Tax Considerations When Handling
Someone Else's Estate- Part 2

Grieving the loss of a loved one is painful and overwhelming. Ideally, settling their finances doesn't add to that emotional burden. That's why we have written this two-part series to help guide you through this delicate time. 

To read part one of this series, click here.

What Is Your Role?

To continue in this series and refresh your memory, let's discuss your role as executor of the estate.

When a loved one passes away, someone must handle the resulting financial fallout, including the tax issues. 

That person may be identified in the “decedent’s” (deceased individual’s) will as the executor of the decedent’s estate. 

If there is no will, the probate court will appoint an administrator. In either case, it’s often the surviving spouse or another family member who takes on the responsibility.

If that's you, your role as the executor is to identify the estate’s assets, pay off its debts, and distribute the remainder to the rightful heirs and beneficiaries. 

You are also responsible for filing any necessary tax returns and arranging to pay any taxes

File Estate’s Federal Income Tax Return (Form 1041)

You, as the executor, are also responsible for the estate’s federal income tax return.  After the decedent has passed away, income generated by his or her holdings now belongs to the estate, and that income does not escape the clutches of good ol’ Uncle Sam. 

The estate’s initial federal income tax year begins immediately after the decedent’s death. The tax year-end can be December 31 or the end of any other month that results in an initial tax period of 12 months or less. 

File the return on Form 1041 (U.S. Income Tax Return for Estates and Trusts). The due date is the 15th day of the fourth month after the tax year-end (adjusted for weekends and holidays). So, for a decedent who died in 2020, the filing deadline for the estate’s 2020 federal income tax return is April 15, 2021, assuming you choose the standard December 31 tax year-end for the estate. 

You won’t need to file Form 1041 when all the decedent’s income-producing assets bypass probate and go straight to the surviving spouse or other heirs by contract or by operation of law. For example, this is what happens with:

  • real property that is owned by joint tenants with right of survivorship, 
  • qualified retirement plan accounts and IRAs that have designated account beneficiaries, and
  • life insurance death benefits that are paid directly to designated policy beneficiaries.   

File Estate’s Federal Estate Tax Return (Form 706)

File the federal estate tax return on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Assuming the decedent did not make any sizable gifts before passing away, no federal estate tax will be due and no Form 706 will be required, unless the estate is valued for federal estate tax purposes at more than $11.58 million for a person who died in 2020.

If such sizable gifts were made, the excess over the applicable threshold for the year of the gift is added back to the estate to see whether the estate tax exemption is surpassed. If it is, there is a 40 percent federal estate tax on the excess. Form 706 is due nine months after the decedent’s date of death, but you can extend the filing deadline for up to six months by submitting Form 4768 to the IRS. 

Planning Point

If you choose to extend, we recommend that you send Form 4768 by certified mail, return receipt requested. 

Losing a loved one is painful enough without the responsibility of settling their estate. We hope that this two-part series has helped to lighten the load of those acting as estate executors.

Would you like to discuss the settling of an estate, or some other tax topic? Click here to schedule an appointment with one of Gold Standard's seasoned tax accountants.

    Contact us: 
    [email protected] | CA (760) 888-6247 | NY (845) 237-4060

    Copyright © Gold Standard Tax & Accounting. All Rights Reserved.