Taxes are generally not the first thought on anyone’s mind when someone close has passed away. Ultimately, however, the executor of the deceased’s estate will be charged with ensuring that tax obligations have been satisfied before closing the estate and distributing assets to beneficiaries. Not doing so can lead to the executor and/or the beneficiaries having their own tax problems if the IRS later discovers that estate assets were distributed and the estate closed before tax debts were satisfied in full.
Estate executors should address at least three tax concerns:
- Income taxes of the deceased,
- Income taxes of the deceased’s estate, and
- Estate taxes of the deceased’s estate.
Before the estate is closed, all required federal and state income tax returns should be filed and any associated taxes paid. The form for filing federal individual income tax returns is Form 1040. The deceased’s estate may also have its own tax filing requirements. While the estate remains open, it may have taxable activity to be reported by filing federal Form 1041. Additionally, for some individuals, the size of their estate and/or certain gifts made during their lifetime will trigger an estate tax. The estate tax is based on asset values rather than income. The related federal filing is made via Form 706. It’s possible that an executor may need to address all three of these filings, among others.
It’s not uncommon for an executor to be unacquainted with the deceased’s tax situation and to be unsure of how best to proceed. A knowledgeable tax advisor can assist in a variety of ways such as by contacting the IRS to ascertain the status of the deceased’s tax account, resolving tax issues the deceased may have had, determining what tax filings are needed, preparing and submitting tax filings, analyzing and communicating the tax impact to beneficiaries, and so on.