The death of a love one is a difficult time of grief and change. In addition, settling affairs can be daunting and confusing, and this is no different when it comes to tax considerations. When a taxpayer dies, certain responsibilities fall onto the personal representative (PR). Under state law, a PR is appointed by a court to administer an estate and includes both executors (when the decedent has a will) and administrators (when the decedent does not have a will). The PR will be responsible for collecting the decedent’s property, paying any creditors, distributing assets to beneficiaries, etc. The PR is also responsible for filing any tax returns and paying any taxes owed.
The absence of a will can complicate matters tremendously and severely lengthen the amount of time spent in court, especially depending on the particular laws of the state you are dealing with. So do yourself and your loved ones a favor and set up a will for yourself, if not establish a trust (see an estate lawyer for proper guidance). When there is no probate and no appointed representative, the IRS allows a person charged with the property of the decedent to file the tax returns, pay tax owed and/or claim refunds. Though not specified who this person should be, it is typically the surviving spouse, the trustee of the decedent’s revocable trust, the personal representative nominated in the will or a beneficiary who undertakes the work. The IRS definition of “personal representative” differs from the state definition in that it refers to anyone filing for a decedent, whether or not court appointed.
The PR is responsible for the following returns as necessary:
- Form 1040 – In the year of death, gross income from January 1 to the date of death is reported on the decedent’s return. If there is a surviving spouse, this return is filed as a joint return. If there is no surviving spouse, this return is filed as a final return.
- Form 1041 – This is an income tax return for probate estates and is required if the decedent’s estate receives income over $600 after date of death.
- Form 706 – This is an estate tax return and is required if the value of the estate exceeds the estate tax exclusion or if portability election is made (the exclusion amount for 2019 is $11.4 million).
- Form 709 – This is a gift tax return which is required any time a taxpayer gives more than the annual exclusion to any one person in a year, specifically in the year of death for the decedent (the annual exclusion for 2019 is $15,000).
- State returns for the year of death and any federal or state returns not previously filed also fall under the responsibility of the PR.
While income received before death must be reported on the decedent’s final form 1040, income received after death may need to be reported in the following ways:
- Estate Form 1041 – use to report income in respect of a decedent (IRD) paid to the probate estate, sale of capital assets by the probate estate, etc.
- Beneficiary’s Form 1040 – use to report IRD paid directly to the beneficiary, sale of capital assets after they have been received from the decedent, etc.
It is important to note that a PR may be personally liable for unpaid tax if he or she distributed assets, the estate is insolvent as a result, and the personal representative had notice of the tax claim. PR’s can request discharge from personal liability for estate, gift and income tax after returns are filed. The PR is discharged from personal liability nine months after receipt of the request by the IRS, unless notified of unpaid tax.
On a related note, if you have a loved one who needs full time care and are looking for a way to cover it, selling his/her home is one common way to generate the necessary funds. It may be tempting to quit-claim the house in order to sell it, especially in the case of a parent and child. Take care, however, because there can be much greater tax implications if a home is gifted before death than if it is inherited or sold under the parent’s name. Please consult your tax adviser beforehand.
-Heritage Accounting and Tax Services