax liability. Given sufficient information, we can recommend the choice of a fiscal year for the estate.

Unlike an individual, an estate is entitled to an income tax deduction for amounts of income or principal paid or distributed to certain beneficiaries during the year, who must in turn include those amounts in their income tax returns for that year. Significant income tax savings may be possible by proper planning.

Real Property Taxes

The personal representative must plan to pay all real property taxes when due. The first installment of taxes on California real property is delinquent on December 11th, and the second installment on April 11th.

The county assessor of each county in which the decedent held real property must be notified first of the change of ownership from the decedent to the estate; and then upon distribution of the real property from the estate to the beneficiary. The change of ownership may result in a reassessment for property tax purposes, depending on the relationship of the transferee. We will prepare the necessary change of ownership forms.