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  • Writer's pictureJeremy Springer

Death & Taxes

We've all heard the joke: What are the two things guaranteed in life? Death and taxes. What many of us never consider is what does happen with taxes when a loved one passes away. While every estate and process is unique, there are some common returns that need to be filed, a responsibility that does fall on someone.



Personal Representative

Under most state laws, a personal representative is the person appointed by the court to administer an estate. The term includes both executors (appointed when the decedent has a will) and administrators (appointed in the absence of a will). A personal representative nominated in a will has no authority over estate assets unless appointed by the court. The probate court will issue Letters Testamentary (called Letters of Administration or Letters of Representation in some states) authorizing the personal representative to act on the decedent’s behalf to handle his or her tax returns and other matters.


Duties of Personal Representative

Specific duties depend on the size and complexity of the estate and state law. In general, you will work with estate’s attorney, the decedent’s family, and other parties to perform duties such as:

  • Obtain the original will, codicils, and trust agreements.

  • Obtain names, addresses, and SSNs for all beneficiaries.

  • If necessary, start the probate process and obtain court appointment as Personal Representative.

  • Obtain an EIN for the estate by filing Form SS‑4, Application for Employer Identification Number (EIN). You can obtain the EIN immediately at www.irs.gov.

  • Open an estate checking account using the EIN assigned to the estate. Close all checking accounts in the name of the decedent. Use the checking accounts ledger or other means to list each deposit or payment.

  • Have mail related to the estate forwarded to you.

  • Ensure that the Social Security Administration is notified of the death to stop payment. As necessary, see that direct deposits in the month of death are withdrawn or checks are returned.

  • If the decedent held any life insurance policies, notify the company of the death.

  • Notify health insurance providers of the death.

  • Notify employer(s) of the death.

  • Identify and value the decedent’s assets and liabilities. Prepare an inventory for filing with the court in the case of probate. Arrange for appraisals as required.

  • Manage the assets by:

    • Depositing all funds received by the estate,

    • Paying bills as they come due. Sell property in order to pay bills. Consult with an attorney in the event that estate assets are insufficient to pay bills and claims.

    • Paying specific gifts listed in the will.

    • Reinvesting excess assets in secure short-term assets. – Keeping track of estate expenses paid by the personal representative.

  • • Protect assets by:

    • Keeping insurance coverage on the decedent’s car(s) and home(s) up to date.

    • As necessary see that normal maintenance is performed on home(s) owned by the estate.

  • Notify creditors through the probate process and/or directly by mail.

  • Prepare an inventory listing the date-of-death value of all assets owned by the decedent.

  • Prepare a final account listing all assets received and expenses paid during the estate administration. Obtain approval of beneficiaries and the probate court (if necessary).

  • Close out the estate after the final account has been filed and estate tax clearance received (if necessary) by distributing checks to beneficiaries and obtaining signed receipts from the beneficiaries.


No Court-Appointed Representative

When there is no probate and no appointed representative, the IRS will allow a “person in charge of the decedent’s property” to file the decedent’s income tax returns and claim refunds. IRS written guidance does not specify who this person should be. If there is a surviving spouse, he or she usually files a joint final Form 1040 and any other required returns. If there is no surviving spouse, the person who files is commonly:

  • The trustee of the decedent’s revocable trust,

  • The personal representative nominated in the will who would have been appointed if probate was required, or

  • A beneficiary receiving non-probate assets who undertakes the work.


The IRS uses the term “personal representative” to refer to anyone filing for decedent, whether or not court appointed.


Decedent’s Tax Returns

The personal representative is responsible for the following returns when required.

  • Form 1040. Final return for year of death (gross income of a decedent from January 1 until the date of death is reported on the decedent’s final income tax return).

  • Form 1041. Income tax return for the probate estate (required if income greater than $600 is received after death by the decedent’s estate).

  • Form 706. Estate tax return (required if decedent’s estate exceeds the estate tax exclusion ($13,610,000 in 2024) or if portability election is made.

  • Form 709. Gift tax for year of death (required if the decedent gave more than the annual exclusion ($18,000 for 2024) to any one person in the year of death or failed to file any prior year gift tax returns).

  • Returns not filed by the decedent for prior years—Form 1040, Form 1040-X, or Form 709.

  • State income tax and estate tax returns. Some states do not have an estate tax, but several states have annual estate tax exclusions that are significantly less than the federal exclusion.


A personal representative may be personally liable for unpaid tax if he or she distributed assets, the estate is insolvent as a result, and the personal representative had notice of the tax claim.


Notice of Fiduciary Relationship

The personal representative must notify the IRS of the fiduciary relationship. Form 56 can be used for this purpose. File separate forms for the decedent and estate. Form 56

can also be used to notify the IRS of a change in fiduciary or termination of fiduciary relationship.


Prompt Assessment

Form 4810 can be filed to shorten the statute of limitations for tax returns from three years to 18 months. File Form 4810 separately after the returns are filed. Prompt assessment can be requested for Forms 1041 and Form 1040, including returns filed by the decedent. Prompt assessment cannot be requested for federal estate tax.


Discharge From Personal Liability

Personal representatives can request discharge from personal liability for estate, gift, and income tax after returns are filed. The personal representative is discharged from

personal liability nine months after receipt of the request by the IRS, unless notified of unpaid tax.


Fees

All personal representatives must include in their gross income any fees paid to them from an estate. Generally, a taxpayer is not in the trade or business of being an executor

and will report these fees as Other Income on Form 1040.


Income in the Year of Death

Report income actually or constructively received by the decedent before death on his or her final Form 1040. Report income received after death on the return of the recipient.

  • Report income from probate assets on Form 1041.

  • Report income from non-probate assets on the tax return of the beneficiary, surviving joint tenant, or successor who received the asset.


Example: Gene died in 2024. His will leaves all of his property to his wife, Kelly. Gene had the following assets:

  • House, bank accounts, and vehicles owned jointly with Kelly.

  • Brokerage account in Gene’s name alone.

  • Life insurance and 401(k) that name Kelly as beneficiary.

  • IRA that names Gene’s adult son, Emmett, as beneficiary.

  • Unpaid wages.


Gene’s only probate assets are the brokerage account and unpaid wages. All other assets are paid to a surviving joint tenant or beneficiary and bypass probate. Income is reported as follows:

  • All income received before death is reported on Gene’s final Form 1040.

  • After-death earnings on the brokerage account and the wages paid to the estate are reported on Form 1041. If brokerage assets are sold during probate, the sales are reported on the estate’s Form 1041.

  • Emmett reports taxable income from the inherited IRA on his Form 1040 in the year(s) he receives distributions.

  • Kelly reports taxable income on all other assets on her Form 1040 in the year(s) she receives the income.


It is important to remember that estate attorneys and estate tax preparers are a valued resource when a loved one passes.


 

Legal Disclaimer: This post contains general information for taxpayers and should not be relied upon as the only source of authority. Taxpayers should seek professional tax advice for more information. This information was current at time of posting; we are not responsible for updating this or any blog post/article for subsequent changes in the law or its interpretation.


Certain content on this page is copyright © 2024 Tax Materials, Inc. All Rights Reserved for applicable content. Used with permission.

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