After an individual’s death, his or her assets will be gathered, affairs settled, debts paid, tax returns filed and assets distributed as directed by the deceased’s Will and/or Trust or if those documents do not exist as provided by Massachusetts intestate law. Don’t neglect the importance of taxes and filing tax returns after death. The Personal Representative (formerly Executor) of the deceased’s estate may be responsible for filing a number of tax returns. Here are five things to keep in mind with respect to taxes after a death.
- A Personal Representative must file the deceased’s final income tax return for the year of death and prior year returns that have not been filed. The deceased’s final income tax return will reflect income earned or received by the deceased from January 1 of the year of death through the date of death.
What should you do if the deceased failed to file tax returns in the years before his or her death? It is not uncommon for a deceased person who was ill for the last years of his or her life to have failed to file his or her income tax returns. It is important for a Personal Representative to investigate whether required returns have been filed and be certain about a decedent’s income tax liabilities. A Personal Representative who distributes estate assets and fails to pay income taxes owed by the deceased will be personally liable to pay those taxes.
- A Personal Representative may be required to file a Massachusetts estate tax return if the value of the estate assets exceeds $1 million. A deceased’s estate includes all assets that he or she owned and controlled, whether held in his or her individual name, jointly with others, or in a revocable trust, and includes life insurance proceeds and retirement assets. If the estate’s assets exceed $1 million, tax is computed on the entire value of the estate. Tax is not payable on assets passing to a spouse or to charity. Don’t forget the deadline for estate tax returns. The filing deadline for estate tax returns is 9 months after death. A Personal Representative who distributes assets and fails to pay estate taxes owed will be personally liable to pay those taxes.
- A Personal Representative may have to file a federal estate tax return if the value of the estate assets exceeds the federal estate tax exemption ($11.4 million for 2019). Even if the value of the estate does not exceed the federal estate tax exemption amount, a federal estate tax return should be filed if the decedent is survived by a spouse so that the deceased’s unused exemption can be used by a spouse at his or her death. The filing deadline for the federal estate tax return is 9 months after death.
- A Personal Representative and Trustee may have to file fiduciary income tax returns for an estate or a trust, respectively. An estate is a taxpayer and must obtain a tax identification number and file a fiduciary income tax return for the estate if income is earned on estate assets or received during the administration of the estate. A revocable trust becomes irrevocable after the death of the trust creator and must obtain a tax identification number at that time and file a fiduciary income tax return for all income earned by trust assets after the death of the creator. Filing deadlines for estate or trust fiduciary income tax returns depend on whether the estate or trust elects to file its tax return on a calendar year basis (ending in December) or a fiscal year basis (rolling 12 months from death). In both instances, the fiduciary income tax return is due 4.5 months after the end of the tax year elected.
- Income tax planning opportunities exist for estates and trusts and beneficiaries because they may not be in the same income tax brackets. The highest income tax brackets for estates and trusts apply at low levels of income, while the highest income tax brackets for individuals apply at high levels of income. For this reason, timing distributions from an estate or trust to its beneficiaries can save money. Beneficiaries pay income tax on any estate or trust income distributed to them in any tax year at personal rather than fiduciary income tax rates. It is important to work with an estate planning attorney to maximize your planning efforts and understand the tax implications and responsibilities of a deceased trust and estate.
Natalene B. Ong, Esq. is an estate planning attorney at Samuel, Sayward & Baler LLC, a law firm in Dedham that focuses on advising clients in estate planning, special needs planning, estate and trust administration and elder law. 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.
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