Handling Taxes as a Fiduciary After Someone’s Death!

By April 24, 2017Blog, Estate Planning

With the recent passing of the April IRS filing deadline, many of us have just concluded the handling our own personal income taxes. It is well established that no one likes dealing with taxes. They can be confusing and overwhelming. That level of anxiety can multiply when you are dealing with someone’s taxes after their death. Being appointed as a fiduciary for a deceased person’s Estate or Trust can be a daunting task all by itself. But, the heirs or devisees and beneficiaries will need to address federal and state taxes as the result of their loved one’s death. Depending on the Estate’s contents and/or the deceased person’s Estate plan, you may find yourself dealing with several different tax circumstances.

Federal Estate Taxes

Contrary to popular belief, most estates will not owe any federal estate taxes. This is because for 2017, the federal estate tax exemption is $5.49 million. This exemption continues to be adjusted upwards each year in the future based on inflation. If the deceased person’s Estate is valued at $5.34 million or more, the fiduciary will likely be required to file a federal estate tax return using IRS Form 706.

Income Taxes

Aside from filing a deceased person’s final income tax return at the federal level (and state level if applicable), there will be a period of time while an estate or trust is being administered after someone dies, that the estate or trust assets will earn interest. This interest typically accumulates prior to the time that the assets can be distributed to the appropriate recipients. In addition, while certain types of assets owned by a deceased person will receive a step up in basis, if these assets (such as stocks and bonds) are sold after death, then the sale may result in a capital gains taxes. Additionally, certain types of accounts have built in income tax such as non-Roth IRAs, 401(k)s, and annuities. While many estates and trusts may not be affected at all by estate taxes, inheritance taxes, gift taxes, or generation skipping transfer taxes, the majority will be affected in some way or another by income taxes. Income earned by an estate or a trust is reported on an IRS Form 1041, and the estate or trust may also need to file a state income tax return for estates and trusts.

State Inheritance Taxes

While an estate tax is a tax that is based on the overall value of the deceased person’s estate, an inheritance tax is based on who receives the deceased person’s property.  Generally, in most circumstances, assets passing to the deceased person’s surviving spouse are exempt from the state inheritance tax. Therefore, depending on your state, the likelihood of an inheritance being subject to a state inheritance tax is minimal at best.

Generation Skipping Transfer Taxes

At the federal level, generation skipping transfer taxes, known as GST taxes for short, only apply to estates that owe federal estate taxes where some of the estate is passing to someone who is a “skip person” or some of the estate is passing into a trust that is a generation skipping trust. A “skip person” is typically defined as a person who is two or more generations below the deceased person, or an unrelated person who is at least 37 1/2 years younger than the deceased person.

At the federal level the generation skipping transfer tax exemption is the same as the estate tax exemption, which means the exemption is $5.49 million for 2017 and will continue to be adjusted upwards each year based on inflation. Therefore, the overwhelming majority of estates will not be subject to federal generation skipping transfer taxes.

What should I do now as a personal representative or trustee?

It is clear that much of the potential tax consequences that may occur while administering an estate or trust can be a confusing endeavor. If you are handling a loved one’s estate or trust and have questions about potential estate or trust tax liability here in Michigan, call Hewson & Van Hellemont at 248-968-5200 for a free consultation.

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