[WSBAPT] Personal Rep and Income Taxes

[Philip N. Jones]

It’s fine to defer to the CPA on income taxes, but when it comes to fiduciary income taxes everything you do impacts the taxes and you need to work closely with the CPA to make sure you are not damaging the tax situation.  Partial distributions, final distributions, distributions in kind, etc. all impact the fiduciary income taxes.  At a minimum, you should call the CPA before you take any of those steps.  And lots of others.  You need not become an expert on income taxes, just become an expert on working closely with the CPA.  One phone cfall to delegate the taxes to the CPA is not enough.
Phil Jones

Philip N. Jones
Duffy Kekel LLP
900 S.W. Fifth Ave. Suite 2500
Portland, OR 97204
pjones at duffykekel.com<mailto:pjones at duffykekel.com>
(503) 226-1371 – office
(503) 853-1482 – cell
(503) 226-3574 - fax

From: wsbapt-bounces at lists.wsbarppt.com <wsbapt-bounces at lists.wsbarppt.com> On Behalf Of Paul Neumiller
Sent: Friday, September 16, 2022 11:41 AM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com>
Subject: Re: [WSBAPT] Personal Rep and Income Taxes

I have questioned whether I should even respond to this posting.  I fail to see why I, as a general practitioner and sole practitioner in a rural county, am being both unethical and negligent because I defer to the probate client’s expert in taxes.  The client’s CPA is licensed in this area, is more experienced, and is cheaper.  Additionally, the vast majority of my probates in this back-water county are non-taxable estates.  Now, I realize there are a litany of  tax horribles that I am sure you can list but I am not equipped to even recognize the issues.  But an experience CPA is equipped and the experienced CPA is cheaper.  I do not close probates without making sure the taxes have been addressed BUT addressed by others.    Cheers and Go Mariners.


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IMPORTANT NOTICE:  This e-mail message is intended to be received only by persons entitled to receive the confidential information it may contain. E-mail messages to clients of Paul A. Neumiller presumptively contain information that is confidential and legally privileged; e-mail messages to non-clients are normally confidential and may also be legally privileged. Please do not read, copy, forward or store this message unless you are the intended recipient of it. If you have received this message in error, please forward it back to the sender and delete it completely from your computer system.

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From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> On Behalf Of Joshua McKarcher
Sent: Wednesday, September 14, 2022 2:03 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Personal Rep and Income Taxes

I absolutely knew SOMETHING in that big, long, hairy email would get correction, but that’s why I love “putting it out there,” because I learn and sharpen, too. Being afraid of being wrong is just no way to live!

And in this case, my CPA friend would say, “Josh, I’ve TOLD you this! It’s elected when we FILE it.” And I would say, “Alright, alright! But I think about it and talk to my client about it when I get the EIN, send them the application page (“Print this page at this moment in time or you’ll never see it again!”), and the confirmation letter. And then it’s YOUR problem to ‘elect’ things!” 😉

So, excellent clarification, yes!

Also, Phil, I “think” there are really cool online publishing options where you could upload that PDF, let people pay online, and they’ll ship it for you. You’ll make money WHILE in Spain, even better!

Regardless, sign me up for one, no question!!

From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> On Behalf Of Philip N. Jones
Sent: Wednesday, September 14, 2022 2:47 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Personal Rep and Income Taxes

I agree with everything Josh says, with one tiny technical disagreement.  The election to use a fiscal year does not happen when you obtain an EIN, even though the EIN application asks you what fiscal year you plan to use.
Here is how you select a fiscal year:

The selection of an ending month for the fiscal year is made by filing an initial fiduciary income tax return for the period ending on the last day of that month.  Reg. §1.441-1(c)(1).  The election may be made on a late-filed return.  Reg. §1.441-1(c)(1).  (Prior versions of this regulation required a timely return.  That requirement was dropped in regulations proposed in 2001 and finalized in 2002.  REG-106917-99 and T.D. 8996.)  The filing of an extension request, or the filing of a Form SS-4 (application for EIN), or the payment of estimated taxes, does not constitute the making of an election to use a fiscal year, nor does it constitute the selection of an ending month, even though the Form SS-4 asks for the ending month of the fiscal year.

As you may have figured out, I wrote the 2017 materials I referred to.  Back then they were 60 or 80 pages, or something like that.  I can’t remember.  They have now grown to 134 pages as of last week.  I wrote them myself, I print them myself, and I saddle-bind them myself.  I do not send out electronic copies.  If you really want your own copy of the latest version, send me a check for $25 and I will print and bind one for you.  I leave for Spain for a month starting 9/25, so if you want one in the near future, act now before my partners figure out that I have turned our firm into a publishing company.  (If you really do plan to order one, send me an email and I will start the presses running this weekend.  If I get hundreds of requests, I might renege on the offer.  I have other things to do.  Like pack for Spain.)
Hasta la vista,
Phil Jones

Philip N. Jones
Duffy Kekel LLP
900 S.W. Fifth Ave. Suite 2500
Portland, OR 97204
pjones at duffykekel.com<mailto:pjones at duffykekel.com>
(503) 226-1371 – office
(503) 853-1482 – cell
(503) 226-3574 - fax

From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> On Behalf Of Joshua McKarcher
Sent: Wednesday, September 14, 2022 12:32 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Personal Rep and Income Taxes

I offer the below to the extent it helps newer estate administration lawyers, or those who are unsure of income taxation for PRs and trustees.

I do what Philip does, and I endorse his views. With respect, and intending encouragement to all, I do not believe an administration attorney can likely ethically rely on "I don't do taxes" to avoid potential liability for some of the traps Phil lists in his email. So, here’s how you might consider approaching the issue (and if you see terms below you don’t know, just start by googling those at least and you’ll slowly start to get the gist! 😊):

If the decedent's former preparer was H&R Block (etc.) or a tax preparer who does not file (or perhaps even know of) “short-year returns,” I recommend they allow me to email my go-to CPA firm at the outset to engage them for the final 1040 and what I hope will be a single fiscal-year return on the 1041, if we can distribute or "turn off" income within about 11 months from month of death.

(In re “short year” and “fiscal year” and “11 months”: Notice when you file for an EIN online, you can choose to end the estate’s tax year at the end of the month immediately preceding the month in which the decedent died. Decedent dies August 1 (through 31), 2022, fiscal year ends July 31, 2023. Fiscal year vs. calendar year income tax reporting! One income tax return on 1041, instead of two! Yay! And then imagine you finish administration by February 2023 and could file a “short year” return that is both the estate’s “first” and “final” income tax return, filed long before either the end of the tax year (July 31, 2023) or the deadline even later in 2023. And imagine you can finalize and close your estate (if no estate tax returns and fairly straightforward income tax returns) before July in my example. Again, we can make this fun, I promise.)

I then make sure the prior 2-5 years returns get to my office or the CPA (only because I know she will digitize and evaluate them for assets I haven't listed for her already and send me what I need).

We immediately do a preliminary analysis of the estate's likely taxable assets (or at least its "tax return triggering" assets -- $600 in GROSS income is a very small number): real property to be sold EVEN IF NO GAIN, annuities left to the estate (upon which we observe a moment of silence, har har), investment accounts cranking out surprising amounts of income, corporate/LLC interests paying periodic income, maybe even bank deposit interest -- the usual suspects.

If you just stop and think even this much, you will “get there”:

Okay, whatever regular ol’ income the decedent was making through the date of death, is now INESCAPABLY the ESTATE’s income in the first instance; cannot avoid it. Next, instead of a filing requirement at $11,000 or whatever it is for living individuals, it’s now only $600 in a fiscal or calendar tax year; and trusts and estates on 1041s have way higher tax rates (and “compressed brackets”) in general. I can look all that up with a quick Google search to “see” it. Okay, so then we want individual taxation so that we’re REPORTING the income on the 1041, but passing out the income, providing K-1s (“Just like for LLCs?” “Yes!”) and having beneficiaries PAY the tax individually (if we have beneficiaries who will “get it” and will “actually do so”). So then if we get income distributed out of the estate in time (but by what deadline?) then we can achieve pass-through income taxation at individual rates for everyone vs. having the estate or trust pay a crazy amount of income tax because nobody was paying attention.

From there, sure, your CPA who is alerted to that initial analysis can perhaps “mostly take it from there” and analyze the beneficiaries’ tax rates, states of residence, and the possibility of simply paying the tax inside the estate or trust (which sometimes does make sense, especially if it’s very little or you simply just KNOW beneficiaries will make it more difficult or simply will never report it and pay it, etc. etc.).

That key CPA relationship, I respectfully encourage others out there, is part and parcel of your administration practice. There is tremendous peace knowing you're either going to have a CPA with history with the client (and a new professional contact/friend/resource) or your own trusted partner who can help you spot issues and set calendar reminders in their usual process and work with the client directly once the big picture is clear and then involve you as needed and at the end when it’s time to file and close the estate.

(No client anywhere ever says, "No, thank you. I'd like to figure out all of that by myself and will hope to land on my own a good CPA to help with it!" 😉)

If you make yourself “know” that much and go learn some of the jargon above, I have to believe you will protect yourself from a potential liability claim someday that may be hard to defend by saying, “I chose to do estate administration but not learn even the basics of estate income taxation.” With respect, I just don’t personally know if that would fly.

I'm guessing the 2017 resource Phil mentions "teaches" (or at least refers to) all of the above. But if not, find a professional tax friend who will teach you and give you at least a basic checklist. Over time, as each step in the process presents itself, you will be shocked how much you learn and become conversant with.

Good luck!

Best regards, Josh

Joshua D. McKarcher
McKarcher Law PLLC
537 6th Street
Clarkston, WA 99403
(509) 758-3345
(509) 758-3314 (fax)
josh at mckarcherlaw.com<mailto:josh at mckarcherlaw.com>
www.mckarcherlaw.com<https://nam11.safelinks.protection.outlook.com/?url=http%3A%2F%2Fwww.mckarcherlaw.com%2F&data=05%7C01%7Cpjones%40duffykekel.com%7C76e528f7cd4146217bf708da98135308%7C2d66ed5354fa4c2f8c4dbff1aca5479d%7C0%7C0%7C637989506017824369%7CUnknown%7CTWFpbGZsb3d8eyJWIjoiMC4wLjAwMDAiLCJQIjoiV2luMzIiLCJBTiI6Ik1haWwiLCJXVCI6Mn0%3D%7C3000%7C%7C%7C&sdata=yjUGdPNM6Q3BJVGcVm%2FRqfAAH9XmJOVcmxUdcVm4pGo%3D&reserved=0>
________________________________
From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> on behalf of Philip N. Jones <pjones at duffykekel.com<mailto:pjones at duffykekel.com>>
Sent: Tuesday, September 13, 2022 5:31 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Personal Rep and Income Taxes

We all need to work hand-in-glove with the family’s tax return preparer for the entire duration of the probate or of the trust administration.  If the decedent’s preparer will be continuing to work with the PR/trustee, that is ideal, and the preparer usually knows the status of prior returns and whether any of the prior returns have been audited or other problems developed.  I like to call the preparer (with the client’s permission) at the outset of the probate and establish that I will be preparing the federal and state estate tax returns, and the preparer will prepare the final 1040 and all of the 1041s for the duration of the probate.  But we all need to have a basic understanding of the fiduciary income tax, because so many decisions made during the probate or trust administration impact the fiduciary income tax and vice versa.  We cannot fully separate the tax issues from the estate/trust issues.  If the PR or trustee closes the probate or concludes the trust administration and distributes the assets without making sure that all of the income taxes (both 1040 and 1041) have been paid, the PR/trustee will incur fiduciary liability (personal liability) for the tax, and the beneficiaries will incur transferee liability.  And there are things we might do during the estate/trust administration that could trigger huge income tax liabilities.  And those liabilities are often avoidable.
If you have the materials from the November 2017 Seattle Estate Planning Council annual seminar, those materials include a lengthy chapter on the fiduciary income tax, with lots of references to Washington law.
Phil Jones

Philip N. Jones
Duffy Kekel LLP
900 S.W. Fifth Ave. Suite 2500
Portland, OR 97204
pjones at duffykekel.com<mailto:pjones at duffykekel.com>
(503) 226-1371 – office
(503) 853-1482 – cell
(503) 226-3574 - fax

From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> On Behalf Of Paul Neumiller
Sent: Tuesday, September 13, 2022 3:24 PM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: Re: [WSBAPT] Personal Rep and Income Taxes

“Hi, thank you using me as your attorney to help guide you through the probate process.  But I am an attorney and not an accountant, bookkeeper, or certified public accountant.  You will need to hire an accountant to assist you in finalizing the decedent’s taxes.  Let me know what you guys come up with.”    I also put this in writing in my standard PR duties letter to the PR right after probate is opened: “Additionally, you are responsible for filing Decedent's final individual income tax return for the year of the date of death.  You may be asked to provide the IRS with Form 56 (Notice Concerning Fiduciary Relationship) to establish that you are acting as the Decedent’s personal representative.  If you would like, I will work with you and your accountant on the preparation of this return.”


[cid:image001.jpg at 01D8C9C2.7CCD0900]

IMPORTANT NOTICE:  This e-mail message is intended to be received only by persons entitled to receive the confidential information it may contain. E-mail messages to clients of Paul A. Neumiller presumptively contain information that is confidential and legally privileged; e-mail messages to non-clients are normally confidential and may also be legally privileged. Please do not read, copy, forward or store this message unless you are the intended recipient of it. If you have received this message in error, please forward it back to the sender and delete it completely from your computer system.

E-mail communication on the Internet may NOT be secure. There is a risk that this confidential communication may be intercepted illegally. There may also be a risk of waiving attorney-client and/or work-product privileges that may attach to this communication. DO NOT forward this message to a third party. If you have any questions regarding this notice, please contact the sender.


From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> On Behalf Of Diane J. Kiepe
Sent: Tuesday, September 13, 2022 3:11 PM
To: 'WSBA Probate & Trust Listserv' <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: [WSBAPT] Personal Rep and Income Taxes

Hello All,

I know this conversation went around before but I’m hoping one or two (or more) of you would share your process in a probate in dealing with income taxes for the decedent; in particular how to find out if there are any outstanding taxes owed for prior years.

Thanks in advance.

Diane J. Kiepe

Diane J. Kiepe
Douglas Eden
717 W. Sprague Ave.
Suite 1500
Spokane, WA  99201
djkiepe at depdslaw.com<mailto:djkiepe at depdslaw.com>
509-455-5300

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