Tax Responsibilities After Someone Dies (Part 2)

After a loved one dies, there are a number of tax requirements that must be taken care of. In a previous article, we described one of the first tax-related duties of an estate executor or administrator — making sure the decedent’s final income tax return is filed for the year of death.

More Miscellaneous Details If an estate must file income tax or estate tax returns, a federal employer identification number (EIN) must be obtained from the IRS. You should open a checking account in the name of the estate with some funds transferred from the decedent’s accounts. The bank will ask for the estate’s EIN. Use the new account to accept deposits from income earned by the estate and to pay expenses — such as outstanding bills, funeral and medical expenses, and, of course, taxes. Finally, state income tax returns and perhaps a state estate tax return will have to be filed.

Here are the rest of the tax-related duties:

File the Estate’s Income Tax Returns. Immediately after death, the decedent’s estate may take over ownership of some or all of the decedent’s assets. If so, the estate will be taxed on its income under complicated IRS guidelines applicable to trusts.

Important distinctions: We are talking about income taxes for the estate, not the final income taxes of the decedent. And the federal estate tax is an entirely different subject.

Small estates (with gross income under $600) aren’t required to file income tax returns. If you’re in charge of an estate that must file, get professional help to assist you with this onerous chore because the tax law is very complex.

File the Estate’s Estate Tax Return. The federal estate tax return is filed on Form 706. Assuming the decedent didn’t make any sizable gifts before dying, no estate tax is due, and no Form 706 is required, unless the federal estate tax exemption is exceeded which is $11.18 million in 2018 (up from $5.49 million for 2017).

By sizable annual gifts, we mean in excess of $15,000 to a single recipient (up from $14,000 in 2017). If sizable gifts were made, the excess over the $15,000 threshold is added back to the estate to see if the federal estate tax exemption threshold was surpassed.

Form 706 is due nine months after death, but the deadline can be extended up to six months. Remember: While life insurance proceeds are generally free of any income tax, they are usually included in the decedent’s estate for estate tax purposes — even if the money goes directly to policy beneficiaries. In fact, life insurance proceeds are the most common cause of unexpected estate tax bills. One other very important point: assets inherited by a surviving spouse are not included in the decedent’s estate, as long as the surviving spouse is a U.S. citizen. This is called the unlimited marital deduction privilege and it’s the most common reason why many large estates don’t owe any federal estate tax.

If you’re the executor of a substantial estate, consult with your attorney even if you think no estate tax is actually due. If you’re correct, the cost to confirm your conclusion will be minimal. If you’re wrong, filing Form 706 is generally a complicated matter and you may need professional assistance. Also, an experienced estate attorney may be able to find perfectly legal ways to substantially reduce the tax bite or even make it disappear.