When an individual dies, their property becomes their estate. Either estate planning documents or state statutes determine what should happen with the assets owned by the estate. The financial obligations of the decedent also typically pass to the estate.
The estate may need to cover the decedent’s final medical expenses, remaining credit card debts and other financial obligations owed prior to their passing. There may also be taxes to consider. Personal representatives generally need to be proactive about appropriately addressing financial obligations, including taxes, using estate resources. The mismanagement of estate resources could lead to liability for the personal representative. They must ensure that they repay debts and manage tax obligations to protect themselves from litigation in the future.
What taxes can impact the estate administration process?
Estate taxes
Estate taxes are due from those who die with millions of dollars in personal property. California no longer collects an estate tax. Still, federal estate taxes may apply. If the property owned by the decedent is worth $13.99 million or more, then federal estate taxes may be due. Personal representatives may need to spend anywhere from 18 to 40% of the total value of the estate to cover estate taxes.
Income taxes
Wage earners, small business owners and investors generally all need to file annual income tax returns. Those who pass away cannot reconcile their final months of income with the Internal Revenue Service (IRS). Usually, the personal representative of the decedent’s estate files a final tax return. If there is any balance due to the IRS or to state tax authorities, the personal representative should prioritize paying those amounts before making distributions to beneficiaries.
Occasionally, the estate might owe income taxes as well. Frequently, estate administration requires the sale of certain assets. If the personal representative conducts sales that generate $600 or more in revenue, then the estate may owe income taxes. In some cases, the personal representative may have to file income tax returns for the estate for two consecutive years, as administration can often take more than 12 months to complete.
Properly addressing financial obligations, including taxes, is a key component of the probate process. Personal representatives often need help ensuring that they fulfill their obligations to protect themselves from liability, and that’s okay.