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ESTATE ADMINISTRATION:
Tax Compliance for a Decedent's Estate
Where one taxpayer ends, another begins. When
an individual dies, his or her estate is created as a new taxpayer, and the
estate is potentially liable for several kinds of tax. The following
information is an overview of taxes for which a decedent's estate could be
liable. The Personal Representative should engage a qualified tax advisor to
assist with determining and meeting any tax compliance.
As a first step, the Personal Representative
obtains a taxpayer identification number (an EIN) for the estate which will
be used to open a bank account for the estate and to file all tax returns.
An attorney can assist with the completion and filing of a Form SS-4
to obtain this number.
The second step is for the Personal
Representative to file Form 56, which notifies the Internal Revenue
Service of the fiduciary relationship between the Personal Representative
and the estate of the decedent. The IRS is directed to send all
correspondence to the Personal Representative directly instead of to the
decedent's last known address.
The Personal Representative's obligations with
regard to taxes may include:
1. Final Individual Return (Form 1040) -
The Personal Representative should assure that the decedent's final Federal
and State income tax returns are filed.
2. Federal and State Estate Income Tax
(Form 1041) - The Personal Representative needs to report any income
earned by the estate during its existence by filing under the EIN. This
return should be filed with the Service Center that serves the state in
which the Personal Representative lives, not where the decedent resided.
This form must be filed by the 15th day of the fourth month
following the close of the relevant tax year.
3. Trust Income Tax Returns - Often,
a decedent's Will establishes a testamentary trust or renders a revocable
trust irrevocable. It may be necessary to obtain EIN numbers for these
entities and report any trust income by filing the appropriate return.
4. Federal and State Estate Tax Returns
(Form 706) - The Personal Representative is responsible for assuring
that any required estate tax return is filed within 9 months of the date of
death. In general, a Maine estate tax return must be prepared and filed when
the "taxable estate" (as opposed to the "probate estate") exceeds $950,000
for death occurring in 2005. Federal estate tax may apply where the taxable
estate exceeds $1.5 million. See Estate Tax articles.
5. Final Gift Tax Returns (Form 709) -
If the decedent made reportable gifts prior to death, the Personal
Representative should assure that final gift tax returns are filed.
6. Federal Generation Skipping Transfer
Tax - When assets are transferred to one who is two or more generations
removed from the transferor, a generation skipping tax may be imposed in
addition to the estate tax. |
