The last thing families want to think about after a loved one has passed is paying their taxes. But taxes must be dealt with, deadlines must be met, and challenges along the way need to be addressed. The article “Elder Care: Death and Taxes, Part 1: Tax guidance for administering a loved one’s estate” from The Sentinel offers a helpful overview and recommends speaking with an estate planning attorney to ensure all tasks are completed on time.
Final income tax returns must be filed after a person passes. This is the tax return on income received during their last year of life, up to the date of death. When a final return is filed, this alerts federal and state taxing authorities to close out the decedent’s tax accounts. If a final return is not filed, these agencies will expect to receive annual tax payments and audit the deceased. Even if the person didn’t have enough income to need to pay taxes, a final return still needs to be filed, so tax accounts are closed out. The surviving spouse or executor typically files the final tax return. If there is a surviving spouse, the final income tax return is the last joint return.
The estate should pay any tax liabilities, not the executor. If a refund is due, the IRS will only release it to the estate’s personal representative. An estate planning attorney will know the required IRS form, which will be sent with an original of the order appointing the person to represent the estate.
Income received by the estate after the decedent’s death may be taxable. This tax may be minimal, depending upon how much income the estate has earned after the date of death. There may be significant income in complex cases, and complex tax filings may be required.
If a Fiduciary Return needs to be filed, there will be a strict filing deadline, often based on the date when the executor applied for the EIN or the tax identification number for the estate.
The estate’s executor needs to know of any trusts that exist, even though they pass outside of probate. Currently, existing trusts need to be administered. If there is a trust provision in the will, a new trust may need to be started after the date of death. Depending on how they are structured, trust income and distributions need to be reported to the IRS. The estate planning attorney will help make sure this is managed correctly, as long as they have access to the information.
The decedent’s tax returns may have a lot of information but probably don’t include trust information. If the person had a Grantor Trust, you’d need an experienced estate planning attorney to help. During the Grantor’s lifetime, the trust income is reported on the Grantor’s 1040 personal income tax return, as if there was no trust. However, when the Grantor dies, the tax treatment of the trust changes. The Trustee must now file Fiduciary Returns for the trust each year it exists and generates income.
An experienced estate planning attorney can analyze the trust and understand reporting and taxes that need to be paid, avoiding additional stress on the family.
Reference: The Sentinel (Dec. 3, 2021) “Elder Care: Death and Taxes, Part 1: TTaxesidance for administering a loved one’s estate.”