Losing a loved one is never easy. In addition to grieving their loss, there is also the added responsibility of managing the deceased person’s affairs or estate. This can be especially burdensome if you are named as their executor, personal representative, or trustee.

When administering an estate and acting on behalf of a loved one, there are several moving parts to consider. These include paying final expenses, ensuring that final legal and tax requirements are met, and managing the distribution of assets.

A qualified attorney can assist with required legal filings, such as opening a probate estate or retitling assets.

When it comes to required tax filings, a final individual return and an estate or trust return (or both) are often required. Common tax returns required after death are summarized below. Consult with a qualified tax preparer to see how they may apply to your situation.

Final Individual Return (Form 1040)

An individual’s final income tax return reports income received during the year up to their date of passing. If married, a joint return can be filed and signed by the surviving spouse. If someone else has been appointed as personal representative or executor, they should sign the return. If a refund is due, make sure to include Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer.

Estate Income Tax Return (Form 1041)

An estate return is filed to report income received after death. This form is generally required if the individual’s estate received gross income of $600 or more after their death, or there is a beneficiary who is a nonresident alien. In order to report income received after death, the executor must first apply for a tax ID number for the estate, also called an employer identification number or EIN.

In general, an estate’s gross income is determined in the same manner as an individual, with similar deductions. If distributions (other than bequests of specific dollar amounts) are made to beneficiaries, a Form K-1 is usually generated to pass estate income to individual beneficiaries. If no distributions are made, the estate generally pays tax on income earned.

Trust Income Tax Return (Form 1041)

If the decedent had a revocable living trust at their passing, the trust usually becomes a separate irrevocable entity at their death and will require a unique tax ID number (EIN), if not already obtained. A trust income tax return is generally required if there is any taxable income for the tax year, gross income of $600 or more, or a beneficiary who is a nonresident alien.

Like an estate, if distributions (other than bequests of specific dollar amounts) are made to beneficiaries, or if the trust document requires income to be paid to a beneficiary, a Form K-1 is usually generated to pass trust income to individual beneficiaries. If no distributions are made or required to be made, the trust typically pays tax on income earned.

If both estate and trust income tax returns are required, the two entities can make a special election to be considered one entity for tax filing purposes and file a single Form 1041. However, the duration of the election period is limited to two years in most cases, so complications can arise if the estate and trust are not fully distributed within that timeframe.

Estate (and Generation-Skipping Transfer) Tax Return (Form 706)

Estates that exceed the estate tax exemption amount ($12.06 million for 2022) are subject to estate tax and must file Form 706. Keep in mind that any gifts made during the deceased’s lifetime that exceed the annual exclusion amount ($16,000 for 2022) are added to assets owned at death to determine the estate’s value. If desired, Form 706 may also be filed for deceased spouses whose estates are less than the exemption amount to utilize an option called “portability” and transfer any unused exemption to the surviving spouse.

State Returns

Individual states may also have estate or inheritance tax filing requirements. Make sure to review the filing requirements for the individual’s state of residence, as well as any state where the individual owned real estate, business, or other property, to determine if returns are required or tax is due.

Administering a loved one’s estate or trust involves many moving parts and considerations. Consult with a qualified tax preparer to help you determine what tax returns should be filed after death.

This is intended for informational purposes only and should not be construed as personalized financial advice. Please consult your financial professional regarding your unique circumstances.

Author Mary T. Lynch Wealth Transfer Specialist

Mary has been involved in the financial planning industry since 2011. She earned a B.A. from Northwestern University and an MBA from the University of Chicago Booth School of Business.

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