This is the second in this two-article series. Click here to read the first one.
Working with a CPA
With all the tax considerations of being an executor, it’s a best practice to consult with a CPA to determine the scope of the estate’s tax-related obligations. From there, you may find it helpful to engage a CPA for any needed tax filings and tax-related advice as you administer and close the estate. A few thoughts on working with a CPA:
- If you currently work with a CPA for your own tax needs or if the deceased did so, this CPA may or may not be the best fit to help you manage and close the estate from a tax perspective. If this person has done good work for you or the deceased in the past, I recommend approaching them to see if working with estates is in their wheelhouse. If so, this is one less relationship you’ll need to develop while administering the estate. If this type of work isn’t something they feel comfortable handling, they may be able to provide a referral to a trusted colleague. If you don’t have a go-to CPA, ask for a referral from the attorney assisting you with closing out the estate. As attorneys tend to work locally, you’ll likely be referred to a CPA local to the attorney, but know that CPAs aren’t constrained by state boundaries and can assist you regardless of the state in which you live, in which the deceased lived, or in which the deceased had assets.
- I sometimes find that a consultation around tax concerns isn’t sought until after the estate administration process has begun, and sometimes not until the estate is ready to otherwise be closed. Although understandable, this timing generally doesn’t provide any opportunity for tax planning. If possible, bring a CPA onto your advisory team as early as possible to help determine what tax filings are advisable and get them started. Time will be needed to calculate the taxes that may be owed by the estate, time beneficiary distributions to minimize taxes, coordinate an estate closing timeframe with your attorney, advise on IRAs without beneficiary designations, and so on. When having an initial consultation with a CPA about the estate, you may find everything is straightforward – you may even find that you don’t need a CPA’s help at all. On the other hand, you may have a messy situation from a tax perspective, and it’s better to know and address this as soon as possible.
- Keep good accounting records of estate activity. You may already need these for court filings, but your CPA will also need them to identify sources of taxable income and determine if any expenses are deductible on the deceased’s final income tax return or the estate’s income or estate tax returns, etc.
- Unless advised by an attorney to do otherwise, don’t change brokers or close out bank accounts too quickly. Once accounts are transferred, it’s much less likely you’ll be able to obtain information if there are questions or to have tax documents corrected if there are reporting errors.
- In my practice, I find that some executors feel comfortable preparing the deceased’s final 1040. This is usually the case when the executor is a child of the deceased and has been confidently assisting with mom or dad’s finances for a number of years. Most executors, however, feel more at ease having a knowledgeable third-party handle the final personal tax return. I rarely find that an executor feels comfortable preparing other returns, e.g., 1041, 709, 706. As an executor, you are a fiduciary charged with the prudent management of estate assets. It is entirely within your right to obtain outside assistance with tax filing of the deceased and/or estate if doing so is in the estate’s best interest.
Other Tax-Related Considerations
- Executors and beneficiaries may be pursued for a deceased’s income taxes or estate taxes not properly remitted. An executor who takes his or her fiduciaries seriously and retains knowledgeable legal and tax advisors will likely not be overly concerned about this, but it is something of which to be aware.
- There may be various and valid legal and tax reasons that an estate cannot quickly be closed, e.g., locating beneficiaries or planning around IRAs. In this case, you have no choice but to leave the estate open until matters are resolved. However, know that every year the estate is open, there could be tax consequences to the estate and its beneficiaries, as well as related tax return preparation fees.
- For certain types of assets in a deceased’s estate, the tax basis in these assets generally adjusts to the fair market value upon the deceased’s death. As such, consider having date-of-death appraisals prepared for those assets that will step-to market value upon death. This may be a straightforward and inexpensive proposition such as with residential real estate or it may require more time and expense such as with an interest in a closely-held business.
- Consider filing Form 56 with the IRS as you begin administering an estate. This form informs the IRS that you are the estate’s fiduciary and should receive any tax correspondence at your mailing address. Form 56 is then filed a second time as the estate is closed and your fiduciary duties are concluded.
- A few special situations that require further analysis:
- The deceased was not a US citizen
- The estate is insolvent
- The deceased or the estate owned foreign assets or digital currency
While this is a primer on the tax implications for those administering an estate there is so much more that can be said. This article should, however, give executors an idea of what they’re in for, but isn’t a substitute for discussions with legal and tax advisors. If I can help in any way or answer additional questions, feel free to contact me at email@example.com.
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