Unique opportunity for accumulated income in 2012/2013. If an estate (and revocable trust) elects a fiscal year ending in 2012, then the 2012 tax regime (lower rates and no Medicare surtax) will apply to the estate’s undistributed income until the beginning of its 2013 fiscal year. The beneficiaries of the estate and trust, who typically are taxed on a calendar year basis, report income received from the estate or trust in the year in which the estate’s tax year ends.
For decedents who died between Dec. 1, 2011, and Nov. 30, 2012, elect a Nov. 30, 2012, fiscal year. If the election is made then, in Year 1 (ending on Nov. 30, 2012), income will be taxed at pre-2013 rates without any potential Medicare surtax, whether the income is distributed to the beneficiaries or accumulated in the estate or trust. If a Nov. 30, 2012 fiscal year is elected, the Year 1 return is due on March 15, 2013 (unless extended).
In Year 2 (running from Dec. 1, 2012 to Nov. 30, 2013), any undistributed income will be taxed at 2012 rates without any surtax. On the other hand, any income distributed to the beneficiaries will be taxed at 2013 rates and potentially be subject to the surtax. Thus, if the beneficiaries need money in Year 2, rather than distributing it to them, consider having the estate or trust loan it to them. Memorialize the loan with a promissory note, and charge interest at the applicable federal rate.
If appreciated assets of the estate or trust are distributed in-kind to the beneficiaries, consider making an election to recognize the gain at the estate or trust level. Generally, when an estate or trust distributes an asset in-kind to a beneficiary (as opposed to liquidating the asset and distributing cash), there is no gain or loss to the estate or trust, and the beneficiary takes a carryover basis in the asset. However, the estate or trust may elect to recognize the gain, in which case the beneficiary takes a basis in the asset equal to its fair market value on the date of distribution. If made, the election applies to all in-kind distributions made during the tax year; it may not be elected on an asset-by-asset basis.
There are at least two circumstances in which the election may be desirable: (1) if the trust has capital loss carryovers that can be absorbed by the gain; and (2) if the election would result in the gain being taxed to the estate or trust under the 2012 regime (15 percent capital gains rate and no Medicare surtax), rather than to the beneficiary under the post-2012 regime when he or she sells the asset (20 percent rate + 3.8 percent surtax).
The increase from 15 to 23.8 percent is almost a 60 percent hike in the tax. On the other hand, the election is not desirable if the beneficiary expects to hold the asset until he or she dies, because, upon death, the basis will be stepped up to its fair market value. The election also is not desirable if the beneficiary plans to hold the asset for a long time before selling it, because the recognition of gain may be deferred until the sale.
As you can see, there are a number of techniques that can be used to minimize income taxes under the new tax laws. Make sure to seek the advice of an estate and trust income tax specialist to determine when and how to take advantage of these opportunities.
Scott Goldberger, J.D., is an estate and trust director in Kaufman, Rossin’s Boca Raton office. Kaufman, Rossin & Co. is one of the top CPA firms in the country and offers a wide variety of services for high-net-worth individuals. He can be reached at sgoldberger@kaufmanrossin.com. John R. Anzivino, CPA is in charge of Kaufman, Rossin’s estate, trust and exempt organization practice. He can be reached at janzivino@kaufmanrossin.com.
