Death and Taxes
Regardless of whether death is unexpected or anticipated, it is always difficult and usually
catches people unprepared. The more we can do to plan and prepare for our loved ones, the less
burdensome we can make it.
? Prepare a will. Wills are right for everyone, regardless of age. Wills clearly state your
wishes so others do not need to guess what your preferences would have been if you
hadn’t died. A living will affords your loved ones peace of mind regarding your medical
wishes and life support intensions.
? Plan for the financial welfare of your survivors. A professional financial advisor can help
you assure that your financial plans accomplish your goals. Insurance policies, retirement
plans, investments, trusts, and other means of support need to be structured correctly to
yield the greatest benefit to survivors and the least amount of taxes or penalties.
? Express your preferences for funeral arrangements and begin a funeral trust cover the
? Choose and ask someone you trust to be your personal representative. This person will
make decisions on your behalf when you cannot. If possible, acquaint your representative
with your lawyer, tax preparer, financial advisor, and insurance agent, as they will need to
work together later when settling your estate.
? Be sure that information about your investment records, business records, tax records,
and outstanding liabilities are up-to-date and easily accessible.
? Keep open communication about upcoming commitments and responsibilities that others
may need to assume in your absence.
How Does Death Affect Assets?
? An estate is created at the time of death. The estate consists of assets that were owned
at the time of a decedent’s death. The estate is responsible for paying all remaining debts
of the decedent, as well as any incurred to handle the final affairs. The estate will exist
until all of the bills are paid and the remaining assets have been distributed.
What Will Loved Ones Need to Do?
After the funeral arrangements are made and services conducted the affairs of the estate need to
be completed. This involves probating the estate, reading the will if there is one, and carrying out
The personal representative is responsible for the distribution of the property and filing out the
final income tax returns. The first step taken by the personal representative is to notify the IRS
that he or she is acting in that capacity. The following actions and forms are needed, as noted:
? File IRS Form 56, Notice Concerning Fiduciary Responsibility.
Once this form notifies the IRS of responsibility, the personal representative will have access to
prior tax information and receive any related correspondence from the IRS.
? File IRS Form SS-4 to receive an ID number for the estate.
? Notify appropriate financial institutions of the death. The name on the accounts should be
changed to that of the estate or the joint owner who has rights of survivorship. The estate
ID number will be needed for this.
? File IRS form 1040 or 1040A, Income Tax Return.
Due by April 15 of the year following the year of death, this will report any income earned
before death. If elected, medical expenses can also be claimed on this form. Surviving
spouses who have not remarried by the end of the year may want to file a joint return.
? IRS Form 706, Estate Tax Return.
This Form lists the value of all the assets the decedent owned at the time of death. Funeral expenses and medical expenses are deductions reportable on this form. If elected, medical expenses can be claimed on the final Form 1040.
Under most circumstances, Form 706 is filed only when the estate is worth at least $ 1,000,000 for 2002-2003; $1,500,000 for 2004-2005; $ 2,000,000 for 2006-2008; $ 3,500.000 for 2009; and no limit for 2010 and later. It must be filed within nine months of the date of death, unless an extension is obtained.
This form reports all the income earned by the decedent after death. If the estate cannot be settled in one year, this form must continue to be filed as long as there is gross income of $600 or more in a year.
If the decedent operated a business at the time of death, the estate may continue to operate that business. Income will be reported on this form.
If any property is sold, such as home, stocks or bonds, or personal property, the estate must report that sale.
The estate is able to deduct certain expenses that it pays. Property taxes, accounting and administrative fees, and other expenses of carrying out the distribution of the assets are allowed. thForm 1041 should be filed by the 15 day of the fourth month in the year following the year of
death. This will be April 15 for a calendar year estate. Choosing a fiscal year may be easier if the affairs of the estate can be completed within twelve months.
What Happens If Tax is Due?
If the filing of any or all of the returns results in a tax, the personal representative is responsible to see that the tax is paid. Assets may have to be sold to pay the taxes. If assets have been distributed and no money remains, the personal representative and beneficiaries will be responsible to pay the tax, up to the value of the assets distributed.
The personal representative should work closely with lawyer, tax preparer, financial advisor, and insurance agent to accomplish all the necessary obligations.