An estate is a taxable entity separate from the decedent and comes into being with the death of the individual. It exists until the final distribution of its assets to the heirs and other beneficiaries. The estate must report income earned by the assets during this period. The tax generally is figured in the same manner and on the same basis as for individuals, with certain differences in the computation of deductions and credits.
A trust is a legal arrangement whereby one party (the trustee) manages property for the benefit of another (beneficiary). Federal laws govern the income tax treatment of trusts; however, many of the legal aspects fall under the laws of the state in which the trust was executed. An inter vivos trust, more commonly referred to as a living trust, is a trust that takes effect during the lifetime of the grantor. A testamentary trust is created at death by instructions in the decedent’s will and is funded with property from the probate estate. The primary parties to a trust are grantor, beneficiary and trustee.
Estate & Trust tax returns are long and complicated documents that require specialized knowledge. The prepared must be versed in the federal tax laws as well as local laws governing the document.
