There’s no escaping taxes when settling an Estate. An executor/trustee is responsible for filing tax returns for both the deceased and the Estate itself. Here’s a preliminary list of tax activities to consider throughout the settlement process.

1. Apply for a tax ID (EIN) for the Estate. Once appointed, the executor should apply for an EIN from the IRS. This unique identifier is required to open a bank account, file tax returns and handle financial transactions on behalf of the Estate. The application can be completed online through the IRS website.

2. File the deceased’s final income tax return. This covers the period from January 1 until the date of death, including any income earned up until that point. Any deductions and credits the deceased was eligible for can still be claimed on this return. Note that it is advised to obtain past tax filings for this and other settlement tasks.

3. File taxes related to businesses owned by the deceased. If the deceased owned one or more businesses, the executor has the responsibility to address the tax obligations associated with that business, including filing returns.  This and other activities associated with the business often require assistance from legal and tax professionals.

4. File Estate income tax returns. If the Estate generates income during the settlement process (from investments, real estate rentals, sale of assets, etc.), the executor may also need to file an Estate income tax return (form 1041), reporting income earned by the Estate after the date of death. In some cases, tax returns may need to be filed multiple times throughout the settlement process.

5. Verify if Estate and inheritance taxes apply. In some cases, the Estate may be subject to federal Estate tax, which is levied on the transfer of the deceased's assets. The current federal Estate tax exemption is $12.92 million for individuals, so it won’t apply to many Estates. However, some states have their own Estate or inheritance taxes, with lower exemption thresholds. As an executor, it's important to review state tax laws where the deceased lived and where any property is located.

6. Consider/pay any taxes due before distributing assets. Consider all of the above and ensure there are funds available to pay any taxes due before distributing remaining assets to beneficiaries. This will avoid the unfortunate scenario of inadequate funds left in the Estate to pay the tax bills. The executor can also remind beneficiaries that they may have personal taxes due on all or part (depending on the type of assets) of their inheritance.

7. Obtain tax clearance before closing the Estate. Under some circumstances, it is advised to obtain tax clearance from federal and state authorities, confirming that all tax liabilities are satisfied. Tax clearance may be required in cases involving large Estates, complex tax situations, states with Estate or inheritance taxes, probate court requirements, or unresolved tax issues.  While not always mandatory, this helps protect the executor from personal liability by providing proof that all tax obligations have been met.

   
    
   Many executors will require assistance from specialized tax and legal professionals to ensure compliance. But no matter how simple or complex, Legacy Logix Estate Settlement can provide a central location to organize and summarize all activity, presenting a clear picture of how taxes are impacting the Estate.