Death and Taxes

The death of a love one is a difficult time of grief and change. In addition, settling affairs can be daunting and confusing, including tax consequences. 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.

Though it may sound daunting, creating a will can be much easier than you may think. Most states only require the will to be declared and signed by the yourself (and spouse, if married), then signed by two witnesses. It can even be handwritten. Check your state to account for any differences.

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.

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.

None of this should be construed as legal or even tax advice. For those, you will need to consult your lawyer and/or tax adviser. Your situation is unique and will require certain considerations, so let an expert guide you in the best path possible.

Thank you!


-Heritage Accounting and Tax Services