Death and Taxes

Statesman Benjamin Franklin was famous for his words of wisdom or ‘proverbs’. One of his quotes that is still in frequent use today is, ‘in this world, nothing is certain except death and taxes.’ In the spirit of Ben’s quote, today we review the various tax returns that may need be filed when someone passes away.

The responsibility for timely filing the tax returns and making sure the tax is paid usually falls to the Personal Representative or Trustee. If you have been appointed as the Personal Representative of an estate, or if you are serving as the Trustee of a Trust created by a person who has passed away, it is important to understand the tax filing obligations. Failure to timely file may result in personal liability for late filing penalties and interest on late paid tax.

Final Personal Income Tax Returns

If someone passes away without having filed income tax returns for the prior year, it will be the responsibility of the Personal Representative to file those returns. If there is a surviving spouse and the couple filed joint returns, then the surviving spouse may file a joint return reporting the income of both spouses. The most common federal personal income tax return for U.S. taxpayers is Form 1040. In Massachusetts, individuals and married couples file a Form 1.

In addition to filing for the prior calendar year, if necessary, final state and federal income tax returns will have to be filed to report the income the deceased earned or received in the year of death. If there is a surviving spouse, a joint return may be filed. However, income earned on assets owned by a decedent after the date of death must be reported on a fiduciary income tax return (see below).

What happens if a person is not married at the time of death (so no surviving spouse to file) and there is no court appointed Personal Representative because the deceased did not have any probate assets?   IRS Publication 559 states that in that case, the Personal Representative is “any person who is in actual or constructive possession of any property of the decedent.” That means a family member, for example, who has knowledge of the deceased’s situation may file the final income tax return.

If a deceased person is due a refund, a Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, must be filed with the return. Form 1310 is exceptionally handy when there is no court appointed Personal Representative because it allows for the issuance of the tax refund check to be made payable to the person signing the Form 1310. The person signing the Form 1310 must check the box on the Form stating that he or she (the signer) will distribute the refund in accordance with the deceased’s Will or, in cases where the deceased did not leave a Will, to the deceased’s heirs at law.

The reason this is so useful is that without that option, the refund check will be issued to ‘the Estate of the Deceased.’ For estates where no probate is needed, there is no account opened in the name of the Estate. As such, the check cannot be deposited until a probate is opened and a Personal Representative appointed – this is often a long, and always costly proceeding. In fact, sometimes the cost of probate may exceed the amount of the tax refund. Form 1310 avoids this situation.

Fiduciary Income Tax Returns

If assets were owned in a decedent’s individual name or if the assets were held in Trust, then to the extent the assets earn income following the deceased’s death, that income is reported on a fiduciary income tax return filed by the Personal Representative of the Estate or the Trustee of the Trust. This is a federal Form 1041 and a Form 2 for Massachusetts. This would be the case for example if the decedent owned an investment account, rental property, a business, a bank account, etc. at the time of death. These assets will continue to produce income after the deceased’s death.

Assets that were jointly held, or assets which designate a beneficiary to receive them, pass directly to the surviving joint owner or named beneficiary and income earned subsequent to the deceased’s death is reported by the new owner.

It is not proper to report post-death income under the deceased’s Social Security number, nor should the Social Security number of the Personal Representative or Trustee be used. Once the owner of the revenue-producing asset passes away, the Personal Representative for the Estate or the Trustee of the Trust must obtain a new Taxpayer Identification Number (TIN), sometimes called an Employer Identification Number (EIN), for the Estate or Trust. Revenue produced by the Estate or Trust holdings will be reported under the Taxpayer Identification Number assigned to the Estate/Trust on a fiduciary income tax return.

Estate Tax Returns

An Estate Tax Return (not to be confused with a fiduciary income tax return discussed above) must be filed when the value of a decedent’s assets is more than the allowable exemption amount. For federal purposes the return is Form 706; in Massachusetts this is a Form M706.

In determining the value of the deceased’s estate for estate tax filing purposes, all of the assets that were owned or controlled by the deceased are included. It doesn’t matter whether it is a probate asset or a non-probate asset; if the decedent owned the asset or could control the disposition of the asset, then the value of the asset is part of the deceased’s gross taxable estate. Examples of assets that are includible in the gross taxable estate include real estate, retirement accounts, bank accounts, investment accounts and life insurance if the deceased owned the policy.

For federal estate tax purposes, the exemption amount is $13.61 million per person in 2024. The amount of the federal exemption will automatically revert to $5 million per person, adjusted for inflation, as of January 1, 2026. With the adjustment for inflation, the amount of the exemption is likely to be around $7 million person.

Massachusetts has a $2 million exemption. This means that if the gross estate (i.e., total value before deductions) of a Massachusetts resident’s estate is more than $2 million, a Massachusetts estate tax return must be filed even if allowable deductions mean that there will not be any estate tax payable.

The due date for filing a federal or Massachusetts estate tax return and paying any estate tax owed is 9 months from the deceased’s date of death.

Conclusion

Tax return filing for someone who has passed away can be confusing. Click here for a chart that may help to clarify this. However, if you are serving as the Personal Representative of an estate or Trustee of a Trust created by someone who has passed away, you are responsible for timely filing the relevant tax returns and it is vital that you understand your filing responsibilities to avoid personal liability. If we can help, please contact our office to schedule an appointment to meet with one of our attorneys.

Attorney Suzanne R. Sayward is a partner with the Dedham firm of Samuel, Sayward & Baler LLC which focuses on advising its clients in the areas of estate planning, estate settlement and elder law matters. She is certified as an Elder Law Attorney by the National Elder Law Foundation, a private organization whose standards for certification are not regulated by the Commonwealth of Massachusetts. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney. For more information visit www.ssbllc.com or call 781/461-1020.

April, 2024
© 2024 Samuel, Sayward & Baler LLC

In October 2023, the Massachusetts legislature enacted a long-awaited update to the Massachusetts estate tax law. Although it did not become law until October, the law’s provisions are retroactive, applying to estates of those who died on or after January 1, 2023.

The new law increases the Massachusetts estate tax exemption amount from $1 million to $2 million, meaning that those who die with an estate valued at less than $2 million will not have to pay a Massachusetts estate tax at death. The law also eliminates the so-called “cliff” effect of the prior law, which taxed the full value of an estate if the estate’s value was over the $1 million threshold. Under the new law, the first $2 million of assets are not taxed. The value of the estate over $2 million is subject to tax at rates ranging from 8% to 16% for estates over $10 million.

Here are a few things to consider with respect to your own estate when thinking about whether and how this new estate tax law impacts you and your family.

1.How Do You Determine if Your Estate is subject to the Estate Tax?

The estate tax is a one-time tax, payable nine-months after death, on the value of the assets in your “estate.” For Massachusetts estate tax purposes, your “estate” consists of all of the assets you own or control. This includes bank accounts, stocks, bonds, investment accounts, retirement accounts such as IRAs, 401ks, 403bs, annuities, life insurance which you own on your own life, the cash value of life insurance you may own on someone else’s life, personal property such as automobiles and jewelry, and real estate, whether located in Massachusetts or in another state. The total value of all of these assets is the total value of your estate that would be subject to estate tax at your death. If that number is above $2 million, your estate will need to file a Massachusetts estate tax return and may have to pay estate tax after your death, depending on the deductions available to your estate. Assets left to charity or to a surviving spouse are deductible. For this reason, for most married couples who leave assets entirely to the surviving spouse at the death of the first spouse to die, there is no estate tax payable until the death of the surviving spouse.

2.What if you did Estate Tax Planning Before the New Law?

Under the old law, when the threshold for the Massachusetts estate tax was $1 million, many Massachusetts residents were impacted by the estate tax and incorporated estate tax planning into their estate plan. This type of planning likely included credit shelter trusts which shelter a portion of assets in trust at the death of the first spouse to die for the benefit of the surviving spouse in order to reduce or eliminate the estate tax payable at the surviving spouse’s death. If you created credit shelter trusts before the change in the law, now is the time to sit down with your estate planning attorney and review your plan. It may be that the complexities of an estate plan that shelters assets from estate tax are no longer necessary. However, you may still benefit from such a plan. The manner and extent to which your trusts are funded should be reviewed and updated to make sure you are taking full advantage of the new $2 million credit. Whereas under the old law we were concerned with funding credit shelter trusts with at least $1 million of assets, now we can shelter up to $2 million of assets at the first spouse’s death, so increasing the funding of those trusts appropriately can reduce or eliminate the estate tax payable at the surviving spouse’s death.

3.What if you are a Massachusetts Resident but own Real Estate in another State?

If you are a Massachusetts resident but own real estate in another state, such as a vacation home in Maine, that property is included in the value of your “estate” when determining if your estate is worth more than $2 million and therefore a Massachusetts estate tax return must be filed. The Massachusetts estate tax is calculated on the full value of your estate, including the out of state property. However, your estate will receive a credit against the Massachusetts estate tax for the proportionate share of that tax attributable to the out of state property.

Keep in mind that 12 other states in the country impose a separate state estate tax. If you are a Massachusetts resident and own real estate in Vermont, Rhode Island, Maine, or several other states, you may have an obligation to file an estate tax return and pay estate tax to the state in which that real estate is located following your death.

It is worth noting that some attorneys believe it is unconstitutional for Massachusetts to consider the value of out of state property in computing its estate tax, even if a credit for a proportionate share of that tax is given. The issue is yet to be conclusively determined under the new Massachusetts estate tax law.

It is common practice to transfer real estate owned for investment purposes, especially rental property, to a limited liability company (LLC) for asset protection purposes. Keep in mind that transferring real estate to an LLC converts real estate into a personal property interest (the membership interest in the LLC) which like any other asset will be part of your “estate” for Massachusetts estate tax purposes, and tax will be paid on the full value of that interest.

4.What if you are not a Massachusetts Resident but own Real Estate in Massachusetts?

Massachusetts also imposes an estate tax on non-residents who own real estate in Massachusetts, based on the value that real estate bears to the owner’s total estate. The estate tax is computed as if the non-resident was a resident of Massachusetts. The share of the tax attributable to the value of the Massachusetts real estate is then determined, and this is the amount paid to the Commonwealth as the non-resident estate tax.

5.How Do You Reduce Your Estate Tax Bill?

For those with assets valued at $2 million or more, reducing the estate tax payable by their heirs after death is often a top planning goal. As mentioned above, certain types of trusts such as credit shelter trusts can be used to reduce estate taxes while still allowing control over assets during life. Transferring assets out of your ownership may be appropriate in some cases and if done properly will reduce the value of the taxable estate. This includes gifts that fall under the federal gift tax annual exclusion, which in 2024 permits gifts of up to $18,000 per person per year without the requirement of filing a gift tax return or reducing the giver’s federal estate and gift tax exemption (currently $13.6 million per person, but scheduled to drop to about half that amount if Congress does not extend the increased exemption amount by the end of 2025). Larger gifts of real estate or other assets may be appropriate, whether directly to individuals or to an irrevocable trust. However, an analysis of the benefits of reducing estate tax versus the advantage of your heirs receiving assets with a stepped-up tax basis should be done before gifting appreciated assets. Transferring life insurance to an irrevocable trust is a way to significantly reduce the taxable estate as it removes an asset from tax that the owner does not typically consider an asset during their lifetime, especially if it is term insurance without cash value. Gifts of tuition or medical expenses may be made in an unlimited amount if paid directly to the institutions providing those services. Finally, gifts to charity, whether directly, via retirement accounts, donor advised funds, or in trust, are a way to reduce the estate tax payable at death while benefiting worthy causes.

If you are a Massachusetts resident with a home, life insurance and a retirement account, you may have a taxable estate without realizing it or planning for it. Review your assets and speak with an experienced estate planning attorney to learn about the estate tax your family may have to pay after your death, consider how it will be paid (and whether further planning is needed to avoid the sale of real estate or a business in order to raise funds to pay taxes), and take whatever steps are appropriate for you to reduce the tax to the greatest extent possible. Your heirs will thank you.

Maria C. Baler, Esq. is an estate planning and elder law attorney and partner at Samuel, Sayward & Baler LLC, a law firm based in Dedham. She is also a former director of the Massachusetts Chapter of the National Academy of Elder Law Attorneys (MassNAELA), and the former President of the Board of Directors of the Massachusetts Forum of Estate Planning Attorneys. For more information, visit www.ssbllc.com or call (781) 461-1020. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney.
March 2024
© 2024 Samuel, Sayward & Baler LLC