Income — Amounts earned by the principal of the trust.
Remainder interest — The property that passes to a beneficiary after the expiration of an intervening income interest.51
Remainderman — Individual or entity entitled to the remainder interest.52
Testamentary trust — A trust that is created by a will and takes effect when the settlor (testator) dies.53
Inter vivos or living trust — A trust that is created and takes effect during the settlor's lifetime.54
Situs — The location or position (of something) for legal purposes.55
Rule against perpetuities — The common-law rule prohibiting a grant of an estate unless the interest must vest, if at all, no later than 21 years (plus a period of gestation to cover a posthumous birth) after the death of some person alive when the interest was created. The purpose of the rule was to limit the time that title to property could be suspended out of commerce because there was no owner who had the title to the property and who could sell it or exercise other aspects of ownership. If the terms of the contract or gift exceeded the time limits of the rule, the gift or transaction was void.56
Knowledge check
1 When does an estate begin and end for tax purposes?The estate begins on the date of death and lasts for any period of 12 months or less, that ends on the last day of a month.The estate begins on the date of the decedent's death and ends when the final income tax return is filed on behalf of the estate.The estate begins on the date of the decedent's death and ends when the executor or administrator has performed the ordinary duties of administration.An estate begins on probate of the will and ends when the probate assets are distributed according to the terms of the will.
Decedent's estates
The probate estate
A decedent's estate comes into existence at the time of an individual's death. For purposes of administration, a decedent's estate only consists of the decedent's probate assets. Probate assets can be generally defined as the property that the client owns solely in his or her own name alone. Assets that are disposed of through the designation of a beneficiary, such as IRAs, 401(k)s, qualified retirement plans, annuities, and life insurance do not fall within the definition of probate property. These assets are termed nonprobate property.
Probate property also does not include property that the client owns jointly with the right of survivorship with another party. Joint property does not pass according to the terms of a will, but will pass to the surviving joint owner automatically upon death by operation of law. In most cases, joint property will be designated as such with the names of the owners and the phrase following their names “Joint Tenants with Right of Survivorship” (JTWROS).57
The administration process
Overview
After the death of an individual, the executor of the estate as named in the will, or in the case of an individual who dies without a will, the estate administrator, is generally charged with taking control of the decedent's assets, paying the decedent's debts and expenses including inheritance taxes, and finally distributing the remaining assets under the terms of the will, or intestate law if there is no will.
This period of administration or probate begins with the probate of the will and the appointment of the individual or entity named in the will as the estate executor. Probate of the will generally involves presentation of the document to the Register of Wills. If someone wishes to contest the validity of the will, he or she must do so within a limited time period after the will is presented for probate.
If someone dies without a will, he or she are said to die intestate. In that case, the court will appoint an administrator to administer the estate. The administrator is typically the decedent's closest living relative.
Executor's duty
During the period of the administration of the estate, the executor or administrator must take control of the probate assets. Like a trustee, the estate executor bears a fiduciary responsibility to the heirs of the estate to make sure that the assets making up the estate are properly maintained and invested during the period of estate administration. During this period, the estate is a taxpayer and must file a tax return reporting the taxable income earned by the estate assets, and pay tax on that income as well. The administration of the estate will end upon the final distribution of the estate assets.
Estates for tax purposes
It is the probate assets which comprise the “estate” for income tax purposes, and the income earned by the assets and the expenses incurred in administration of those assets during the period the estate is in existence which are reportable on the estate income tax return, Form 1041. For tax purposes, the estate begins on the date of the decedent's death58 and ends when the executor or administrator has performed the ordinary duties of administration, such as the collection of assets and the payment of debts, taxes, legacies, and bequests, whether the period required is longer or shorter than the period specified under the applicable local law for the settlement of estates. However, the period of administration of an estate cannot be unduly prolonged. If the administration of an estate is unreasonably prolonged, the estate is considered terminated for federal income tax purposes after the expiration of a reasonable period for the performance by the executor of all the duties of administration. Further, an estate will be considered as terminated when all the assets have been distributed except for a reasonable amount which is set aside in good faith for the payment of unascertained or contingent liabilities and expenses (not including a claim by a beneficiary in the capacity of beneficiary).59 The period between the date of death and closing of the estate is sometimes referred to as the period of the administration of the estate or probate.
Mr. Warren dies with the following assets with fair market values as indicated:
| Stock | $ 100,000 |
| Bonds — taxable | 50,000 |
| Bonds — tax-exempt | 25,000 |
| Personal property | 5,000 |
| Rental property | 300,000 |
| Operating business | 800,000 |
| Partnership interest | 25,000 |
| Life insurance | $ 500,000 |
| IRA | 325,000 |