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Filing Taxes for a Deceased Family Member

When a financially comfortable loved one departs, a bevy of tax issues can come into play.

If you are the executor of a loved one’s estate, and if they were well-off, there are several tax issues that you’ll need to deal with. The article “How to file a loved one’s taxes after they’ve passed away” from Market Watch gives a general overview of estate tax liabilities.

Winding down the financial aspects of the estate is one of the tasks done by the executor. That person will most likely be identified in the decedent’s will. If the family trust holds the assets on behalf of the deceased, the trust document will name a trustee. If the person died without a will, also known as “intestate,” the probate court will appoint an administrator.

The executor is responsible for filing the federal income tax for the decedent’s estate, if a return needs to be filed. Income generated by the estate is taxed. The estate’s first federal income tax year starts immediately after the date of death. The tax year-end date can be December 31 or the end of any other month that results in a first tax year of 12 months or less. The IRS form 1041 is used for estates and trusts and the due date is the 15th day of the fourth month, after the tax year-end.

For example, if a person died in 2019, the estate tax return deadline is April 15, 2020, if the executor choses the December 31 date as the tax year-end. An extension is available, but it’s only for five and a half months. In this example, an extension could be extended to September 30.

There is no need to file a Form 1041, if all of the decedent’s income producing assets are directly distributed to the spouse or other heirs and bypass probate. This is the case when property is owned as joint tenants with right of survivorship, as well as with IRAs and retirement plan accounts and life insurance proceeds with designated beneficiaries. 

Unless the estate is valued at more than $11.2 million for a person who passed in 2018 or $11.4 million in 2019, no federal estate tax will be due.

The executor needs to find out if there were large gifts given. That means gifts larger than $15,000 in 2018-2019 to a single person, $14,000 for gifts in 2013-2017; $13,000 in 2009-2012, $12,000 for 2006-2008; $11,000 for 2002-2005 and $10,000 for 2001 and earlier. If these gifts were made, the excess over the applicable threshold for the year of the gift must be added back to the estate, to see if the federal estate tax exemption has been surpassed. Check with the estate attorney to ensure that this is handled correctly.

The unlimited marital deduction privilege permits any amount of assets to be passed to the spouse, as long as the decedent was married, and the surviving spouse is a U.S. citizen. However, the surviving spouse will need good estate planning to pass the family’s wealth to the next generation, without a large tax liability.

While the taxes and tax planning are more complex where significant assets are involved, an elder law attorney can strategically plan to protect family assets, when the assets are not so grand. Estate planning is more important for those with modest assets, as there is a greater need to protect the family and less room for error.

Reference: Market Watch (June 17, 2019) “How to file a loved one’s taxes after they’ve passed away”

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