Estate Planning Forum: timing the termination of an estate

California CPA, Dec, 2004 by Bill Downs

A recent question on CalCPA's Estate Planning Forum dealt with the timing of the termination of an estate.

The estate had a significant capital loss, which would be available to the heirs when the estate filed its final income tax return. The CPA requested clarification of the proper timing for closing of the estate. In short, what event establishes the date on which the estate is ended, for income tax purposes?

Rick Franceschini, a CalCPA Estate Planning Committee charter member, directed the questioner to Regulation 1.641(b)-3, Termination of Estates and Trusts.

There is some judgment to be exercised in determining when an estate or trust is terminated. In the case of a probate estate, there will be a final order for distribution, and the assets of the estate would be distributed some time after the order by the Probate Court.

"[A]n estate will be considered terminated when all of the assets have been distributed except for a reasonable amount which is set aside in good faith for the payment of unascertained or contingent liabilities and expenses ...," according to the regulation.

This can be comforting to those who thought that all of the assets had to be distributed before the estate could be considered closed. An executor's fear that a small checking account might be considered a violation triggering ongoing income tax return filings appears to be unfounded.

Similar provisions apply to trusts. Termination occurs when substantially all the assets are distributed. A reserve of a reasonable amount for payment of expenses is permitted and should not prevent filing of the final trust return.

There are other situations considered in the regulation regarding termination of trusts. If an income interest in a trust ends with the death of the income beneficiary, the income is allocated to the income beneficiary until the date of death, and the remainder afterward. The income would be distributed via Schedule K-1 (Form 1041).

Visit the Estate Planning Forum at www.calcpaweb.org/webforum.> --BILL DOWNS, CPA

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