"Don’t Dead People Get Tax Breaks?"

A person sitting at a desk with documents, a pencil, a calculator, and a laptop sitting on it. They are using the laptop and calculator at the same time.

Most individuals are required to prepare and file income tax returns (Form 1040) during their lifetimes. Upon the death of an individual, their estate essentially becomes a new entity. A personal representative or executor may be appointed to administer the estate, which includes the inventorying of the decedent’s assets.

The personal representative or executor, as appointed by the court, has the fiduciary duty to collect, preserve, and distribute the decedent’s estate to the beneficiaries. Another fiduciary duty includes attending to the various tax returns for the estate.

How to Handle Income Tax Liabilities On Behalf of Deceased Individuals

After an individual passes away, their estate becomes a new entity that may accrue income after the decedent’s date of death. Therefore, a new tax identification number for the estate must be obtained to report the post-death income, as well as any deductions incurred during the estate’s administration. The decedent’s estate, in and of itself, has the following tax liabilities to deal with:

  1. Final Individual Income Tax Return (Form 1040) – This tax filing covers the period of January 1 to the date of the individual’s death.
  2. Gift Tax Returns (Form 709) – This is only necessary if the decedent made any gifts over and above the gift tax exclusion amount (for 2023, the gift tax exemption level is $17,000 per individual). The gifts must have been made and the gift checks deposited before December 31 in a calendar year.
  3. Estate Tax Returns (Form 706) – These are due nine months from the date of the individual’s death.
  4. Fiduciary Income Tax Returns for Estates and Trusts (Form 1041) – This is only necessary if the estate or trust earns income of $600 or more from the assets held in the estate and trust.

How We Handled Estate Tax Returns for a Client

The situation began when we received notification from a financial advisor that an estate’s income tax return was needed. To begin preparing the tax return(s), we reviewed the information provided by the financial advisor.

After reviewing the tax return(s), we determined that the decedent’s gross estate valuation (date of death valuation of all assets in which the decedent held an interest in, whether individually, jointly, held in Trust, or listing a beneficiary designation) was over the Minnesota Department of Revenue’s Estate Tax Exemption amount, which for 2023 is set at $3 million (the 2023 federal estate tax exemption level is $12.92 million). This meant we would be diving into the other various tax returns that may be required when administering a decedent’s estate.

Our focus for the estate, as instructed by the financial advisor and upon review of the decedent’s asset information as provided, was the Estate Tax Returns. That is because we knew that it would take a long time to gather and input the date of death valuation information for each asset, such as certified appraisals, date of death valuation reports, copies of the estate planning documents, partnership and corporate documents, and bank and investments statements covering the date of death.

Taking a snapshot of the decedent’s life and assets is a key part of the preparation of the Estate Tax Returns. Once we obtained all the date of death valuation reports, appraisals, and document verifications, we began preparing the Estate Tax Returns for the estate.

However, because we were just shy of one week from the nine-month filing deadline from the decedent’s date of death, we also immediately filed the automatic extension of time to file a return (IRS Form 4768 Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes.

That led to putting the income tax return for the estate on the back burner for the time being. Once the Estate Tax Returns were filed, our attention then returned to the estate’s income tax return filing requirement. It was at that time when our client said, “Don't dead people deserve to get some sort of standard deduction too?”

As you can see, the administration of an estate and/or trust includes several tax returns to be reviewed to ensure that the personal representative is covering all the tax liabilities for a decedent. The question as to whether dead people deserve to get a standard deduction is noteworthy and bewildering at the same time.

As outlined earlier, the various tax returns for an estate includes estate, gift, and income taxes. However, if decedents and their estates have no tax liabilities, filing those tax returns will be unnecessary. Decedents and their estates may not have tax liabilities if:

  1. The decedents never made any taxable gifts over the exemption level during their lifetime.
  2. The decedents have a gross estate valued under the estate tax exemption levels (both federal and state).

In addition, if the income accrued post-death on the assets held by the decedents is under $600, then the decedents and their estates may have no tax liabilities.

To Learn More, Schedule an Initial Consultation with Our Experienced Probate Attorneys in Eagan Today

Making the commitment to crafting a legacy plan is so significant when discussing the administration of an estate or trust. That is because estate planning involves reviewing and planning for tax consequences upon death as well. A well-laid out estate plan can lessen the stress of tax obligations involved in the administration of an estate or trust.

At Kennedy & Ruhsam Law Offices, P.A., our probate, trust, and estate lawyers provide professional fiduciary services in the probate and trust administration arena. Our firm has extensive experience in preparing and filing the various tax returns for every probate and trust administration matter that arrives at our law firm’s door.

For more information about Kennedy & Ruhsam Law Offices, P.A., check out our clients’ reviews.

To schedule an initial consultation with our estate, probate, and trust legal team in Eagan, MN, give us a call at (651) 369-7749 or contact us online today.