Estates & Trusts

Losing a loved one is a very emotional, stressful time for the surviving family members.  The last thing they’re thinking of is taxes. Unfortunately, one or more people are tasked with taking care of the decedent’s affairs, and this is not a simple process.  It is best that you get a good estate attorney who can help you get the process going and ensure you do everything you need to do to liquidate a decedent’s estate.   Here is some helpful information to guide you in the process: 

Understanding Probate and Its Importance

When a person dies, if a trust was not set up, the probate process begins.  Probate is the formal legal process that gives recognition to a will and appoints the executor or personal representative who will administer the estate and distribute assets to the intended beneficiaries. 

Locating and Reviewing the Will or Trust

Make sure you find the will (or trust if one was set up).  This document does many things, such as appointing the executor or trustee (usually a close family member but not always), instructing who the beneficiaries are and what they get, and what is in the estate.  It also outlines any bequests that may take place before the beneficiaries receive what is called the “residuary estate,” which is what is left after those bequests.  The will or trust will also outline the responsibilities of the trustee or executor as well as outline who the successors are in case any of them pass away. 

Applying for an EIN and Understanding Estate Taxes

The Executor or Trustee will need to apply for an EIN with the IRS.   The estate becomes an entity in and of itself for tax purposes.  Typically, the EIN letter (SS-4) will state that if using a calendar year, the estate tax return (Form 1041) must be filed by April 15th.  But depending on the date of death, it may be decided that a fiscal year is beneficial, where in that case, the return must be filed by the 15th day of the fourth month following the end of the tax year. 

Transferring Assets to the Estate

Once the EIN is received, the process begins on transferring assets from the decedent to the estate.  This includes all cash, investments, real estate, etc.  

Need More Information? 📞

Filing Tax Returns and Allocating Income

The executor or trustee will then have two tasks to complete: 

  1. File the decedent’s final individual tax return 
  • Note that if the final 1040 indicates a refund due, the return will need to be paper filed for refunds going to someone other than the deceased taxpayer.

2. File the estate tax return if any of these requirements are met: 

  • Any taxable income 
  • Gross income of more than $600 (regardless of taxable income) 
  • Any beneficiary is a nonresident alien 

Remember that income must be allocated properly.  If done correctly, the fiduciary should receive tax docs under both the decedent’s social security number and also the EIN of the estate, which makes it easier for tax reporting purposes.  The reason why a fiduciary might elect to use a fiscal year for the tax year is to be able to allocate as much income as possible to the decedent’s final tax return because the tax is less than via the estate, thereby not penalizing the beneficiaries.  Trusts reach the highest marginal tax rates at much lower thresholds than individuals, so it is crucial to receive the best legal and tax advice possible.  The goal is to push income out of the estate to the beneficiaries and not be what is called “trapped in the estate,” where the taxes could be more unfavorable if paid by the estate. 

Handling Estate Tax Returns and Distributions

Once the estate tax return is prepared, the best case is that a “first and final” estate return is filed, where the estate is fully liquidated by the end of the first tax year.  In that case, the estate will not pay the taxes, but the beneficiaries will pay them, and their share of the estate’s income will be reported to them on a K-1 for the individual returns.  In many cases, the estate will not be able to liquidate the estate in the first year, and if no distributions were made, the estate will pay the taxes, not the beneficiaries.   If early distributions are made, a proportionate share of the income will be reported on the K-1s.   Typically, estates should not be kept open for more than two tax years except for special circumstances. 

Seek Professional Assistance from Manay CPA

Need help? Manay CPA is here to make the tax preparation process easy for you! 

Our team of experienced professionals understands the importance of preserving your loved one’s legacy while minimizing tax burdens. Contact us at 404-900-1040 or visit our website for further assistance. 

Need More Information? 📞
Manay CPA Expert Authors
Author Avatar

Manay CPA is a reputable, full-service CPA firm based in Atlanta, Georgia. Founded in 2001, we provide comprehensive accounting and tax solutions to individuals and businesses across all 50 states.

Leave a Reply

Your email address will not be published. Required fields are marked *