DRAFTING WILLS AND TRUSTS FROM AN INCOME TAX PERSPECTIVE
A Panoply of Forms

By Noel C. Ice

The following is not a typical outline of income tax issues in the administration of trusts and estates. Rather, it is a series of forms, beginning in Article I with some typical will and trust clauses dealing with income tax issues. There follow a couple of letters and memos, used to fully apprise the poor fiduciary of the nuts and bolts issues that cannot be avoided, such as— “Do I need to get one or more taxpayer identification numbers, and, if so, how do I do it? Where do I deduct administrative expenses? What is the §645 election, and why is it so complicated? What is DNI and how is it affected by the separate share rule? Will there be gain when I fund a trust?”

For a more typical outline on the ins and outs of the post-mortem income tax rules, try to find the latest of Prof. Mickey Davis’s always excellent papers, presented on the subject at various Advanced Estate Planning/Drafting Courses sponsored by the SBT-PDP. Likewise, see Steve Akers Post-Mortem outline, a version of which resides at http://www.trustsandestates.net/Guest_Folder/Akers_Post-Mortem_Est_Admin_2003.htm.

If you do not tell the fiduciary about these rules who will? If you do not do it in writing, do you really expect the fiduciary to recall your oral explanation? Perhaps you could just say, “Don’t do anything at all without consulting me first,” but this simply may not be practical; moreover, all the lawyer can do is to advise; it is the fiduciary who has the responsibility of making ultimate decisions. These decisions must be made on a fully informed basis, and cannot always be done meaningfully merely on the basis of a prior oral conversation with counsel. Even if all of the technical issues are explained, in detail, orally, it is not reasonable to expect the fiduciary to absorb and be able to recall all that was said; unless, perhaps, the fiduciary is a professional fiduciary. I maintain that the lawyer should strive to give the fiduciary written instructions about what the fiduciary may need to know to execute the office. Unfortunately, it is impossible to give all the information that might be needed without bombarding the fiduciary with more data that the fiduciary can possibly absorb. Thus, a reasonable approximation is the most that can ever be achieved. Even then, the fiduciary would probably wish you had been less informative. You can’t win. All you can do is try.

The sample letters below cover a lot more than just income tax issues, but I thought I would throw the whole of them in for your benefit without editing, since I believe you will find them useful. I will confine my oral remarks to the income tax issues found in the letters.

ARTICLE 1
TRust Administrative provisions

The following provisions in this Article are will and trust clauses, which treat income tax issues, which I commonly use, and which I excised for your consideration.

1.1 Valuation For Funding and Distribution Purposes-In Kind Distribution.

1.1(a) In General.

Unfortunately, when property, including cash, is distributed in satisfaction of a gift that is not a specific gift, it will often be necessary to value the entire estate available for distribution as of the date of distribution, depending on the valuation method required by the governing instrument (e.g., minimum worth, FMV or fairly representative). Revaluation can be necessary, for example, if the distribution is in satisfaction of a fractional share gift (e.g., a gift of a fraction of the residuary estate), if some beneficiaries of the gift receive different assets than others (i.e., a nonprorata distribution), as is generally permitted but not required under this instrument; or if prorata distributions are not made at the same time. Revaluation is presumably also necessary in the case of a pecuniary distribution made under a Rev. Proc. 64-19 approach, in order to be able to demonstrate that such a distribution is “fairly representative of appreciation and depreciation” of all assets available for distribution. If a pecuniary gift is to be satisfied with property other than cash at its “fair market value on the date of distribution,” it will usually be necessary to recognize capital gain if the value of the property at the time of distribution exceeds its basis for federal income tax purposes; or, at least that is the probable IRS’ position. Interestingly, these are rules that will often be overlooked by all but a good probate tax lawyer, often to the advantage of the taxpayer, who otherwise pays a “competence tax.”

1.1(b) Method For Valuing Property Distributed as a Part of a Nonprorata Distribution of the Residuary Estate.

Except as otherwise specifically provided to the contrary herein, fractional share gifts that are not specific gifts, including gifts of the residuary estate, may be funded on a nonprorata basis (pick-and-choose) provided funding is based on either (1) the fair market value of all of the assets available for funding on the date or dates of funding or (2) in a manner that fairly reflects the net appreciation or depreciation in the value of all of the assets measured from the date of death to the date(s) of funding. Unless otherwise specified herein, the fiduciary will have the reasonable discretion to determine which of the two funding methods to use.[1]

[Note that a true pick-and-choose fractional share, as described in (1), apparently allows the fiduciary to play around with the basis. E.g., as long as each beneficiary receives assets equal in value to the beneficiary’s proportionate share of the fair market value of the entire fund subject to division, the fact that one beneficiary may receive low basis and the other high basis assets, is irrelevant for tax purposes. Arguably, method (2), Rev. Proc. 64-19,[2] requires that the assets themselves fairly reflect the appreciation and depreciation.[3] The GST regulations are even more explicit than Rev. Proc. 64-19 on this subject.[4]]

1.1(c) Method For Valuing Property Distributed in Satisfaction of a Pecuniary Bequest is Fair Market Value on Date or Dates of Distribution Except for Pecuniary Gifts Exceeding $100,000.

Except as otherwise specifically provided to the contrary, a pecuniary gift of $100,000 or less will be satisfied using assets having a fair market value at the date or dates of distribution equal to the pecuniary amount of the gift. However, in the case of distributions in satisfaction of pecuniary gifts of over $100,000, the cash and other property distributed will have an aggregate fair market value fairly representative of the pecuniary beneficiary’s proportionate share of the appreciation or depreciation of all property then available for distribution in satisfaction of the pecuniary gift.

1.1(d) Meaning of “Fairly Representative of Appreciation or Depreciation.”

The phrase “fairly representative of the pecuniary beneficiary’s proportionate share of the appreciation or depreciation” or “fairly reflects net appreciation or depreciation” or “fairly representative of appreciation or depreciation,” when used in connection with the valuation or funding of a pecuniary gift under this instrument, will all generally have the same meaning as the latter phrase has when it is used in Rev. Proc. 64-19; or, in the case of GSTT property, as the second phrase has in the final treasury regulations governing Chapter 13 of the IRC[5]. Maker believes that this means that the value of the property subject to this valuation method will generally be deemed to equal the fair market value of the property on the date used for determining basis for federal income tax purposes, but that the property used to satisfy the gift subject to the standard will fairly reflect net appreciation and depreciation (occurring between the basis determination date and the date of distribution) in all of the assets from which the distribution could have been made. Maker believes that in the case of property included in the Maker’s gross estate, the value of property for this purpose is its value for purposes of chapter 11 of the IRC, but that if the property was not included in the gross estate (e.g., the property is the sales proceeds of property included in the estate), the value of the property will, presumably, be its federal income tax value (adjusted basis). Notwithstanding the foregoing, this valuation funding provision will be implemented, interpreted, or modified by the Decedent’s fiduciary as and if necessary in order to be consistent with the usage of the terminology in Rev. Proc. 64-19, and, in the case of GSTT property, to comply with any final treasury regulations governing Chapter 13 of the IRC at the date of distribution, in order that the denominator of the “applicable fraction” (for GSTT purposes with respect to an Exempt Share or Trust) will equal in value the available GSTT exemption, consistent with Maker’s manifest intent elsewhere expressed. In this regard “[i]f the pecuniary amount is payable in kind on the basis of value other than the date of distribution value of the assets, the trustee is required to allocate assets to the pecuniary payment in a manner that fairly reflects net appreciation or depreciation in the value of the assets in the fund available to pay the pecuniary amount measured from the date of death to the date of payment.”[6]

1.1(e) Trustee Prohibited From Operating Trust As a Device To Carry On a Business.

Although the fiduciaries have been given broad powers, including the power to carry on a business under appropriate circumstances, the trusts created under this instrument are created for the primary purpose of protecting or conserving the trust property for beneficiaries, and, following the death of Maker, the trustee is prohibited from operating the trust simply as a device to carry on a profit-making business to the exclusion of the primary purpose.

* * * *

1.2 Tax Elections.

(1) The IRC permits or requires a fiduciary to make certain tax elections as an incidental consequence of the discharge of its fiduciary duties, including at various times and in various contexts:

(A) whether to elect to file a joint return with a spouse under the provisions of §6013(a) of the IRC,

(A-1) whether an estate tax deduction will be taken for estate transmission[7] and estate management expenses[8], or whether such expenses will be deducted on the probate estate's federal income tax return, or deducted in part on each,

(A-2) whether and to what extent to make an election pursuant to §2056(b)(7)(B)(v) to qualify certain terminable interest property, if any, for the estate tax marital deduction,

(B) whether and to what extent to make an election under §643(e)(3) of the IRC,

(C) whether and where and to what extent to make an allocation of the Generation Skipping Transfer Tax (GSTT) exemption under §2631(a) of the IRC for purposes of determining the “inclusion ratio” described in Chapter 13 of Subtitle B of the IRC,

(D) to elect a taxable year, which may be a fiscal or a calendar year, under the provisions of §441 of the IRC,

(E) the date that should be selected for the valuation of property in a gross estate for federal and state death tax purposes,

(F) whether any portion of an estate should be valued under any of the applicable provisions of §2032A of the IRC,

(G) whether any portion of the federal estate tax liability for an estate will be paid under any deferred payment option available to Maker's estate under the IRC,

(H) whether a deduction will be taken as an income tax deduction or as an estate tax deduction,

(I) whether and to what extent to elect to report on Maker's final income tax return unrecognized income from United States Series E and EE savings bonds,

(J) whether to make, terminate or revoke an S-Corporation election under §1362 of the IRC.

(K) whether to make an election to qualify a trust as an “electing small business trust” under IRC §1361(e).

(2) The fiduciaries are specifically given the discretion to make all tax elections, including those enumerated above. In the case of a tax election affecting Maker’s probate estate, such election will be made by Maker’s executor or as otherwise required by law in order to make the election. Such elections will be made in a fiduciary capacity, after considering the income and estate tax consequences and the intent expressed in this instrument. However, a fiduciary will not be liable to anyone for any adverse tax consequence occasioned by the exercise or nonexercise of such election, if made in good faith.

(3) An allocation of receipts and expenditures between income and corpus for fiduciary accounting purposes need not follow the allocation for tax reporting purposes. However, a fiduciary may, but need not, make compensating adjustments between income or principal or in the amount of any gift under this instrument as a result of a tax election.

(4) In addition, no liability will be incurred by the mere fact that the exercise or nonexercise of a tax election benefits Maker's spouse, it being intended to provide for Maker's spouse during such spouse's lifetime. If (as is hereby expressly authorized) Maker's executor joins with Maker's spouse (or the estate of Maker's spouse if Maker's spouse is deceased) on Maker's behalf in filing income tax returns, or consents for gift tax purposes to having gifts made by either of them during Maker's life considered as made one-half (1/2) by each of them, any resulting liability will be borne as prescribed by law.

1.3 Income in Respect of a Decedent.

Unless this instrument specifically provides otherwise elsewhere (e.g., only to the extent consistent with my manifest and paramount intent explicitly set forth in the above Subsections that deal with the MRD Rules), if a pecuniary or a residuary gift to Charity is made under this instrument, the principal amount of the gift will be satisfied, as a matter of right, first out of any income in respect of a decedent (691 items) otherwise available for that purpose, before any other properties are allocated, and second, if need be, out of other net income of the residuary estate. If there is more than one such gift, the 691 items and other income will be pro rated between them (691 items first, other income, if need be, second). If the 691 items exceed the value of the charitable gift, the charity(ies) will be entitled to a fractional share of the 691 items and no other income. Notwithstanding anything else herein to the contrary, the fractional share will be a true fraction, with no “pick and choose” power in the fiduciary. The allocation of income under this Section (if needed to satisfy the principal amount of a gift to Charity) will not, however, have the effect of reducing the value of any other gift or right to income in a beneficiary. Thus, if the allocation of income under this Section would have that effect (but for this sentence), then Maker’s fiduciary will make whatever equitable adjustment out of corpus is necessary to make the beneficiary (including the charity itself) whole.

ARTICLE 2
A Letter to the Personal Representative Talking About Income Tax Issues, Among Other Things [9]

[TOWHOM]
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RE: Estate of [DecedentFullName], Deceased
[DecedentFullName], Deceased
Probate Cause No.: [ProbateCauseNo]
Date of Death: [DateOfDeath]

[Dear [SALUTATION]:

I realize that this is a lengthy letter, so please bear with me. I have worked long and hard on this letter, with the intent to reduce to writing in one place most of what you will need to know to fulfill your duties as [TitleOfExecutor]. The letter covers a lot of ground, but it covers things you will or may need to know. If you read it carefully I think it will help you understand much of what estate and trust administration is all about. This letter and the attachments can serve as a roadmap and a reference for the future. Although, in the interest of full disclosure to interested parties, I may be copying others on this letter, including, perhaps, beneficiaries, I want to make sure that everyone knows that I am representing you alone, in your fiduciary capacity, and am not representing anyone else connected with the estate, even though it is my intent and desire to keep them informed of much that is going on in the estate.

Fiduciary Duties. An executor is a fiduciary, and so is a trustee. A fiduciary is a person that is in a special relationship of trust and confidence with another person. Because of that relationship the fiduciary has a duty to treat that person with the utmost fairness in all dealings between them. An executor is in a fiduciary relationship with the estate, and the beneficiaries of the estate, and, perhaps, with the creditors of the estate. As a fiduciary, the executor owes them special duties. A trustee is in a fiduciary relationship with the trust and the beneficiaries of the trust, and as such owes them special duties. These duties are outlined in a memorandum I am attaching entitled “Fiduciary Duties.”

***TAXPAYER IDENTIFICATION NUMBERS
(herein “TINs” or “EINs”)

Unfortunately, this is an area where the IRS has gone out of its way to add considerable complexity to the law.

Form SS-4. I am enclosing one or more IRS Form(s) SS-4 which require your signature in order that the number we have obtained for you will be valid. Please sign and return the SS-4(s) to me, as soon as possible. For your convenience in this regard, I am enclosing a stamped, self-addressed, return envelope.

Ordinarily, it is necessary to obtain taxpayer identification numbers for everyone who must file a tax return in connection with the estate or any trust closely connected with the estate, if a TIN does not exist for the taxpayer already. For example, if there are any trusts to be funded, each trust will need its own TIN, unless perhaps, the trusts are “grantor trusts” under IRC §678, a subject that may require a separate discussion. Further, if the estate will have any income to report, then a TIN for the estate will have to be obtained. The [TrustName] became irrevocable upon [theDecedent]'s death. Therefore it will also be necessary to get a new TIN number for that trust.

Taxpayer Identification Number For Estate. The law requires that the estate have its own TIN if it has income sufficient to be taxed or if a Form 1041 for the estate will need to be filed, as is usually the case. Through an expedited application process, we have already obtained a Taxpayer Identification Number for the Estate. This number is [EINEstate], and is used to identify the estate for tax purposes. Please make sure that your C.P.A. realizes that it will not be necessary to obtain another one. I have until the end of the month to withdraw this number, if one has already been obtained by you or by your accountant.

Estimated Tax Payments. Although trusts are required to pay estimated income tax payments in the same manner as individuals, estates are exempted from this requirement for the first two taxable years.[10] Estates must pay income taxes in four quarterly installments on April 15, June 15, September 15, and January 15 beginning with the third taxable year. The same exemption does not apply to a trust, unless it is a Qualified Revocable Trust (QRT) for which a §645 election is made, a matter that will be discussed below.

Taxpayer Identification Number For Living Trust. Since [theDecedent]'s portion of [TrustName] became irrevocable at death, we will almost certainly need one or more taxpayer identification numbers for the new (now) irrevocable trust, as well as the subtrusts to be created under it, if any. We have already a obtained TIN [TINRevocableTrust] for you to use. Please make sure that your C.P.A. realizes that it will not be necessary to obtain another one. I have until the end of the month to withdraw this number, if one has already been obtained by you or by your accountant.

As discussed later below, I am strongly recommending that your accountant make a “§645 Election” to treat [TrustName] and the estate as one taxable entity. This will save a lot of problems if my advice is followed, but it will not alleviate the need to obtain a TIN for the trust and the estate.

If the trust was substantially unfunded during life, you might decide to make distributions from the estate directly to any subtrusts created under the [TrustName], in which case, it is arguable, that there would be no point in obtaining a TIN for [TrustName], since it will never have any income. However, since it might be considered to be in “constructive” receipt, I still advise obtaining a new TIN for [TrustName], and making the §645 Election.

Tax Identifications For Subtrusts. If subtrusts are created, each one should obtain a new TIN prior to funding. I am not analyzing here whether or how many subtrusts there are or will be, and will leave that discussion for later, but merely note that if [TrustName] is to be further divided, new TINs will need to be obtained. The subtrusts created will in all probability be treated as true trusts for tax purposes, and annual income tax returns will have to be filed. A possible exception is noted below. In any case, the return should be a fairly easy matter to take care of.

Possible Grantor Trust Treatment Under IRC §678 if Sole Beneficiary is Also (or becomes the) Sole Trustee. If the sole trustee of a trust is also the beneficiary of the trust, and if the trustee has the power to distribute income and corpus to him or herself “without regard to other available assets,” then I believe that it is possible to argue that the trust is a “grantor trust” for tax purposes, because of the application of IRC §678. A fortiori, if the sole trustee is the beneficiary of a trust that requires all income to be distributed annually, the trust ought to be treated as a grantor trust, at least with respect to ordinary income. The argument is aggressive where all income is not “required” to be distributed, and is somewhat less strong if the distribution terms are otherwise different than those recited. The conservative course is most likely to treat any successor trusts as taxable trusts for income tax purposes (with separate and special consideration being given if the trust has a mandatory income distribution provision and the sole trustee is the sole beneficiary). But if income will be accumulated in such a trust, you must be mindful that at the present time trust income tax rates are fairly steep. On the other hand, a trust gets what is known as a “distribution deduction” for income that is distributed, and this can ameliorate the problem. Of course, if §678 applies, and the trust is treated as a grantor trust, then the trust income taxation rates do not apply at all. Again, if you choose to argue that §678 applies, we need to discuss the risks and benefits in greater detail, whether over the phone or in person.

Since the income tax reporting for the trusts will not be handled by me or my office, but should be handled by your C.P.A., your C.P.A. should be closely consulted about the final reporting position you will take. I include the above discussion in order to make the C.P.A.'s job easier, and trust that you will share at least this portion of the letter with your C.P.A., unless the C.P.A. that will do your tax reporting is being copied on this letter. In this regard, I am enclosing a seven page article taken from Probate and Property March/April 2002, written by Jonathan Blattmachr and Bridget Crawford. This is done to assist your C.P.A. (or to convince you how difficult this simple question of TINs actually is).

How Should a Trust Bank Account be Styled? I want to emphasize that a trust is not itself a legal entity in Texas, but can only act by and through a trustee. Therefore, the name of the trustee, as such, should be on all legal documents, including all accounts with financial institutions. So, for example, you should place “[Name of Trustee], Trustee” before the name of the trust. For example:

[Name of Trustee] (or successor), Trustee under [Name of Subtrust], created under [Name of Original Trust or Last Will and Testament], originally signed by [name of Settlor] on [date of signature], who died on [date of death].

Please note that this example does not suit your particular case, because it is a generic example. We can talk later about exactly how to style a particular trust account, distribution deed, etc.

The original trust instrument provides that all of the trusts under it can be freely renamed (I think), and technically (you may find this hard to believe), a trust does not have a legal name as such, since it is not a legal entity. Instead, the name is a convenient way to describe the document under which the trust relationship was created. The holder of legal title is the trustee, as such, and not the trust. This is all very theoretical, and as a practical matter, you may find that how you end up having to style the trust accounts is, as a matter of practical convenience, whatever the financial institution requires.

***The All Important IRC §645 Election to Treat a Revocable Trust Under the Rules Applicable to Decedent's Estates or to Combine the Trust and the Estate.

Although we feel strongly that this law firm is best qualified to prepare estate and gift tax returns, because of the specialized nature of those returns and the issues they involve, we generally do not prepare income tax returns. As indicated elsewhere in this letter, income tax reporting for estates and trusts is important, and we expect that this will be done by an accountant you hire. However, because not all accountants are familiar with the income tax issues associated with estates and trusts, we would hope that whoever prepares the income tax reporting, the Form 1041 for the estate, the trust, etc., will consult carefully with us, at each stage, and, although I do not insist on it, I strongly recommend that we be given pro forma copies of income tax filings well in advance of the due date, with the understanding that we are under no obligation to review them for accuracy.

Notwithstanding this delegation of the income tax reporting, there are some matters that are so important that I will point them out here so that you will be aware of them, and, if this letter (or parts of it) are given to the accountant, the accountant too will be advised ahead of time of certain issues we think particularly important. One of those issues is the election to treat [TrustName] and the estate as one tax reporting entity, if [TrustName] qualifies as a QRT, which stands for “Qualified Revocable Trust.” I am enclosing a memo entitled “The All Important IRC §645 Election to Treat a Revocable Trust Under the Rules Applicable to Decedent's Estates or to Combine the Trust and the Estate.” I suggest that you give a copy of this memo to your accountant, with the proviso that the accountant not rely on it (since the law changes so rapidly, and because I did not tailor the memo), but use it only as a basis for further research.

***Distributions During Administration. Note that certain types of distributions have the effect of carrying out Estate income, called “distributable net income” or DNI. The effect of this is that the Estate gets a distribution deduction and the beneficiary receives taxable income as a result of the distribution. These rules can be very complicated, and can result in one beneficiary receiving taxable income and another nontaxable income. In that case the beneficiary that received the taxable income may object and claim a right to be reimbursed. For this reason you should work closely with me and with your accountant before making interim distributions, particularly ones that are disproportionate during the same taxable year. To complicate (or simplify, depending on your perspective) things further, there are “separate share” rules that overlay the distribution deduction rules. These rules have always applied to trusts, but now they apply to estates as well. “The general effect of the separate share rule is to limit the amount of DNI that is carried out to each beneficiary (which is taxable to the beneficiary, §662(a), and deductible to the estate, §661(a)) to the DNI that is allocable to each beneficiary’s separate share.”[11]

Notice Concerning Fiduciary Relationship. Enclosed is an IRS Form 56, Notice Concerning Fiduciary Relationship. It is technically due [DateForm56Due]. Please sign and return this form to us for filing.

Estate Bank Account. Since we now have a tax identification number ([EINEstate]) for the estate, you should establish as soon as possible a separate checking account for the Estate to be administered by you as [TitleOfExecutor]. As will be discussed further below, all debts and obligations of the Estate should be paid from this account and, in addition, the account should serve as a depository for Estate funds. You may also wish to open a savings account for the Estate to hold any surplus funds. Both the checking and the savings account may be opened at the bank of your choice. The bank will need to know the taxpayer identification number described above to open the account.

The Estate bank account (or other assets titled in the name of the Estate) can be held in the following form: [NameofFirstExecutor] and [NameofCoExecutor], [TitleOfExecutor] of the Estate of [DecedentFullName], Deceased. The tax identification number of the Estate, rather than your own social security number, should be used in this connection.

Accounting for Estate Income. From [DateOfDeath] and continuing during the period of administration of the Estate, all property that was formerly the community property of [NameOfSurvivingSpouse] and [theDecedent] will be treated as being owned in equal shares by [NameOfSurvivingSpouse] and the Estate as tenants in common. In addition, all property that was formerly [theDecedent]’s separate property will be treated as being owned entirely by the Estate, and, of course, [NameOfSurvivingSpouse]’s separate property will continue to be owned entirely by [him/her]. In connection with this, it is important to note that if the Estate's funds become commingled with [NameOfSurvivingSpouse]’s personal funds, then the Estate may be deemed to have made a distribution to [him/her] for income tax purposes and the Estate's income will be taxed to [him/her] to the extent of such distribution. Therefore, in order to make it clear that income has not been distributed from the Estate to [him/her] and to thereby utilize the Estate as another income taxpayer, from [DateOfDeath] and continuing during the administration period, all income from [theDecedent]'s separate property and one-half of the income from the community property should be deposited in the Estate's bank account. The allocation of the former income of [NameOfSurvivingSpouse] and [theDecedent] in this manner may achieve income tax savings due to the fact that such income will be split between two taxpayers ([NameOfSurvivingSpouse] and the Estate).

Accounting for Estate Assets. In connection with this matter, it should be pointed out that all cash owned by [theDecedent] as separate property at the time of death, as well as one-half of all cash owned by [NameOfSurvivingSpouse] and [theDecedent] as community property at the time of death should be deposited in the Estate's bank account. However, all income from [NameOfSurvivingSpouse]’s separate property, as well as any Social Security (and possibly pension or annuity benefits) payable to [NameOfSurvivingSpouse] individually, belong entirely to [him/her] and should not be deposited in the Estate's bank account.

Marshalling the Assets. After you have located all of [theDecedent]’s assets, those assets need to be secured and possession taken. In the case of bank accounts, accounts with brokerage companies, etc., it may be helpful to have those accounts re-titled in the name of the Estate, or to move the account into an account titled in the name of the Estate, in order to have use of the funds to pay debts, expenses, etc., or to facilitate distribution. It should not be necessary to re-title real estate or other assets, however, until the property is actually distributed.

If property is held in the name of more than one person, or is survivorship property —a species of nonprobate asset discussed elsewhere in this letter— then special care will have to be taken. In the case of a bank account that is a probate asset, it should be secured immediately, so that no other person named on the account can withdraw the funds. If the account is a survivorship account, then it will not be an Estate asset at all, but you are cautioned that whether the account is effective as a survivorship account can be a delicate legal question, and I should be consulted before you take any action one way or the other.

Nonprobate Assets. Nonprobate assets are assets that pass on the death of a decedent to a third party (other than the Estate), and which do not pass under a Will or under the laws of intestate succession. Typically, such assets pass in accordance with a beneficiary designation under a contractual arrangement. Death benefits under a life insurance contract, IRA or retirement plan are typical examples. Other examples include survivorship bank, savings or brokerage accounts and real property or stock where the property is held by two persons as “joint tenants with right of survivorship.” Often the nonprobate designation will fail for obscure reasons of law, especially in the case of bank and brokerage accounts. Therefore, you should get my opinion about whether any so-called nonprobate designation is effective, or whether instead, the asset ought properly to be considered an Estate asset. Assets in a revocable or an irrevocable trust are typically nonprobate assets.

Accounting For Life Insurance. The proceeds of any insurance policies on [theDecedent]’s life that are payable to anyone other than the Estate should not be deposited in the Estate's account since the proceeds belong entirely to the named beneficiary. The proceeds of any insurance policies on [theDecedent]'s life that were formerly [theDecedent]’s separate property and that are payable to you in your capacity as [TitleOfExecutor] of the Estate belong entirely to the Estate and, therefore, should be deposited in the Estate's account. However, one-half of the proceeds of any community property policies belong to [NameOfSurvivingSpouse]; therefore, in that instance only the remaining half of such proceeds should be deposited in the Estate's account.

Paying Estate Debts. The Estate's one-half portion of all community debts outstanding at the time of death should be paid from the Estate’s bank account. Similarly, if there are continuing community obligations, such as mortgage or promissory note obligations, the Estate's one-half portion of such obligations should be paid from the Estate's bank account. Of course, the other one-half of such continuing community obligations, as well as one-half of all community debts outstanding at the date of death, should be paid by [NameOfSurvivingSpouse]. All of [theDecedent]’s separate debts and continuing separate obligations, as well as all funeral expenses and administration expenses (such as attorneys' fees, accountants' fees, etc.), should be charged against the Estate. It should be pointed out that, in order to maximize potential income tax savings, it might be a good idea for you to consult with us before making any withdrawals from the Estate's bank account other than those discussed above.

Duties of Executor. The following information is set forth to summarize your duties as [TitleOfExecutor] of [theDecedent]’s Estate and to provide you with guidance in carrying out your responsibilities.

Powers. As [TitleOfExecutor] of [theDecedent]’s Estate, you have broad powers, limited only by the Will and by the Texas Probate Code. In such capacity, you are the Estate's representative for the purposes of concluding [theDecedent]’s affairs. This will involve the collection of [theDecedent]’s assets (or [theDecedent]’s one-half interest in community assets), the payment of debts, the payment of the Estate's administration expenses and death tax liabilities, and the distribution of the remaining assets to the beneficiaries named in the Will.

Due Dates. The first step in this process was to have the Will admitted to probate. This permitted the administration phase of the Estate to begin and now requires completion of the matters below. As will be discussed further below, many of the following matters will be completed either by us or by your CPA; however, your assistance will be needed in order to gather the required information. You should familiarize yourself with the matters to be completed in the administration process, as well as their respective filing deadlines.

NOTICES

Mandatory Published Notice to General Creditors. . . .

Notice to the State, a Governmental Agency of the State or a Charitable Organization. . . .

Copy of Notice to Creditors to be Filed With Court. . . .

Mandatory Actual Notice to the Comptroller. . . .

Permissive Notice. . . .

Mandatory Notice to Secured Creditors. . . .

Memo Enclosed on Paying Debts. I am enclosing a Memo entitled “Paying Debts, Allowances And Taxes And Satisfying Gifts Under The Will, a Guide to the Independent Executor.” You may want to read this if there is any question about the solvency of the estate.

Inventory Appraisement and List of Claims. . . .

Federal Estate Tax. It is my understanding that the value of [theDecedent]'s gross estate (all of [theDecedent]'s separate property plus one-half of the community property plus the value of certain lifetime transfers) did not exceed $ (or a lesser figure if taxable lifetime gifts were made) on [DateOfDeath], a federal estate tax return need not be filed and no estate taxes will be imposed. Where no such taxes are due, no Texas inheritance tax is due. If it is even remotely possible that the estate might be larger than $ (or a lesser figure if taxable lifetime gifts were made) on [DateOfDeath], please tell me immediately, because in that case both a federal estate tax and a state inheritance tax return might be due nine months from date of death.

Final Income Tax Return (Form 1040). The final federal income tax return (Form 1040), covering the period beginning on January 1 and ending [DateOfDeath], must be prepared and filed on behalf of [theDecedent] if [theDecedent] had a certain minimum amount of gross income. The return must be filed and the income taxes that are due must be paid on or before the normal income tax return due date (April 15, _____). In addition, the income tax return for the preceding year must also be prepared and filed if it has not been filed already.

As the administration progresses, we will be in a better position to evaluate the need for the return for [YearOfDeath]. To reiterate, the Form 1040 for [YearOfDeath] must be filed and the taxes must be paid on or before April 15, [YearIncomeTaxDue]. This return will include the income from [theDecedent]’s separate property and one-half interest in the income from the community property for the period beginning January 1, [YearOfDeath] and ending [DateOfDeath]. At your and [NameOfSurvivingSpouse]’s joint election, the return may be filed as a joint tax return for [NameOfSurvivingSpouse] and [theDecedent]. If a joint return is filed, it will also include the income from [NameOfSurvivingSpouse]’s separate property for the entire year and [Decedent’s] one-half interest in the income from the community property through [DateOfDeath].

Of course, if an income tax return for calendar year [YearIncomeTaxDue] was not filed while [theDecedent] was alive, then it too will have to be filed by you by the due date which would have been applicable if death had not intervened, which ordinarily would be April 15, [YearOfDeath] absent an extension. I understand that [theDecedent]'s final income tax return for (the year preceding death) has already been filed and the taxes paid. If I am wrong about this, please let me know immediately.

Discharge of Representative. Texas law permits a personal representative to receive a judicial discharge under some circumstances. This usually involves additional cost, and for that reason and others many independent administrations are simply never “formally” closed. If you wish to be formally discharged by the court, you must ask us to undertake this as an additional obligation of the engagement.

***Fiduciary Income Tax Return (Form 1041). A decedent’s estate is a taxpayer for federal income tax purposes. The IRS treats an estate as coming into being at the decedent’s date of death, rather than on the date the personal representative qualifies or an estate administration is opened. Therefore, the beginning date of the first year is [DateOfDeath]. The fiscal year may end on the last day of any month, provided that it does not extend beyond one year from [DateOfDeath]. You will need to determine the fiscal year for the Estate as soon as possible. You should choose this date after consulting with the accountant for the Estate. Please let me know as soon as possible what fiscal year is selected.

A fiduciary income tax return for income of [theDecedent]'s Estate (Form 1041) will be required in all years in which the gross income of [theDecedent]'s Estate exceeds $600. The due date for the estate income tax return is the 15th day of the fourth month after the close of the fiscal year of the Estate. The latest possible fiscal year end is . Therefore, the latest possible date for the filing of the Form 1041 is [LatestDueDate1041]. It may be advantageous to pick a short first fiscal year, in order to pay income taxes at a lower marginal rate.

If all of the untitled assets are delivered into the possession of the beneficiaries, and title to all other assets is transferred into the names of the beneficiaries, before the Estate accumulates $600 in income, then you may be able to avoid the obligation to file a return for the Estate. Even if gross income exceeds $600, an estate receives a distribution deduction for most distributions made during the fiscal year. Therefore, it is very possible that there will be no tax owing even though as a technical matter a return is due.

Note that certain administration expenses, fees (including attorney and accountant fees) and expenses are deductible against the income of the Estate, if any. If the Estate does not have income, or if the income is carried out as a result of an interim distribution for which the Estate received a distributable net income deduction, the value of the deduction could be lost. Generally, these types of expenses can be carried over from year to year as a net operating loss (NOL), but NOLs are not carried out to the beneficiaries in the year of the final distribution that closes the Estate, which means that without careful planning, the deduction will be lost. On the other hand, deductible expenses that are incurred in the year that Estate is closed are passed out and utilized among the beneficiaries, and will not be lost. You should keep the rudiments of these rules in mind in order to get the most leverage out of the deductible Estate expenses.

Form 2848. Since it may become necessary for me to represent the estate before the IRS, I previously had you sign an IRS Form 2848 Power of Attorney. A copy of that document is enclosed.

***Responsibility for Filing Returns. As the attorneys representing you in your capacity as [TitleOfExecutor], we will handle all of the Estate's probate matters, as well as any other legal matters regarding the Estate. However, as a firm policy, we do not normally prepare income tax returns. Therefore, we recommend that you retain a CPA to prepare any income tax returns, such as the Estate's fiduciary income tax returns, as well as the final individual income tax return for [theDecedent]. Our records do not indicate that you have chosen a CPA to help you with Estate accounting matters. As soon as you have selected a CPA, please let me know his or [him/her] name, address and telephone number.

Insurance. If you have not already done so, you should contact your insurance adviser in order to be certain that there is continuing and adequate fire, casualty and liability insurance coverage with respect to all property comprising the Estate, and insurance on all vehicles. This is very important.

Distribution and Closing of Estate. After all of [theDecedent]'s known debts and taxes and the taxes and debts of the estate have been paid, you may then distribute the remaining assets in accordance with the provisions of the Will.

Protecting You as Executor. There is no such thing as a “model” estate. Every estate has its unique problems, and difficult decisions are often associated with those problems. There are several ways that we can protect you legitimately for the actions you must take. It is extremely important that you obtain a receipt for any assets you distribute to a beneficiary. This receipt, which I will prepare, should describe the assets in detail so that you can prove what has been distributed, to whom, and when. It also shows that the beneficiary has accepted the asset from the Estate.

Significant Date List. I am also enclosing a Significant Date List. The more important dates are highlighted on the list. Please review the Significant Date List and mark your calendar accordingly. As a condition of my representation as attorney, I must insist that you compare the dates listed in this letter with the dates on the Significant Date List, to make sure that they correspond with one another, and that you further, calculate these dates yourself to make sure that they are accurate. If you come up with a different date than I came up with, or if any date in this letter does not correspond to the Significant Date List, then you should call me immediately.

Calculating the correct due date is extremely important, since both you and the Estate could be damaged if the date is calculated incorrectly. However, anyone who has to calculate as many due dates as are involved in the administration of an estate will make a mistake sooner or later, if the process is repeated enough times. This is the problem with which I am faced, since I have to do this for many estates. My solution is to calculate these dates separately (once in this letter and once on the Significant Date List) and then ask you to calculate them as well. My theory is that if this is done, it is extremely unlikely that the same mistake will be made three times. This is my answer to the problem.

Executor’s Fees or Commissions. In the absence of a will provision to the contrary, §241 of the Probate Code establishes the commissions to which an executor is entitled in Texas. However, if the Will sets forth a different amount or formula, then the Will provision governs and §241 does not apply.[12]

The rules governing compensation by an executor are somewhat vague and uncertain. As stated above, in the absence of a Will provision to the contrary, §241 of the Probate Code establishes the commissions to which an executor is entitled in Texas. However, if the Will sets forth a different amount or formula, then the Will provision governs and §241 does not apply.

The Will has the following to say on the subject of executor's commissions: [WillProvForExecCom]

~~The Will provides~~ that in addition to being reasonable, compensation shall not exceed the customary and prevailing rate. Unfortunately, the “customary and prevailing rate” is not something that is regularly published in the Wall Street Journal or anywhere else, and it may not be too far off to say that the “customary and prevailing rate” varies. To help you determine what corporate fiduciaries charge, I am enclosing a collection of rate schedules that I started to acquire a number of years ago from the local banks. These schedules may be out of date by now, and so I will try to obtain more current schedules. When I do, I will send them to you.

Since this is an “Independent Administration”, it is my opinion that you are entitled to compensation under the terms of the Will, rather than as specified by the statute, although I have to tell you that I know of no cases that directly address this question. The statutory rate may, therefore, be relevant in determining what is customary and reasonable; and so I will discuss it here.

If the statutory rate is not reasonable, clearly you are entitled under the Will to such additional amount as the Will provides, provided that it is necessary to make the compensation reasonable. However, because the law is not clear, we must ask whether the statutory rate is per se reasonable, such that you could always rely that it was at least enough. I have been unable to locate a case directly on this point, but my opinion, which is apparently that of the Probate Judges in Tarrant County, is that, while the statutory rate is always available when the Will is silent —whether it is reasonable or not— if the Will provides for reasonable compensation, then the statutory rate is relevant but not dispositive, which means that it could result in a commission that is too high.

Basically, the Texas statutory scheme (§241 of the Probate Code) —which may be only one factor if the Will provides for an Independent Administration or otherwise specifies the rate of compensation— uses what we call the 5% in and out method. Under this method fiduciaries are “entitled to receive, and may retain in their hands, a commission of five percent (5%) on all sums they may actually receive in cash, and the same percent on all sums they may actually pay out in cash.”[13] [Emphasis added.]

The following important modifications to the 5% in and out rule are set forth in the statute and should be noted by you.

No commission shall be allowed for receiving funds belonging to the testator or intestate which were on hand or were held for the testator or intestate at the time of his death in a financial institution or a brokerage firm, including cash or a cash equivalent held in a checking account, savings account, certificate of deposit, or money market account; nor for collecting the proceeds of any life insurance policy; nor for paying out cash to the heirs or legatees as such; provided further, however, that in no event shall the executor or administrator be entitled in the aggregate to more than five percent (5%) of the gross fair market value of the estate subject to administration. If the executor or administrator manages a farm, ranch, factory, or other business of the estate, or if the compensation as calculated above is unreasonably low, the court may allow him reasonable compensation for his services, including unusual effort to collect funds or life insurance. For this purpose, the county court shall have jurisdiction to receive, consider, and act on applications from independent executors.[14]

There are many problems in applying the 5% in and out rule in real life. A common issue is determining the size of the commission on the sale of mortgaged real estate. According to Woodward and Smith:

In some instances where there were no other assets from which a commission could be paid, the administrator has refused to tender a deed except on condition that the mortgagee-purchaser pay him the statutory commissions on the amounts theoretically paid in and paid out in the transaction. As an example, if the mortgagee makes the high bid of $10,000, a sum less than the amount of the debt, he may credit the bid against the debt. The representative is entitled to demand a commission of five percent of the amount of the bid, amounting to $500, as cash received, and also five percent of $9,500, as his commission on money paid out. In other words, the transaction is treated as if the mortgagee had actually paid in to the administrator the amount of his bid, and the administrator had paid out what remained after retaining his commission.[15]

It has been held that fiduciaries are entitled to a commission on amounts borrowed,[16] and amounts paid out for federal estate and state inheritance taxes.[17] The commission does not apply to receipts and disbursements incurred in the operation of a business held by the estate.[18] However, the statute allows special compensation for operating a business. Such special compensation does not deprive the fiduciary of the statutory commission on other transactions not related to the operation of the business.[19] No commission is allowed for cash payments to the beneficiaries.[20]

If there is more than one fiduciary, the commission is the same as if there were only one, and the fiduciaries should divide the commissions equally.[21] (Corporate fiduciaries are often able to avoid this rule by providing in a fee agreement, a contract, that fees will not be shared.[22])

An amendment to the statute now requires before receiving the commission, the court must first specifically find that the fiduciary has “taken care of and managed the estate in compliance with the standards of this Code...”[23] However, this rule is thought not to apply to an independent executor.[24]

Communication. To the extent that you elect to handle matters directly, it is very important for you to keep me advised and to furnish me copies of all outgoing and incoming correspondence and other documents.

Gathering of Information. The first thing I need is to obtain a schedule of all of [theDecedent]’s assets. I will need a list of all bank accounts, brokerage accounts, etc. A good way to do this is to let me have a copy of the last statement issued by the institution before [DateOfDeath] and a copy of the first statement issued by the institution after [DateOfDeath]. Next, I will need a copy of any deeds to any real property in which [theDecedent] had an interest. I will also need a copy of any other instruments of title, e.g., automobile titles.

Court Documents. For your records, I am enclosing copies of all documents that have not yet been sent to you and will send you copies of all future correspondence and other documents as they are prepared.

Disclaimer. Note that under Texas and Federal law a person may have the right to “disclaim” a gift under a Will. A disclaimer may be of only some of, or of all, the interest the disclaimant has in the estate. The disclaimer must generally be made within nine months of death [NineMonthsOfDeath]. The disclaimer must meet a number of specific legal requirements in order to be effective. A disclaimant cannot direct where the disclaimed property will go, nor may the disclaimant have accepted the disclaimed property or any of its benefits (e.g., the income from or use of the property) prior to the disclaimer. Property that is disclaimed will pass as if the disclaimant predeceased the testator, unless the Will directs otherwise. The reason that many people disclaim assets is in order to effectively transfer assets to a younger generation free of estate and gift tax.

Disclaimers can be tricky. For instance, disclaiming an interest in a formula bequest can be ambiguous; and disclaiming a specific asset that is part of the residuary estate, especially where there is more than one residuary beneficiary, can also be problematic. The requirement that the income also must be disclaimed can cause the disclaimer to fail if it is not handled with extreme care, and there are frequently issues involving the question of whether or not the disclaimant has previously accepted benefits of the disclaimed property, which is yet another way the disclaimer can fail. For these reasons and others, disclaiming property is a technical matter that should not be attempted without legal counsel.

Transfer of Title to Car and Home. A frequently asked question is how does the executor go about transferring title to the car and the home. At some point during the administration it may be necessary to transfer title to the home and any vehicles listed in [theDecedent]’s name. If the home has been left outright to a person under the Will, the probate of the Will acts as a document of conveyance, effective on the close of the Estate. However, in this case and in others, it is my general recommendation that a special warranty deed be prepared conveying the property from the Estate to the beneficiary. We will take care of this for you at the appropriate time, should you request.

In the case of a vehicle, you need to take the car title, Application for Texas Certificate of Title, and Odometer Statement, to a sub courthouse. You should be able to obtain an Application for Texas Certificate of Title and Odometer Statement there. However, for your added convenience we are enclosing for your possible use an Application for Texas Certificate of Title and Odometer Statement. Sign and complete the title, Odometer Disclosure Statement, and Application as the “transferor,” indicating your capacity as independent executor. You should be able to obtain an exemption from the sales and use tax by filling in “bequest under Will” in the blank provided in the Application. There is a $10 fee. The forms are no longer required to be notarized. It will be necessary to bring along current Letters Testamentary to present to the clerk. If there are any problems in implementing this procedure, be sure and let me know.

***Gain or Loss on Funding Gifts. Unfortunately, when property other than cash is distributed in satisfaction of a gift that is not a specific gift, it will often be necessary to value the entire estate available for distribution as of the date of distribution. This can be necessary, for example, if the distribution is in satisfaction of a fractional share gift (e.g., a gift of a fraction of the residuary estate), if some beneficiaries of the gift nevertheless receive different assets than others (i.e., a nonprorata distribution), as may or may not be permitted under the governing instrument, or if prorata distributions are not made at the same time. If the distribution is in satisfaction of a pecuniary gift (a gift expressed as a dollar amount), it will be necessary to at least value the property distributed, or, perhaps, to value the entire estate, depending on whether the valuation method for funding pecuniary gifts is specified as being “fair market value on the date of distribution” or “fairly representative of appreciation or depreciation.” If a pecuniary gift is to be satisfied with property other than cash at its “fair market value on the date of distribution,” it will usually be necessary to recognize capital gain if the value of the property at the time of distribution exceeds its basis for federal income tax purposes; or, at least that is the probable IRS’ position.

Summary. By way of a partial summary, let me point out that the administration of this Estate is an essential and very important process. It clears title to real estate. It settles legitimate debts (and wipes out others). It establishes a new tax basis for the property in the Estate as well as for the community property interest of the surviving spouse. It permits clear title distribution of property to the persons entitled to receive it under the terms of the Will. This letter is a general guide that will help you keep abreast of many matters necessary to complete the administration of [theDecedent]’s Estate. Obviously, many matters will come up which are not specifically addressed in this letter. We will address questions that you raise as to such other matters. We will assist you in connection with the performance of your duties as [TitleOfExecutor] of the Estate. Further, we will probably need to communicate with you on a fairly regular basis during the period of administration.

Important Telephone Numbers. Please contact me if you have any questions concerning this letter, your duties, or the future procedures. You should feel free to contact my secretary, xxx at (817) 878-2944, to furnish additional information or my para-legal, xxxx, at (817) 878-6044 to ask routine questions. You may, of course, contact me directly at (817) 877-2885.

Yours very truly,

Noel C. Ice

NCI/ice

Enclosures:      Memorandum entitled “Fiduciary Duties”
Letters Testamentary
Oath of [TitleOfExecutor]
IRS Form 56
Probate Significant Date List
Proof of Death and Other Facts
Order Admitting Will to Probate and Appointing [NameofFirstExecutor]
      as [TitleOfExecutor]
Application for Texas Certificate of Title and Odometer Statement
Stamped, self-addressed return envelope
IRS Form 2848
IRS Forms SS-4
Table of Estate Planning and Probate Documents
Memo “Paying Debts, Allowances And Taxes And Satisfying Gifts Under      The Will A Guide To The Independent Executor”
Memorandum entitled “Fiduciary Duties”
Memo, “The All Important IRC §645 Election to Treat a Revocable Trust Under
      the Rules Applicable to Decedent's Estates or
      to Combine the Trust and the Estate.”
Article, “Grantor Trusts and Income Tax Reporting Requirements: A Primer”       by Jonathan G. Blattmachr and Bridget J. Crawford”

cc: [CC]

[CCC]

ARTICLE 3
Model Letter to Client Regarding the Form 706 and the Issue of whether to Take the §642(g) Swing Items on the estate Or the Fiduciary Income tax return, and Including a Discussion of the §2204(a) and the §6905 Elections

PERSONAL AND CONFIDENTIAL ATTORNEY CLIENT PRIVILEGED

[TOWHOM]
[HOME_STREET]
[HOME_CITY], [HOME_STATE] [HOME_ZIP]
[PhoneBusMain] (Business)
[PhoneHomeMain] (Home)
[PhonesImptOther]
[FAX] (FAX)
[EMail]
[WESITE]

RE: Estate of [DecedentFullName], Deceased
[DecedentFullName], Deceased
Probate Cause No.: [ProbateCauseNo]
Date of Death: [DateOfDeath]

Dear [SALUTATION]:

The due date for the estate tax return is [706DueDate].

Enclosed herewith is what may be the final version of the Federal Estate Tax Return Form 706 and Texas Inheritance Tax Return. We have made a few minor adjustments here and there from what I sent you last, but none of the changes are dramatic.

Transferor Liability, Discharge, Request for Prompt Assessment, and Statutes of Limitation. You should be advised that 31 USC §3713 make an executor personally liable for payments and distributions before taxes have been paid. One way to assure that this does not become an issue is to not make any distributions until all of the appropriate statutes of limitation have run, typically three years. (There is no limitation on the assessment of tax (a) in “the case of a false or fraudulent return with the intent to evade tax,”[25] (b) in “case of a willful attempt in any manner to defeat or evade tax,”[26] or (c) in “the case of failure to file a return.”[27] Finally, there is a six year statute in the case of a substantial omission from the estate tax return.) Waiting for the statutes to expire has the advantage of creating the least disturbance with the IRS, but can also mean that the beneficiaries would have to wait longer before the estate can be closed and all of the assets more safely distributed. The following is a discussion about how the harshness of §3713 can be mitigated.

Estate Tax, Gift Tax and Income Tax Liability.[28] There are three taxes for which you could be personally liable, at least to the extent of the value of assets included in the gross estate that were or are under your control: (1) The first is the estate tax. (2) The second is any gift tax that [theDecedent] might have owed but were not paid prior to death. (3) And the third is for any income taxes that might have been owed by [theDecedent] at or as of date of death. Until the time for audit or reassessment expires on each of these taxes, you may not know for sure just what the liability for these items actually is.

In our case, we have a pretty good idea that there is no liability, other than as has been and will be reported; but as your lawyer, I am under an obligation to point out these issues. I call your attention to them because you may be under pressure to distribute the assets of the estate prior to expiration of the applicable limitation periods; in which case, you could find yourself personally liable for the taxes without the assets to pay them with (because you distributed them).

There are, however, a few techniques that can give you some protection, and that may allow you to make distributions to the other beneficiaries earlier than otherwise. There are essentially three elections that you can make: (1) one to discharge you early for estate tax liability, (2) another to release you for income and gift tax liability, and (3) a third to actually promptly assess any income taxes the [theDecedent] may have owed. Note that the first two elections merely discharge you, individually, for distributions made to the beneficiaries out of the estate. If additional taxes are later assessed, the IRS can still collect them from the distributees. The third election, the one for prompt assessment of income taxes under IRC §6501(d), is broader.

Whether or not a request for prompt assessment and/or for a discharge actually increases the likelihood of audit is not easy to say. Common sense and instinct argue that it would, but the general experience (such as there is) casts doubt on this conclusion. I think that the likelihood of increased scrutiny is perhaps a little greater in the case of asking for a prompt assessment; that it is less still in the case of asking for a discharge for gift and income tax liability, and less still if you request a discharge for estate taxes. I think it probably true that the more elections you make, the greater the likelihood of drawing the unwarranted attention of the IRS, so I do not automatically recommend that you make all three.

I am reluctant to ask for a prompt assessment of income taxes, in the absence of compelling reasons, but still think you should consider it an option. However, I feel that the other two elections offer less risk and more benefit. Allow me to be more specific, by addressing each of these two elections below.

Under IRC §2204(a) you are entitled to discharge from personal liability for estate taxes, and under IRC §6905 you can seek release from liability for other taxes (e.g., income and gift taxes). In both cases, the discharge must be issued within 9 months from the request.

I recommend that these elections be made, since it will allow you to safely make distributions earlier than otherwise.

I am enclosing an original letter to the IRS, transmitting the Form 706 and making the §2204(a) and §6905 elections. In the event that you want to make the §2204(a) and §6905 elections, please sign where indicated, and return the letter to me, along with the signed Form 706 (assuming no changes in that document). If you decide to make one election, but not the other, then give me or _________ a call, and we will send you a new letter, appropriately modified.

If you decide to make neither election, do not sign or return the cover letter to the IRS, and I will draft a new cover letter conveying the 706, without reference to these elections. When you receive a copy of the letter transmitting the 706 to the IRS, you will be able to confirm that we either did, or did not, make the election(s) you desire. The elections can still be made, even after the 706 is filed, by the way.

If you decide to request a prompt assessment of income taxes, you will have to let me know, and we will have to prepare and you will have to sign a Form 4810.

Form 2848. Enclosed is a Form 2848 Power of Attorney allowing me to represent you before the IRS on estate tax issues. Please sign and date this form where indicated if you want me to be able to deal with the IRS on tax matters affecting the estate, including any of the elections described above, which I, of course, will not make on my own, without your permission.

Review of Forms. Please review the Form 706 and Texas Inheritance Tax Return carefully, and if they meet with your approval, you should sign and date your signature where indicated on the first page of each form.

Checks to the IRS and Texas Treasurer. Next, you should write a check to the IRS and to the State Treasurer. These checks should be drawn on the estate’s checking account. The check to the IRS should be for $asdfdsfsdf, and should be made payable to Internal Revenue Service. Please write on the check the decedent’s name, Social Security No. and the words “Form 706.”

The check to the State Treasurer should be for $wertwerwerwer, and should be made payable to State Treasurer.

Valuation Of Oil and Gas Interests. We have not attempted, nor are we qualified, to definitively value the oil and gas interests in the estate. The preferred method would be for you to get an appraisal. However, one method commonly used to value royalties is to come up with a recent monthly average net payout (using, say, the last 36 months), and to capitalize it by multiplying the number by some figure, between 24 and 60 representing a payout. The IRS typically uses 5 years, unless a different capitalization rate is indicated.

We understand that the oil and gas properties in the estate have produced, on average, a net annual royalty equal to that listed in other correspondence. If the value is way off, or if there are special circumstances which would make a 3 year multiple inappropriate, and if the difference is SIGNIFICANT, then let us know and we will change it. We can go to a 5-year multiple if you prefer. This will raise the level of the gross estate somewhat, and will result in greater estate tax owing.

The Texas Probate System, Second Revised Edition, discusses this issue on Worksheet 7 and Special Instruction 26, paragraph no. 5. I made a form out of Worksheet 7, to compute the mineral interest values.

Special Instruction 26, paragraph 5 reads:

5. In the absence of other relevant evidence of value, determine the value of producing mineral interests by multiplying the amount of royalty income received during the twelve months immediately preceding decedent’s death by three or the average monthly royalty by thirty-six. This is a three-year payout. Sometimes a two-, or four-, or even five-year payout is more appropriate. See Worksheet 7. Discounts should be available four lifting risks (perhaps 331/3% to 40%) followed by a further discount for present value (say at “prime” plus 1%).[29]

However, the truth is that I am aware of no reliable published documents that tell us that the IRS will accept either three or five times earnings. It is just a rule of thumb, that in my experience the IRS will often accept either, though they are said to prefer a 5-year multiple when it generates more tax.

Again, the value used on the inventory or 706 could be relevant in order to get a new basis for depreciation purposes.

Changes. If there are any changes to make, please call me so I may make them in time to get the 706 signed by you and delivered to the IRS before the due date. Also, please do not hesitate to call if you have any questions.

***Whether to Deduct Administration Expenses on the 706 or the 1041.

Expenses Deductible only on the 706. Certain types of expenses may only be deducted on the estate tax return, usually under IRC §2053. These include funeral expenses and claims against the estate representing personal expenses of the decedent that are not deductible for income tax purposes, federal gift and income taxes owed by the decedent, or expenses that were incurred by the decedent with respect to tax-exempt income.

Expenses Deductible on Both the 1041 and the 706. Deductions “in respect of a decedent” may be taken on both the estate tax return, Form 706, and the income tax return for the estate, Form 1041. Deductions “in respect of a decedent” are a narrow category that include certain items there were accrued prior to death, but on a cash basis of accounting were not properly deductible on the decedent's personal income tax return (Form 1040), items that would typically have been deductible in years after death had the decedent lived. These deductions commonly include taxes and interest, and depletion and investment expenses and are deductible against income taxes by virtue of §691(b) and against the estate tax via §2053 as a debt of the estate.

Expenses Deductible on Either the 1041 or the 706, but Not Both. Prohibition against Double Deductions. There are a number of expenses that you may choose, in the exercise of your discretion, to deduct on either the fiduciary income tax return, Form 1041, or on the estate tax return, Form 706. Another way to phrase the issue is that an estate or trust will usually incur costs and expenses that are properly deductible for fiduciary income tax purposes but that are also administrative expenses deductible on the estate tax return.

These are sometimes referred to as §642(g) swing items, because that section of the IRC requires that these types of deductions can be taken only once. The expenses that may be deducted on either return (but not both) include, among other things: executor’s commissions, attorney and accounting fees and expenses incurred in the administration of the estate, court costs, filing fees, appraisal fees and costs, expenses incurred in storing and maintaining estate assets, travel expenses, and expenses in connection with the necessary sale of estate property, incident to settlement of the estate or distribution of the trust.[30] Sometimes interest expenses fit in this category too, particularly interest incurred on deferred payment of estate taxes. Expenses relating to property in a living trust are usually deductible for estate tax purposes, if the trust property is included in the estate.[31]

Technically, the way the law works is that §642(g) swing items are deductible for income tax purposes only if the estate waives the right to take them as estate tax deductions.[32] The waiver is made by filing a statement with the district director. This can be done either as an attachment to the income tax return or as a separate statement “for association with the return.”

It appears to be a common practice in those cases where one is not sure of the best place to take the deduction to take them on both returns, adding a note that a waiver may be filed later.[33] The regulations specifically allow claiming the deduction on both returns as long as the estate tax deduction has not been “finally allowed” at the time the estate files the income tax waiver:

Amounts allowable under section 2053(a)(2) (relating to administration expenses) or under section 2054 (relating to losses during administration) as deductions in computing the taxable estate of a decedent are not allowed as deductions in computing the taxable income of the estate unless there is filed a statement, in duplicate, to the effect that the items have not been allowed as deductions from the gross estate of the decedent under section 2053 or 2054 and that all rights to have such items allowed at any time as deductions under section 2053 or 2054 are waived. The statement should be filed with the return for the year for which the items are claimed as deductions or with the district director for the internal revenue district in which the return was filed, for association with the return. The statement may be filed at any time before the expiration of the statutory period of limitation applicable to the taxable year for which the deduction is sought. Allowance of a deduction in computing an estate's taxable income is not precluded by claiming a deduction in the estate tax return, so long as the estate tax deduction is not finally allowed and the statement is filed. However, after a statement is filed under section 642(g) with respect to a particular item or portion of an item, the item cannot thereafter be allowed as a deduction for estate tax purposes since the waiver operates as a relinquishment of the right to have the deduction allowed at any time under section 2053 or 2054. [Emphasis added.][34]

The estate tax deduction will be considered to have been finally allowed on the issuance of a closing letter, the execution of a closing agreement, or the expiration of the statute of limitations on the estate tax return, whichever first occurs. But “[t]he statement [associated with the 1041] may be filed at any time before the expiration of the statutory period of limitation applicable to the taxable year for which the deduction is sought.” So, presumably, it is the earlier of these two dates that fixes the issue. As a practical matter, this may mean that the waiver is effective as long as the statute of limitations has not run on the estate tax return, prompting some fiduciaries to claim the deduction on both returns, and file the waiver just before the expiration of the period for assessing an estate tax deficiency.

Estate Transmission and Estate Management Expenses. A similar issue to the one just discussed is whether to take an estate tax deduction for estate transmission and estate management expenses, or whether such expenses will be deducted on the probate estate's federal income tax return, or deducted in part on each. However, here, if estate transmission expenses (expenses that would not have been incurred but for the decedent’s death, such as executor commissions and attorney fees) are NOT taken on the Form 706, the marital deduction will be reduced commensurately, which in turn will necessitate a commensurate reduction in the amount passing to the bypass trust, and so the decision not to take a 706 deduction is not as clear cut. On the other hand, estate management expenses (investment advisory fees, stock brokerage commissions, custodial fees and interest) may be deducted for estate income tax purposes on the Form 1041 without reducing the marital deduction, and that is the place where we invariably recommend they be taken.

* * * *

We elected to deduct the §642(g) items on the Form 706, Estate Tax Return. As indicated above, this does not preclude you from taking the same deduction on the Form 1041, Income Tax Return; however, in that case, we would eventually need to waive the right to take the deductions on the estate tax return, and we would need to recompute the estate tax and take other measures to correct the record.

As indicated above, your accountant may want to take the §642(g) deductions on the Form 1041, even though we have also taken the deduction on the Form 706. This is permissible, but it does mean that either (a) the 1041 will have to be amended at some point to delete the deductions, or (b) you will need to file a waiver of the right to claim the deductions on the 706. If a waiver is filed, then the estate tax will need to be recomputed accordingly. I would hope that if a waiver is going to be filed, that you would discuss the matter with me first.

If a deduction is taken on both the 706 and the 1041, as current practice generally favors initially, then a waiver should be filed before the statute of limitations runs on the estate tax return. Because the waiver is made by filing a statement with the district director, either as an attachment to the income tax return on which the deductions are claimed, or as a separate statement “for association with the return,” I will leave the responsibility for this filing (of the waiver) to you and your accountant. I would appreciate it if you inform me before filing it, however, and encourage you to wait to file it as long as possible, in order to leave our options open.

Communication With C.P.A. Preparing the Form 1041. Although we have prepared the Estate Tax Return, as I have mentioned to you before, I expect that you will retain a C.P.A. to prepare any income tax returns associated with the estate or related trusts. In this regard, there are two matters that I strongly urge you to ask your accountant to consider: (1) The first is whether or not a §645 Election should be made to treat [TrustName] and the estate as a single taxpayer for income tax purposes. (2) The second is whether to deduct the §642(g) expenses described above on the income tax return. I am, of course, available for consultation with your accountant regarding this question; however, since I believe it is important to document “who is doing what,” I want to emphasize just what it is that we are undertaking to do, and what we expect that you and your accountant will be doing.

* * * *

If the enclosures that require your signatures meet with your approval and are accurate as far as you known, then please return those enclosures to me as soon as you have signed them and I will see to it that they are properly filed with the IRS and the Texas Comptroller. For this purpose I am enclosing a stamped, self addressed return envelope.

Yours very truly,

Noel C. Ice

NCI/ice

Enclosures: Federal Estate Tax Return Form 706
Form 2848 Power of Attorney
Texas Inheritance Tax Return
Stamped, Self-Addressed, Return Envelope
Cover Letter to the IRS

cc: [CC]

[CCC]

ARTICLE 4
Memo to Client Regarding the IRC §645 Election
Where Decedent Died After December 23, 2002

Estate of [DecedentFullName], Deceased
Probate Cause No.: [ProbateCauseNo]
Date of Death: [DateOfDeath]

The All Important IRC §645 Election to Treat a Revocable Trust Under the Rules Applicable to Decedents’ Estates or to Combine the Trust and the Estate

The following memo incorporates principles found in the final regulations under IRC §645 applicable to decedents dying on or after December 24, 2002. These rules were fairly new, even before the advent of the final regulations, and probate lawyers are still trying to come to terms with them. Although, in principle, §645 was meant to simplify life by putting revocable trusts on a par with fully administered probate estates, the breadth of the final regulations is so extensive that I fear any attempt to offer a simple (or simplistic) explanation of how they operate might overlook something that could later turn out to be important. For that reason, and because I, and other probate lawyers, are still trying to come to terms with the new rules, I offer the following relatively comprehensive explanation, at the risk of overkill.

4.1 The “§645 Election” In GENERAL.

If a “grantor” trust is a “Qualified Revocable Trust” (a QRT), the trust and the estate can be merged, in effect, for certain income tax reporting purposes. The grantor trusts for which this election can be made are called QRTs, which stands for “Qualified Revocable Trusts.” [TrustName] was a grantor trust and may very well qualify as a QRT. In order to qualify for this special treatment, a “§645 Election” must be made. Once made, the election is irrevocable.[35]

If [TrustName] qualifies as a QRT, I would seriously consider making the election, unless your accountant has some good reason why not to.

It is my tentative opinion that [TrustName] was a QRT, and I recommend that your accountant make the §645 Election. However, before passing on this issue in a manner on which you can rely, we will have to talk further. For instance, if [theDecedent] was incapacitated at date of death, the trust may or may not be a QRT, depending on the facts.

I quote from the regulations and the statute freely below, mainly because I expect that your C.P.A. will be preparing the income tax returns for the estate/trust, and want to call attention to where the law on the subject is to be found.

4.2 The Statute Itself.

The statute itself is always a good place to start. IRC[36] §645 provides:

§ 645 Certain revocable trusts treated as part of estate.

(a) General rule. For purposes of this subtitle, if both the executor (if any) of an estate and the trustee of a qualified revocable trust elect the treatment provided in this section, such trust shall be treated and taxed as part of such estate (and not as a separate trust) for all taxable years of the estate ending after the date of the decedent's death and before the applicable date.

(b) Definitions. For purposes of subsection (a)—

(1) Qualified revocable trust. The term “qualified revocable trust” means any trust (or portion thereof) which was treated under section 676 as owned by the decedent of the estate referred to in subsection (a) by reason of a power in the grantor (determined without regard to section 672(e)[37] ).

(2) Applicable date. The term “applicable date” means—

(A) if no return of tax imposed by chapter 11 is required to be filed, the date which is 2 years after the date of the decedent's death, and

(B) if such a return is required to be filed, the date which is 6 months after the date of the final determination of the liability for tax imposed by chapter 11.

(c) Election. The election under subsection (a) shall be made not later than the time prescribed for filing the return of tax imposed by this chapter for the first taxable year of the estate (determined with regard to extensions) and, once made, shall be irrevocable.

4.3 What is a QRT?

A “qualified revocable trust” or QRT is a certain type of “grantor trust.” A grantor trust is a trust that is recognized for state law purposes, but which is ignored for tax purposes, during the lifetime of the grantor, such that the assets of the trust are treated as the property of (owned by) the grantor, and any income, gains, losses, or other tax related activity involving the trust assets are, accordingly, taxed to the grantor, as if the trust did not exist. Even though a trust is a grantor trust, it may or may not, as a formality, have to file a tax return. If it does file a tax return, the return merely itemizes the activity inside the trust, and the income, gain and loss is picked up on the grantor’s 1040.

Not all grantor trusts qualify as QRTs. For one thing, to be a QRT the grantor must have retained the power to revoke the trust at date of death (with some limited exceptions).[38]

The Preamble to the final regulations has this to say on the subject:

A trust that was treated as owned by the decedent under section 676 [the power to revoke] by reason of a power that was exercisable by the decedent with the consent or approval of a nonadverse party is a QRT. The final regulations . . . clarify that while a trust, in which the power to revoke is held only by the decedent's spouse and not by the decedent, is not a QRT, a trust, in which the power to revoke is exercisable by the decedent with the approval or consent of the decedent's spouse, is a QRT.

Clarification has . . . been requested regarding whether a trust qualifies as a QRT if the grantor's power to revoke the trust lapses prior to the grantor's death as a result of the grantor's incapacity. Some trust documents for revocable trusts provide that the trustee is to disregard the instructions of the grantor to revoke the trust if the grantor is incapacitated.[39] The IRS and the Treasury Department believe that, if an agent or legal representative of the grantor can revoke the trust under state law during the grantor's incapacity, the trust will qualify as a QRT, even if the grantor is incapacitated on the date of the grantor's death.

4.4 Effective date of final regulations.

Final regulations governing the §645 Election are effective for decedents dying after December 24, 2002. Rev Proc 98-13, 1998-1 CB 370, and Notice 2001-26, 2001-13 IRB 942, which used to govern the area, are both obsolete as of 12/24/2002. Prior to 8/5/1997 the law did not permit this one-taxpayer treatment. The following is taken from the Headnote to the Preamble of the final regulations:

IRS issued final regulations explaining Code Sec. 645; election to treat certain revocable trusts as part of estate for income tax purposes: regulations clarify and provide more flexible definition of what constitutes QRT for Code Sec. 645; purposes, and expand definition to include certain foreign trusts and related estates. IRS notes however that Code Sec. 6048; information reporting is still required with respect to such foreign trusts irrespective of Code Sec. 645; election. Regulations also establish Code Sec. 645; election procedures and applicable election period; clarify various issues surrounding TIN and filing requirements; and clarify grantor trust reporting rules under Code Sec. 671; Rev Proc 98-13, 1998-1 CB 370, and Notice 2001-26, 2001-13 IRB 942, are both obsolete as of 12/24/2002.

4.5 What Are Some of the Different Tax Rules Applicable to Trusts and Estates, in the Absence of a §645 Election? / Reasons for Making the §645 Election?

If an administration is opened and an executor appointed, the electing trust is treated, during the election period, as part of the related estate for all federal income tax purposes.

Although there are not an overwhelming number of tax differences in the treatment of a probate estate and trust, there are a few. A QRT is treated as part of the related estate for purposes of the IRC §642(c)(2) charitable set-aside deduction, for example, but a post-death revocable trust is allowed a charitable deduction only for amounts paid to charities. Another difference is that the IRC §1361(b)(1) subchapter S shareholder requirements are not the same for estates and trusts. The IRC §469(i)(4) special offset for rental real estate activities also differs somewhat. The active participation requirement under the passive loss rules is waived for two years after the owner's death in the case of estates, but not in the case of revocable trusts.[40] Finally, although trusts are required to pay estimated income tax payments in the same manner as individuals, estates are exempted from this requirement for the first two taxable years.[41] Presumably a QRT would also be entitled to this benefit.

What are some of the reasons why you might want to make the §645 election, other than convenience? There are not very many. Here are a few, which could be important, and which may be largely a restatement of the preceding paragraph, but stated differently:

· Estates are allowed a charitable deduction for amounts permanently set aside for charitable purposes while post-death revocable trusts are allowed a charitable deduction only for amounts paid to charities.

· The active participation requirement under the passive loss rules is waived in the case of estates (but not revocable trusts) for two years after the owner's death.

· Estates can qualify for amortization of reforestation expenditures, while trusts do not.

· A revocable trust usually is forced to choose a calendar year as its tax reporting year, while an estate (under §645 or otherwise) can choose a fiscal year end other than December 31.

· An estate does not have to make quarterly estimated income tax payments for two years, but a trust does.

4.6 When Must the §645 Election be Made?

According to the Preamble to the final regulations:

[F]or the election to be valid, the election form must be filed not later than the time prescribed under section 6072 for filing the Form 1041 [including extensions, apparently] for the first taxable year of the combined electing trust and related estate, if there is an executor, or of the first taxable year of the electing trust, if there is no executor (regardless of whether there is sufficient income to require the filing of that return).

4.7 How is the §645 Election Made?

The IRS has stated that it intends to issue a form, Form 8855, for this purpose.

(i) Time and manner for filing the election. If there is an executor of the related estate, the trustees of each QRT joining in the election and the executor of the related estate make an election under section 645 and this section to treat each QRT joining in the election as part of the related estate for purposes of subtitle A of the Internal Revenue Code by filing a form provided by the IRS for making the election (election form) properly completed and signed under penalties of perjury, or in any other manner prescribed after December 24, 2002 by forms provided by the Internal Revenue Service (IRS), or by other published guidance for making the election. For the election to be valid, the election form must be filed not later than the time prescribed under section 6072 for filing the Form 1041 for the first taxable year of the related estate (regardless of whether there is sufficient income to require the filing of that return). If an extension is granted for the filing of the Form 1041 for the first taxable year of the related estate, the election form will be timely filed if it is filed by the time prescribed for filing the Form 1041 including the extension granted with respect to the Form 1041.[42]

4.8 How Long Does the Election Remain in Effect?

Generally, the election terminates one day prior to the “Applicable Date.”

[T]he final regulations provide that the applicable date is the day that is the later of 2 years after the date of the decedent's death or 6 months after the date of final determination of liability for estate tax.

* * * *

While the final regulations retain the issuance of the closing letter as one of the triggers for the date of the final determination of liability, the final regulations have been changed to provide a minimum election period of two years for all electing trusts and related estates and, as well as to provide that if the issuance of the closing letter triggers the date of the final determination of liability, the date of the final determination of liability is the date that is 6 months after the date the closing letter is issued, rather than the date the closing letter is issued as provided in the proposed regulations.

* * * *

[T]he final regulations provide that the election period terminates on the earlier of the day on which both the electing trust and related estate, if any, have distributed all of their assets, or the day before the applicable date. The final regulations continue to provide that the election does not apply to successor trusts (trusts which are distributees under the trust instrument). [43]

4.9 Special TIN Rules.

4.9(a) TIN for the QRT or TINs for Multiple QRTs.

According to the final regulations a separate TIN is always required for the QRT, even if an election is not going to be made. However, if the QRT is unfunded, it seems to me that if the §645 election is not made, then there should be no need to get a TIN, unless and until the QRT is funded. Also, it is possible that there could be multiple QRTs, and the regulations seem to imply that each one needs a separate TIN.

Note that if the election is made “the trustee is not required to file a Form 1041 for the short taxable year of the QRT beginning with the decedent's date of death and ending December 31 of that year.”[44] Of course, in that case the “the payors of the electing trust must be furnished with the TIN obtained by the trust to file as an estate.”[45] The following is taken directly from the regulations:

Regardless of whether or not there is an executor, the final regulations retain the requirement that a Form 1041 (including the items of income, deduction, and credit of the QRT) must be filed for the short taxable year of the QRT beginning with the decedent's date of death if a section 645 election will not be made for the trust, or if the trustee and the executor are uncertain whether a section 645 election will be made for the QRT by the due date of the Form 1041 for the short taxable year of the QRT beginning after the decedent's death and ending December 31 of that year.

* * * *

If there is an executor and the electing trust terminates on or before the termination of the section 645 election period, the trustee must file a final Form 1041 under the name and TIN of the electing trust to notify the IRS that the trust no longer exists. This Form 1041 will not include any of the trust's items of income, deduction, and credit because those items will be included on the Form 1041 filed for the combined electing trust and related estate.

If there is an executor, the trustee may not need to obtain a TIN for the new trust deemed to have been created upon the termination of the election period. The trustee must consult the instructions to the Form 1041 upon the termination of the election period to determine if a new TIN must be obtained. If a new TIN is not required to be obtained, the trustee must file Forms 1041 for the new trust under the TIN obtained by the trustee under § 301.6109-1(a)(3) for the QRT following the death of the decedent. If there is no executor, the trustee must obtain a TIN for the new trust deemed to have been created upon the termination of the election period. If a new TIN is required under the regulations or the instructions to the Form 1041, the trustee must file Forms W-9 with the payors of the trust to provide them with the TIN to be used following the termination of the election period.

* * * *

The final regulations under §1.6072-1(a)(2) are revised to provide that the due date for the Form 1041 filed for the taxable year ending with the decedent's death is the fifteenth day of the fourth month following the close of the 12-month period that began with the first day of the decedent's last taxable year.

* * * *

Section 301.6109-1(a)(3) is intended to clarify that a trust must obtain a new TIN after the death of the decedent, if a trust that was treated as owned by the decedent during the decedent's life will continue for a period of time following the death of the decedent to allow a winding up of the affairs of the trust following the death of the decedent.[46] [Emphasis added.]

* * * *

(1) Obtaining a TIN. Regardless of whether there is an executor for a related estate and regardless of whether a section 645 election will be made for the QRT, a TIN must be obtained for the [each] QRT following the death of the decedent. See §301.6109-1(a)(3) of this chapter. The trustee must furnish this TIN to the payors of the QRT. See §301.6109-1(a)(5) of this chapter for the definition of payor.[47]

4.9(b) TIN for the Estate.

My preliminary opinion is that if an estate administration is opened, a TIN for the estate is also required, as well as a TIN for each QRT. Again, I quote the regulations:

(ii) Filing requirements—

(A) Filing the Form 1041 for the combined electing trust and related estate during the election period. If there is an executor, the executor files a single income tax return annually (assuming a return is required under section 6012) under the name and TIN of the related estate for the combined electing trust and the related estate. Information regarding the name and TIN of each electing trust must be provided on the Form 1041 as required by the instructions to that form. The period of limitations provided in section 6501 for assessments with respect to an electing trust and the related estate starts with the filing of the return required under this paragraph. Except as required under the separate share rules of section 663(c), for purposes of filing the Form 1041 under this paragraph and computing the tax, the items of income, deduction, and credit of the electing trust and related estate are combined. One personal exemption in the amount of $600 is permitted under section 642(b), and the tax is computed under section 1(e), taking into account section 1(h), for the combined taxable income.

(B) Filing a Form 1041 for the electing trust is not required. Except for any final Form 1041 required to be filed under paragraph (h)(2)(i)(B) of this section, if there is an executor, the trustee of the electing trust does not file a Form 1041 for the electing trust during the election period. . . . [48]

4.10 Application of the Separate Share Rules.

Although items of income, deduction, and credit of a QRT and related estate are combined for purposes of computing the tax, IRC §663(c) separate share rules may provide an exception to this general rule.[49]

The separate share rule is an income tax notion which determines who picks up the income earned by the estate or QRT when distributions are made. Whether a §645 election is made or not, the estate or any trust that makes a distribution during the year will be entitled to a distribution deduction for its distributable net income (DNI). This deduction is offset by the fact that the beneficiary/recipient of the DNI picks up the income, and the estate or distributing trust should prepare and send a Form 1099 to the recipient of the DNI. Since there may be more than one beneficiary, and since distributions may not be made proportionately among them in accordance with their interests, there are rules, called the “separate share” rules that determine how and under what circumstances the income is to be apportioned. If it is not apportioned fairly, there may be a need to make an “equitable adjustment” so that one beneficiary is not stuck with all of the taxable income, while another otherwise similarly situated beneficiary gets tax-free income. These rules are too complicated to discuss in detail here. This is largely a matter that your accountant can help you with, if the issue becomes relevant; and, in that regard, I am, of course, available to consult with in a difficult case.

For present purposes, and to aid (perhaps) your income tax preparer, I quote below a portion of the new regulations on the subject.

(iii) Application of the separate share rules—

(A) Distributions to beneficiaries (other than to a share (or shares) of the combined electing trust and related estate). Under the separate share rules of section 663(c), the electing trust and related estate are treated as separate shares for purposes of computing distributable net income (DNI) and applying the distribution provisions of sections 661 and 662. Further, the electing trust share or the related estate share may each contain two or more shares. Thus, if during the taxable year, a distribution is made by the electing trust or the related estate, the DNI of the share making the distribution must be determined and the distribution provisions of sections 661 and 662 must be applied using the separately determined DNI applicable to the distributing share.

(B) Adjustments to the DNI of the separate shares for distributions between shares to which sections 661 and 662 would apply. A distribution from one share to another share to which sections 661 and 662 would apply if made to a beneficiary other than another share of the combined electing trust and related estate affects the computation of the DNI of the share making the distribution and the share receiving the distribution. The share making the distribution reduces its DNI by the amount of the distribution deduction that it would be entitled to under section 661 (determined without regard to section 661(c)), had the distribution been made to another beneficiary, and, solely for purposes of calculating DNI, the share receiving the distribution increases its gross income by the same amount. The distribution has the same character in the hands of the recipient share as in the hands of the distributing share. The following example illustrates the provisions of this paragraph (e)(2)(iii)(B):

Example. (i) A's will provides that, after the payment of debts, expenses, and taxes, the residue of A's estate is to be distributed to Trust, an electing trust. The sole beneficiary of Trust is C. The estate share has $15,000 of gross income, $5,000 of deductions, and $10,000 of taxable income and DNI for the taxable year based on the assets held in A's estate. During the taxable year, A's estate distributes $15,000 to Trust. The distribution reduces the DNI of the estate share by $10,000.[50]

(ii) For the same taxable year, the trust share has $25,000 of gross income and $5,000 of deductions. None of the modifications provided for under section 643(a) apply. In calculating the DNI for the trust share, the gross income of the trust share is increased by $10,000, the amount of the reduction in the DNI of the estate share as a result of the distribution to Trust. Thus, solely for purposes of calculating DNI, the trust share has gross income of $35,000, and taxable income of $30,000. Therefore, the trust share has $30,000 of DNI for the taxable year.[51]

(iii) During the same taxable year, Trust distributes $35,000 to C.[52] The distribution deduction reported on the Form 1041 filed for A's estate and Trust is $30,000. As a result of the distribution by Trust to C, C must include $30,000 in gross income for the taxable year. The gross income reported on the Form 1041 filed for A's estate and Trust is $40,000.[53]

ARTICLE 5
Memo to Client Regarding the IRC §645 Election
Where Decedent Died Before December 24, 2002

Estate of [DecedentFullName], Deceased
Probate Cause No.: [ProbateCauseNo]
Date of Death: [DateOfDeath]

The All Important IRC §645 Election to Treat a Revocable Trust Under the Rules Applicable to Decedents Estates or to Combine the Trust and the Estate

The §645 election is a fairly new procedure. Until late December of last year, we had only proposed regulations and a Revenue Procedure, and the two did not always agree with one another, which made the whole area very complex, in addition to being very new. We now have final regulations, which are likewise challenging to comprehend in all their breadth, but which do not apply in our case, and are thus only mildly helpful.

This memo incorporates the principles applicable to decedents dying BEFORE December 24, 2002. The Preamble to the final regulations provides that‑

Estates and trusts of decedents dying before December 24, 2002 may follow the election procedures provided in the proposed regulations or Rev. Proc. 98-13. With respect to obtaining a TIN for a QRT and filing a Form 1041 for the short taxable year beginning with the decedent's death and ending December 31 of that year, estates and trusts of decedents dying before December 24, 2002 may follow the procedures in these final regulations, the proposed regulations, or Rev. Proc. 98-13.

5.1 The “§645 Election” In GENERAL.

Since [theDecedent] was the “grantor” of a revocable living trust, that trust may very well qualify as a QRT. In order to qualify for this special treatment, a “§645 Election” must be made. Once made, the election is irrevocable.[54] If [TrustName] qualifies as a QRT, I recommend that the election be made, unless your accountant has some good reason why not to.

Because the trust was a revocable trust, it was not treated as a separate taxpayer so long as [theDecedent] was alive; rather, the trust was ignored for tax purposes, and the assets of the trust were treated as if they belonged to [theDecedent]. On [theDecedent]'s death, the trust became irrevocable, and historically would become a separate taxpayer. This would mean that there would be two Fiduciary Income Tax Returns which would need to be filed for a while, a return for the probate estate, and a return for the trust.

Since the trust is the recipient of the bulk of the estate, it may be more convenient to combine the two for tax reporting purposes. IRC[55] §645[56] now gives the executor and trustee of a qualified revocable trust the right “to elect to treat trust as part of estate, and not separate trust for all tax years of estate ending after decedent's death and before ‘applicable date’ as defined by Code Sec. 646(b)(2). This election is irrevocable and must be made not later than filing date for return for estate's first tax year.”[57] However, “[i]f a Form 1041 reporting the items of the trust has already been filed for the trust for its taxable year ending after the date of the decedent's death without a copy of the required statement attached to the form, then the trust must file an amended Form 1041 and attach a copy of the required statement to the amended form.”[58]

If [TrustName] qualifies as a QRT, I would seriously consider making the election, unless your accountant has some good reason why not to.

I quote from the statute, the proposed regulations and applicable Revenue Procedures freely below, mainly because I expect that your C.P.A. will be preparing the income tax returns for the estate/trust, and want to call attention to where the law on the subject is to be found.

5.2 The Statute Itself.

The statute itself is always a good place to start. IRC §645 provides:

§ 645 Certain revocable trusts treated as part of estate.

(b) Definitions. For purposes of subsection (a)—

(2) Applicable date. The term “applicable date” means—

(A) if no return of tax imposed by chapter 11 is required to be filed, the date which is 2 years after the date of the decedent's death, and

(B) if such a return is required to be filed, the date which is 6 months after the date of the final determination of the liability for tax imposed by chapter 11.

5.3 Rev. Proc. 98-13

The procedure for making the election is found in Rev. Proc. 98-13, 1998-1 CB 370. However, Proposed Regulations were issued in December, 2000 setting forth slightly differing procedures. Final regulations were made applicable to decedents dying on or after December 24, 2002, but for decedents dying prior to that date the old rules (whatever they were) still apply.

The following is taken from Rev. Proc. 98-13,[60] except that I have updated the references from §646 to 645 to reflect the redesignation of the section by the IRS Restructuring and Reform Act of 1998:

Both estates and trusts can function to settle the affairs of a decedent and distribute assets to heirs. In the case of a revocable inter vivos trust, the grantor transfers property to a trust that is revocable during the grantor's lifetime. When the grantor dies, the power to revoke ceases and the trustee performs the settlement functions typically performed by an estate executor. H.R. Conf. Rep. No. 220, 105th Cong., 1st Sess. at 711 (1997).

Section 645(a) provides that if both the executor (if any) of an estate and the trustee of a qualified revocable trust elect the treatment provided in section 645, such trust shall be treated and taxed for income tax purposes as part of such estate (and not as a separate trust) for all taxable years of the estate ending after the date of the decedent's death and before the applicable date, as defined in section 645(b)(2).

Section 645(b)(1) provides that the term “qualified revocable trust” means any trust (or portion thereof) that was treated under section 676 as owned by the decedent by reason of a power in the decedent to revoke (determined without regard to section 672(e)).

Section 645(b)(2) provides that the term “applicable date” means – (A) if no estate tax return is required to be filed, the date that is 2 years after the date of the decedent's death, and (B) if an estate tax return is required to be filed, the date that is 6 months after the date of the final determination of the estate tax liability.

Section 645(c) provides that the election under section 645(a) shall be made not later than the time prescribed for filing the income tax return for the first taxable year of the estate (determined with regard to extensions), and once made, shall be irrevocable.

3. Procedures and Requirements for Making the Section 645 Election

.01 Required Statement.

To make the election, a required statement must be attached to a Form 1041, U.S. Income Tax Return for Estates and Trusts, at the time and in the manner described in this revenue procedure. The required statement must:

(1) Identify the election as an election made under section 645;

(2) Contain the name, address, date of death, and taxpayer identification number (TIN) of the decedent;

(3) Contain the qualified revocable trust's name, address, and TIN. If the trust does not have a TIN because the trust was reporting pursuant to section 1.671-4(b)(2)(i)(A) of the Income Tax Regulations, the trustee must obtain a TIN unless a Form 1041 does not have to be filed under SECTION 3.03. See section 301.6109- 1(a)(2) of the Procedure and Administrative Regulations;

(4) Contain the estate's name, address, and TIN;

(5) Provide a representation that as of the date of the decedent's death, the trust for which the election is being made, or a portion thereof, was treated under section 676 as owned by the decedent of the estate referred to in section 645(a) by reason of a power in the decedent to revoke (determined without regard to section 672(e)); and

(6) Be signed and dated by both an executor or administrator of the estate and a trustee of the qualified revocable trust. If there is more than one trustee, only one must sign the required statement, unless otherwise required by the governing instrument or by local law. Similarly, if there is more than one executor, only one must sign the required statement, unless otherwise required by the governing instrument or by local law.

If there is no probate estate and, hence, no executor or administrator, the election may still be made. In that case, a TIN must still be obtained for the estate and only a trustee of the qualified revocable trust must sign the required statement; however, the required statement must then include a representation that there is no executor or administrator and that neither an executor nor an administrator will be appointed.

.02 Submission of the Required Statement.

The original required statement must be attached to the Form 1041 filed for the estate for its first taxable year. Additionally, except as provided in SECTION 3.03, a copy of the required statement must be attached to a Form 1041 filed for the trust for the taxable year ending after the date of the decedent's death. The election is considered made when the original required statement is attached to the Form 1041 filed for the estate's first taxable year, or when a copy of the required statement is attached to the Form 1041 filed for the trust, whichever occurs first. Once made, the election is effective from the date of the decedent's death.

If the election is made, then the items of the trust, including income, deductions and credits, that are attributable to the qualified revocable trust for the period subsequent to the decedent's death must be excluded from the Form 1041 filed for the trust for the taxable year ending after the date of the decedent's death and must be reported on the estate's Form 1041.

If there is no executor or administrator and neither one will be appointed, a trustee of the qualified revocable trust must sign every Form 1041 filed for the estate.

If a Form 1041 reporting the items of the trust has already been filed for the trust for its taxable year ending after the date of the decedent's death without a copy of the required statement attached to the form, then the trust must file an amended Form 1041 and attach a copy of the required statement to the amended form. The items of the trust that are attributable to the qualified revocable trust for the period subsequent to the decedent's death must be excluded from the amended Form 1041 and reported on the estate's Form 1041.

.03 A Form 1041 Does Not Have to be Filed for Certain Trusts.

The trust[61] does not have to file a Form 1041 for its taxable year ending after the date of the decedent's death if the following conditions are met: (1) The Form 1041 for the estate's first taxable year is filed before the due date for filing a Form 1041 for the trust for the taxable year ending after the date of the decedent's death; (2) The trust items attributable to the decedent are reported pursuant to section 1.671-4(b)(2)(i)(A) or (B); and (3) The entire trust is a qualified revocable trust. [Emphasis added.]

* * * *

Note that if the trust does not have a TIN because the trust was reporting under the alternate grantor trust reporting requirements of Treas. Reg. §1.671-4(b)(2)(i)(A), the trustee must obtain a TIN unless a Form 1041 does not have to be filed.

If the election is made, then the items of the trust, including income, deductions and credits, that are attributable to the qualified revocable trust for the period after the decedent's death must be excluded from the Form 1041 filed for the trust for the taxable year ending after the date of the decedent's death and must be reported on the estate's Form 1041.

Note that a trust making the election does not have to file a Form 1041 for its taxable year ending after the date of the decedent's death if the following conditions are met:

(1) The Form 1041 for the estate's first taxable year is filed before the due date for filing a Form 1041 for the trust for the taxable year ending after the date of the decedent's death;

(2) The trust items attributable to the decedent are reported under the alternate grantor trust reporting rules of Treas. Reg. §1.671-4(b)(2)(i)(A) or Treas. Reg. §1.671-4(b)(2)(i)(B); and

(3) The entire trust is a qualified revocable trust.

It is likely that [theDecedent] was reporting under the alternate grantor trust reporting rules of Treas. Reg. §1.671-4(b)(2)(i)(A) or Treas. Reg. §1.671-4(b)(2)(i)(B) if a trust 1041 was not being prepared in the past. Thus condition (2) would be met. I assume that the entire trust was a qualified revocable trust, meeting condition (3). So, if the premises were correct, it appears to me that if you file a Form 1041 for the estate before the due date for filing the trust's Form 1041 for the taxable year ending after [theDecedent]'s death (April 15, _____), the trust will not have to make the election, but the election will be made by the estate alone.

5.4 What Are Some of the Different Tax Rules Applicable to Trusts and Estates, in the Absence of a §645 Election?

If an administration is opened and an executor appointed, the electing trust is treated, during the election period, as part of the related estate for all federal income tax purposes.

Although there are not an overwhelming number of tax differences in the treatment of a probate estate and trust, there are a few. A QRT is treated as part of the related estate for purposes of the IRC §642(c)(2) charitable set-aside deduction, for example, but a post-death revocable trust is allowed a charitable deduction only for amounts paid to charities. Another difference is that the IRC §1361(b)(1) subchapter S shareholder requirements are not the same for estates and trusts. The IRC §469(i)(4) special offset for rental real estate activities also differs somewhat. The active participation requirement under the passive loss rules is waived for two years after the owner's death in the case of estates, but not in the case of revocable trusts.[62] Finally, although trusts are required to pay estimated income tax payments in the same manner as individuals, estates are exempted from this requirement for the first two taxable years.[63] Presumably a QRT would also be entitled to this benefit.

What are some of the reasons why you might want to make the §645 election, other than convenience? There are not very many, here are a few, which could be important, and which may be largely a restatement of the preceding paragraph, but stated differently:

· The active participation requirement under the passive loss rules is waived in the case of estates (but not revocable trusts) for two years after the owner's death.

· Estates can qualify for amortization of reforestation expenditures, while trusts do not.

· A revocable trust usually is forced to choose a calendar year as its tax reporting year, while an estate (under §645 or otherwise) can choose a fiscal year end other than December 31.

· An estate does not have to make quarterly estimated income tax payments for two years, but a trust does.

5.5 Application of the Separate Share Rules.

[3] See BNA Tax Management Portfolio 843-1^st at VIII, by Professor Jeffrey N. Pennell, and BNA Tax Management Portfolio 800-1^st at V.D.5.d.4, by Professor Wm. P. Streng. Here is the language approved in Rev. Proc. 64-10:

I hereby agree that the assets to be distributed in satisfaction of this bequest or transfer in trust will be selected in such manner that the cash and other property distributed will have an aggregate fair market value fairly representative of the pecuniary legatee's (or transferee's) proportionate share of the appreciation or depreciation in the value to the date, or dates, of distribution of all property then available for distribution in satisfaction of such pecuniary bequest or transfer.

I personally do not agree with what I think is the position of Professors Pennell and Streng (whose position there is a remote possibility I may be misconstruing). 64-19 only says that the value must be “fairly representative” of the beneficiary’s “proportionate share of the appreciation or depreciation in the value” of the property. I don’t see that it is clear that this requires that the basis of the property distributed reflect the change in value. However, the fairly representative wording used in the GSTT regs. ‑reproduced in full by the following footnote‑ is slightly more explicit on this issue, without, however, being entirely without ambiguity. Treas. Reg. §26.2654-1(a)(1)(2)(B) states that the “assets” themselves will be allocated “in a manner that fairly reflects net appreciation or depreciation in the value of the assets.”

[4] Treas. Reg. §26.2654-1(a)(1)(2)(B) provides:

If the pecuniary amount is payable in kind on the basis of value other than the date of distribution value of the assets, the trustee is required to allocate assets to the pecuniary payment in a manner that fairly reflects net appreciation or depreciation in the value of the assets in the fund available to pay the pecuniary amount measured from the valuation date to the date of payment.

The GST language is slightly less ambiguous than the 64-19 language, the former appearing to require that the assets themselves be allocated in a manner reflecting appreciation and depreciation, where the latter arguably only requires that the value of the assets reflect the change.

[5] All references herein to the "IRC" are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated.

[7] We usually take these on the 706 if a marital deduction is wanted, since the marital deduction is reduced dollar for dollar by any estate transmission expenses not taken on the 706.

[8] We always take these on the 1041 if a reduce to zero marital deduction is available, because doing so does not reduce the marital deduction.

[9] See the Texas Probate System, 3^rd Edition, Letter 23 (James Brill, Editor), which inspired this letter, and which can be used as a good form to use in combination with the following.

[11] Akers, Post Mortem Estate Administration.

[12] Stanley v. Henderson, 139 Tex. 160, 162 S.W.2d 95 (1942). Lipstreu v. Hagan, 571 S.W.2d 36,38 (Tex. Civ. App.--San Antonio 1978, writ ref'd n.r.e.). Woodward and Smith, Probate and Decedents' Estates, 18 TEXAS PRACTICE (1971), §721.

[14] Tex. Prob. Code §241(a), as amended, effective September 1, 1991.

[15] Woodward and Smith, Probate and Decedents' Estates, 18 TEXAS PRACTICE (1971), §721, p. 83-84. Wolfe’s Estate v. Wolfe, 36 Tex. Civ. App. 168, 81 S.W. 90 (1904)

[16] Von Koenneritz v. Ziller, 112 Tex. 126, 245 S.W. 423 (1922). Goodwin v. Downs, 280 S.W. 512, 514 (Com. App. 1926).

[17] Walling v. Hubbard, 389 S.W.2d 581 (Tex. Civ. App.--Houston 1965, writ dism’d n.r.e.).

[18] Dwyer v. Kalteryer, 68 Tex. 554, 5 S.W. 75 (1887).

[19] Walling v. Hubbard, 389 S.W.2d 581 (Tex. Civ. App.--Houston 1965, writ dism’d n.r.e.).

[21] Wright v. Wright, 304 S.W.2d 951 (Tex. Civ. App.--Amarillo 1957, writ ref'd).

[22] See Sewell & Nimmons, “The Executor's and Administrator's Statutory Compensation in Texas,” 3 ST. MARY'S L.J. 1, 5 n.20 (1971).

[24] Woodward and Smith, Probate and Decedents' Estates, 18 TEXAS PRACTICE (1971), §721, 1994 supplement p. 12. Hughes v. Mulanaz, 105 Tex. 576, 153 S.W.2d 299 (1913).

[28] This portion of the letter can easily be shortened, depending on the sensitivity of the issue.

[29] N.B.: I know of no authority for this rule. Apparently it is unwritten.

[30] Treas. Reg. §§1.212-1(i) and 20.2053-3.

[31]See Steve Akers’ treatise on Post-Mortem Estate Planning.

[33] See Zaritsky & Lane, Federal Income Taxation of Estates and Trusts, ¶2.08[1][a]; Bittker & L. Lokken, Federal Taxation of Income, Estates and Gifts ¶ 81.2.6 (Warren, Gorham & Lamont, 2d ed. 1992); R. Stephens, G. Maxfield, S. Lind & D. Calfee, Federal Estates and Gifts Taxation ¶ 5.03[3][d] (Warren, Gorham & Lamont, 6th ed. 1992).

[35] IRC §645(c); Treas. Reg. §1.645-1(e)(1).

[36] All references herein to the “IRC” are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated.

[37] N.B.: This is the statute that treats powers held by a grantor’s trust as held by the grantor.

[39] N.B.: This is most curious, because it is circular. I don’t know what it means. No matter what the document says, a grantor who was incapacitated (i.e., lacked the legal “capacity” to revoke the trust), could not revoke it. Perhaps an agent could revoke under a durable power of attorney, but that is a dangerous power to give. Also, as a metaphysical matter, everyone, in the millisecond before death, will be incapacitated. On a more practical level, it may be expected that the incapacity will be for hours, perhaps days, rather than milliseconds, in most cases.

[42] Treas. Reg. §1.645-1(c)(1)(i). Other conditions are listed in Treas. Reg. §1.645-1(c)(1)(ii).

[43] Final Treas. Reg. §1.645, Preamble: Treasury Decision 9032, 12/24/2002, IRC Sec(s). 645; 671; 6048.

[44] Final Treas. Reg. §1.645, Preamble: Treasury Decision 9032, 12/24/2002, IRC Sec(s). 645; 671; 6048.

[45] Final Treas. Reg. §1.645, Preamble: Treasury Decision 9032, 12/24/2002, IRC Sec(s). 645; 671; 6048.

[46] Final Treas. Reg. §1.645, Preamble: Treasury Decision 9032, 12/24/2002, IRC Sec(s). 645; 671; 6048. If the trust was unfunded during life, and will essentially terminate at death, except perhaps as a conduit to other trusts or outright to the beneficiaries, then it is not clear to me that a new TIN must be obtained or not.

[50] N.B.: But since both the estate and trust are reporting on the same 1041, I am not sure exactly what obvious differences this will make.

[52] N.B.: Here I can see where it would make a difference, because C is not reporting his taxes on the same return as the combined estate/QRT.

[55] All references herein to the “IRC” are to the Internal Revenue Code of 1986, as amended, unless otherwise indicated.

[56] IRC §645 was previously §646, which can cause confusion if you are reading references to it written before the IRS Restructuring and Reform Act of 1998.

[58] Rev. Proc. 98-13, 1998-1 CB 370, 3.02 last sentence.

[59] N.B.: This is the statute that treats powers held by a grantor’s trust as held by the grantor.

[61] The estate would still have to make the election, however.

ARTICLE 1 TRust Administrative provisions

1.1(a) In General.

1.1(b) Method For Valuing Property Distributed as a Part of a Nonprorata Distribution of the Residuary Estate.

1.1(c) Method For Valuing Property Distributed in Satisfaction of a Pecuniary Bequest is Fair Market Value on Date or Dates of Distribution Except for Pecuniary Gifts Exceeding $100,000.

1.1(d) Meaning of “Fairly Representative of Appreciation or Depreciation.”

1.1(e) Trustee Prohibited From Operating Trust As a Device To Carry On a Business.

1.2 Tax Elections.

1.3 Income in Respect of a Decedent.

ARTICLE 2 A Letter to the Personal Representative Talking About Income Tax Issues, Among Other Things[9]

ARTICLE 3 Model Letter to Client Regarding the Form 706 and the Issue of whether to Take the §642(g) Swing Items on the estate Or the Fiduciary Income tax return, and Including a Discussion of the §2204(a) and the §6905 Elections

ARTICLE 4 Memo to Client Regarding the IRC §645 Election Where Decedent Died After December 23, 2002

4.4 Effective date of final regulations.

4.5 What Are Some of the Different Tax Rules Applicable to Trusts and Estates, in the Absence of a §645 Election? / Reasons for Making the §645 Election?

4.9(a) TIN for the QRT or TINs for Multiple QRTs.

4.9(b) TIN for the Estate.

ARTICLE 5 Memo to Client Regarding the IRC §645 Election Where Decedent Died Before December 24, 2002

ARTICLE 1
TRust Administrative provisions

ARTICLE 2
A Letter to the Personal Representative Talking About Income Tax Issues, Among Other Things [9]

ARTICLE 3
Model Letter to Client Regarding the Form 706 and the Issue of whether to Take the §642(g) Swing Items on the estate Or the Fiduciary Income tax return, and Including a Discussion of the §2204(a) and the §6905 Elections

ARTICLE 4
Memo to Client Regarding the IRC §645 Election
Where Decedent Died After December 23, 2002

ARTICLE 5
Memo to Client Regarding the IRC §645 Election
Where Decedent Died Before December 24, 2002