If you have been appointed to administer the estate of a loved one, you may be confused about the need to file, or why you must file an income tax return on behalf of the estate. The short answer is that the deceased may continue to receive income following his or her death. For example, income from a business, rental property or even interest from bank accounts and dividends from stocks or mutual funds, which the Internal Revenue Service (IRS) considers as income to the estate.
You should understand that income tax is different from estate taxes. Income tax is based on the amount of the income being made by the estate. Estate taxes are based on the value of the estate itself.
The income that is received by the deceased’s estate from the time of death to the time all assets and property are distributed to the beneficiaries must be reported to the IRS. The report must be submitted to the IRS on the Fiduciary Income Tax Return or Form 1041. Assets that are received directly by beneficiaries from the decedent should be claimed on that beneficiary’s individual income tax return. The same is true for property that does not remain in the decedent’s estate for long before they are transferred to the beneficiary.
If you want to avoid the fiduciary income tax, some or all of the assets must be transferred to the beneficiaries before the end of the first tax year. Also, if the assets are transferred before they earn sufficient income to report, the estate will not hold the property long enough to earn income. There are several strategies to consider to determine the best method for managing income tax responsibilities in the estate. Property that is held in a trust or in joint tenancy is typically distributed quickly in order to reduce the tax consequences. Of course, if the probate process is stalled by legal complications or other issues, the distribution of the assets is put on hold. This means that the estate could hold the assets for a period of time that allows it to earn income and results in an estate income tax return being required.
Managing the tax issues resulting at the death of someone is complicated and requires an experienced estate planning attorney with knowledge in tax matters for estates and trusts.
The Astill Law Office has provided high quality legal services for over 30 years. We specialize in wills, trusts, estate planning, and asset protection. If you have any questions about creating a Trust, Will, or estate planning in general, contact The Astill Law Office at 801-438-8698.