Legal-Ease: Basic tax checklist upon loved one’s death

Although competent legal and accounting professionals should always be consulted whenever someone dies, there are five areas of tax-related obligations of which family members should be aware upon a loved one’s death.

First, the surviving spouse, probate executor, administrator or “responsible person” (if there is no spouse or probate estate) should file the decedent’s income tax return (Form 1040) for the year or partial year of the person’s death. Of course, if the decedent’s annual income was small enough, no return is required to be filed. See IRS Publication 559 for details.

Second, if the decedent’s lifetime gifts and both probate and non-probate estate asset values exceed $12.92 million, a federal estate tax return (Form 706) is generally required to be filed. The value above $12.92 million will usually be taxed.

In some instances, even if the decedent’s gifts and bequests did not reach the $12.92 million total, a decedent’s family may file a Form 706 if the decedent had a surviving spouse with an anticipated gift and bequest total that may exceed $12.92 million when the spouse dies.

Generally, though, if the decedent’s lifetime gifts and bequests do not exceed $12.92 million, there is no need to even file a Form 706, and there will be no inheritance or estate taxes (sometimes called death taxes) on the assets received.

Third, while most inherited assets are not subject to inheritance or estate tax (see above), the receivers of some inherited money or accounts may be subject to income tax if the inherited money or accounts are from government-promoted retirement plans like IRAs and 401Ks.

Fourth, a decedent’s trust or probate estate that earns money or other income after the decedent’s death but before the trust or probate estate is fully distributed may have to file a 1041 return for the trust, estate or both together. That 1041 return will be due annually based upon either on the calendar-year end or the anniversary of the death of the decedent. The 1041 return is required to be filed each year that the gross income to the trust, estate or both together produce totals at least $600.

Importantly, even though there may be a need to file Form 1041 due to $600 or more in gross income, if the earnings (from the trust, estate or both) are distributed before the end of the reporting year, only the heirs (not the trust, estate or both) pay income tax on the money. If the trust or estate has earnings that are not distributed to the heirs before the end of the reporting year, the tax rate for the trust, estate or both is very high.

Fifth, for capital assets like non-retirement-invested stocks and bonds and real estate, there will possibly be taxable gains or losses for the heirs or receivers of those assets when those assets are sold. Thus, unless those assets have readily ascertainable values (like stocks and bonds), those assets (like real estate) should be appraised as of the date of the decedent’s death to establish the tax basis to be able to later calculate the gains and losses if or when those assets are sold by the receivers of those assets.

Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at [email protected] or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.