Final Estate Tax Return – Living Trusts & Intestate Probate Taxes

The Final Estate Tax Return is often a big surprise for the family of the deceased. If the decedent had no will, no instructions as to where their property and money would go after his death, then how could they even begin to prepare and file their return. They know that they have a legal responsibility to pay taxes but they are not sure how much. What they do not realize is that the IRS has made it very easy for them to calculate the amount they owe and they are very knowledgeable about the process.

It is very important to understand that the final estate tax return is filed with form 706. This is the form that you must use when filing your federal tax return and it is used to report your final assets, liabilities, and state tax returns as well as distribute your Social Security benefits. There are other names by which this document is referred to such as the final tax return, final estate statement, and final estate tax return but in general the form is used when preparing the final tax return. Form 706 is a simple to use form that asks for some basic information and then gathers all the needed information into one quick and easy to fill out piece of paper. Most people refer to the form as the Faxing of Final Estate.

Form 706 has two sections to it and these are the following: (i) the Table of Contents and (ii) the section entitled Income, Gift Taxes, and Allowable deductions. The following paragraphs (a) through (d) detail what items are included in the table of contents and what items are reported on the taxable income of the decedent. The first paragraph (a) explains which tax items must be reported on the final estate tax return and what category of tax is selected for that return. The second paragraph (b) provides a detailed description of each item and the applicable tax rate.

For purposes of computing adjusted taxable gifts for the year that a decedent died, the following instructions apply: For each gift that is an asset, the fair market value of the gift is computed by adding the cost of the gift to the total assets that the decedent owned during the decedent’s lifetime. The cost of the gift is calculated based on the current selling price of the gift in dollars. This is also the same as the fair market value of the gift which is the selling price divided by the total number of units that the decedent owned throughout the year. Gifts that are payable in installments and that are covered under the installment agreement are not eligible to be reported on the final estate tax return.

The last part of the Final Estate Tax Return is the section which includes options and privileges. The basic options that can be listed under the last clause of paragraph (c) are the right to an intestate estate, the ability to execute a living trust, and the right to make an anatomical gift. If the decedent did not designate specific options or privileges, then the applicable options are those mentioned in the test of intestate intestacy. The test of intestate intestacy determines the outcome of the distribution. If there were no test, then the distribution would be straightforward. If the test stated that the decedent had a choice, then the applicable option would be revocable right of survivorship.

To claim a charitable deduction property, the decedent must have owned the property during the life of the beneficiary. If the beneficiary was an individual, then the individual may claim the property as the basis for the charitable deduction. The property belongs to the decedent immediately after his death, and if the decedent’s living trust was created during the life of the decedent, then the property belongs to the trust, and not to the decedent. There are two exceptions to this general rule. The first exception occurs if the decedent lived in a marital relationship with the beneficiary for a period of one year after the decedent died, and the property was transferred between them after that period of one year, then it would be taxable because of the transfer.

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