When a loved one dies, the resulting tax issues must be handled. The person to handle these issues is typically identified in the decedent’s will as executor of the estate. However, if there is not a will, the probate court will appoint someone to be the administrator.
An executor has two basic functions. The first is to marshal the assets of the estate. That is the executor must locate and document the assets. The executor must also then distribute the assets. This is actually three functions in one.
The executor must pay the debts of the deceased out of the estate assets, pay the taxes and then distribute the remainder to any heirs. Many new executors get tripped up on the taxes as they do not know what taxes need to be paid. Problem: the executors may be held liable for any tax deficiencies owed by the estate.
The Wills, Trusts & Estates Prof Blog recently published a helpful list of taxes for estate administrators titled "Tax Issues When Closing an Estate."
Here are some of the practical pointers included in this list:
- Filing a final 1040 - An income tax return needs to be filed for the last tax year the deceased was alive. This should cover the period from January 1 until the date of death.
- Filing the estate's income tax returns - If the estate earns money after the deceased passes away, the estate is responsible for paying income taxes on that money.
- Filing an estate tax return - If any estate tax is due, then an estate tax return must be filed.
- Miscellaneous - Many estates have several other tax issues to deal with that executors should consult with experts about.
If you are administering an estate and have any questions about taxes, see an experienced attorney about what you need to do. The fees for the attorney are a legitimate estate expense and can protect you from liabilities flowing from your role as executor.
Reference: Wills, Trusts & Estates Prof Blog (February 17, 2015) "Tax Issues When Closing an Estate."