After you die, your loved ones must make several important decisions, most of which have specific time frames and limitations. It is important that upon death, the named Executor under your Will, or if there is no Will, the person in charge, consults an attorney and an accountant to proceed with the proper settlement of the estate.
One of the first issues to decide is whether the estate has to file an estate tax return. At this time there is no federal estate tax, but the return may be due if congress passes a law and makes it retroactive to January 1, 2010. The federal estate tax return is normally due nine months from date of death. Even if there is no federal return due, it is important to determine whether a state estate tax return is due. States have various requirements that must be complied with.
Even if there is no estate tax return due, it is important to determine all of the date of death values of assets owned, as these values may be determined to be the new tax basis for the decedent. Although the rules are also changing regarding the allocation of basis upon death, there is a benefit when one dies and assets have increased from the date of the purchase to the date of death, as the date of death value may be the controlling date for future gains and losses subsequent to the decedent’s death. This could be a significant benefit, since many people believe that the date they purchase property becomes their basis, and they may report a future capital gain based on the prior purchase date, when the date of death value could be the new adjusted basis for purposes of gains and losses.
There are also benefits when a decedent owns assets that have built-in income, which is known as income in respect of a decedent. These assets are normally retirement plans, U.S. Savings Bonds, and deferred annuities. All of these assets maintain a build-up of income within the asset that has never been income taxed. When the decedent dies, there is normally a significant income tax due when the beneficiary receives these assets, and the tax will be paid at the rate of the recipient, normally not the decedent.
However, there are some special rules that allow some of the income to be reported on the decedent’s final income tax return, and in some cases, a decedent’s estate must take the minimum distribution, if it had not been taken during the year. There are significant adverse consequences that will occur if the fiduciary for the estate does not comply with all of the technical rules, and IRS penalties could equal 50% in some cases. All options should be reviewed before making a decision, and in some cases, not all beneficiaries must elect the same decision in collecting the assets upon death. There are also special elections that a spouse may utilize that are not available to other family members or other beneficiaries.
In cases where there is a Trust, there are options available where the estate and Trust may be considered one entity for filing a tax return, so as to minimize the need for separate returns as well as combine all income and deductions. This can be very favorable for income tax purposes since estates and Trusts have significantly lower exemptions and higher tax rates than individuals.
As always, when dealing with tax issues, it is critical that good advice is sought initially so that all deadlines are met properly regarding tax issues and that elections are decided in the most favorable light for the beneficiary, to reduce all estate and income taxes.
Hyman G. Darling, Esq.