Filing Taxes for a Deceased Family Member

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 trustee or executor. That person will most likely be identified in the decedent’s trust or 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 or trust, 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 in cases where a return needs to be filed. Income generated by the estate, even after the death of your loved one, is subject to income tax. 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 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 fiscal tax year-end.

For example, if a person died in 2019 and the trustee chooses December 31, 2019 date as the tax year-end, the estate tax return deadline is April 15, 2020. An extension is available, but it’s only for five and a half months. In this example, an extension could be granted for 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 or trust administration. 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.

The trustee also needs to keep in mind transfer tax issues, such as the estate tax and the gift tax. For recent years, this is not as much of a concern because no federal estate tax will be due unless the estate is valued at more than $11.2 million for a person who passed in 2018 or $11.4 million in 2019.

However, the trustee also 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.

Whether or not a person died leaving property to a spouse also impacts whether or not tax will be due. 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 tax consequences and tax planning strategies are more complex where significant assets are involved, an estate planning attorney can strategically plan to protect family assets, when the assets are not so grand. In fact, 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”

Gifting While You Can See the Impact

There are many advantages to making gifts to people or organizations, while you are still living, rather than do all of your gifting through your will, reports Tri-County Times in the article “Giving while living.”

Among the reasons is that annual gift-giving can be used to reduce estate taxes. Today’s annual tax break for gifts to individuals is $15,000, which is separate from the lifetime exclusion of $11.4 million per person. Married couples can shield $22.8 million.

Remember that you can give more than $15,000 as a gift, but you have to know the limits. It’s easy to go over this without needing to pay taxes on the gift, but you may need to file a gift tax return. Speak with your estate planning attorney about the limits and when a gift tax return needs to be filed.

You can also make gifts to reduce the size of your estate, without using your lifetime gift and estate tax exclusion, if you want to make certain gifts. Be certain to follow the rules and to pay the institutions directly, and not to the person.

  • Pay medical bills for another individual—pay the health care facility directly;
  • Pay tuition bills for a student—pay the educational institution directly; and
  • Make a charitable contribution to an exempt organization.

Funding 529 accounts is a wonderful way to help the next generation achieve higher education, although those funds can now be used for other qualified educational expenses. There is a $15,000 annual gift limit, but you can bundle five year’s worth of $15,000 gift tax exemptions into an initial $75,000 contribution to one student’s 529 account.

Note that if you die in the five years after making the gift, a prorated amount of your gift will be put back into your estate, but only for tax purposes. The money remains in the 529 account.

Not all gifting is about taxes or inheritances. Special trips with the family make memories across generations and create strong family bonds. Create a vacation with more meaning than a theme park. If the family loves the outdoors, consider a long week in a nature preserve or spend a week volunteering with a reputable charitable group.

Talk with your estate planning attorney about how gifting can fit into your estate plan, while you are still around to enjoy seeing its impact. While you’re doing that, make sure your estate plan is up-to-date and that includes beneficiary designations. Check on how assets are titled and if trusts have been funded. Then, go plan a memorable family vacation.

Reference: Tri-County Times (April 25, 2019) “Giving while living”