"May your loved one rest in peace in a place with no IRS".
The death of a loved one is difficult enough without having to get stressed out regarding the handling of your loved one's affairs. This page is dedicated to reducing that strain with some straight forward answers to the most common questions asked in this situation.
Do I need to obtain a tax identification number for the decedent's estate? An estate is created when an individual dies and assets that do not pass directly to heirs go into that estate. If the estate will have income, an estate tax return may be required and that is where the Tax ID # comes in.
What happens to the decedent's bank accounts? If the accounts have a joint owner on the account or a beneficiary designated, the bank will most likely be able to distribute and close the account upon receipt of a death certificate. Distribution of assets from checking and savings accounts are not taxable to the beneficiary.
What happens to the decedent's IRA accounts? There are 2 different types of IRAs - Traditional (tax deferred) and Roth (tax free). Depending on the age of the deceased IRA owner and whether or not beneficiaries were listed on the account different options exist. The rules can get complex, so run the specifics by a knowledgeable tax pro or financial person BEFORE cashing anything out.
An overview of the options available to beneficiaries of IRA accounts:
1) Cash out and pay the tax. (No 10% penalty)
2) If original participant was not 70 1/2 yet, beneficiary can take distributions over a 5 year period. Account balance must be closed out by the end of the 5th year after date of original owner's death.
3) Beneficiary can leave the IRA in the name of the decedent and take lifetime (RMD) distributions.
4) If beneficiary is a spouse of IRA owner, may treat IRA as his or her own IRA. In most cases, a spouse will roll the IRA over into an IRA in their own name.
What happens to the decedent's other property? If the decedent's home is registered "Transfer on Death" with the county recorder, the home may not have to go through probate. Survivors should check with a qualified attorney regarding the need for probate and proper procedures following the death of a family member. If the decedent died intestate (without a will), probate may or may not be required.
As a beneficiary of the decedent's estate, what tax documents do I need to file with my own return?You may need a K-1 from the Estate and 1099-R from the IRA or Annuity Custodian if you received distributions from these accounts. Ask the person handling the estate if you will be receiving a K-1. (These often come out late and can create an inconvenience if you receive it after you have already filed.)
Are funeral costs tax deductible? No.
Do I have to file a final tax return on behalf of the decedent? Yes, if there is enough income.
(Same rules that apply to the living).
What documentation is necessary to file the final tax return? In addition to the normal tax documents, a copy of the death certificate and a copy of the will or other legal document giving authority to the survivor to handle administration of the estate. Any tax refunds are considered part of the decedent's estate.
Will there be an inheritance or estate tax? Generally no, except for the largest estates. (Income tax on IRA distributions as indicated above is a separate matter). Any estate tax due is usually paid out of the assets of the estate, not by the heirs. Estate tax is a complex topic and should be addressed by the executor of the estate with a lawyer and/ or tax preparer if the estate is large or contains significant income generating assets.
Are life insurance proceeds taxable? No.
Can I apply for a property tax refund on behalf of the survivor's estate? No. Only a spouse is entitled to such a refund. Any unissued property tax refund (applied for before death) will be forfeited.
There are other accounts that I don't understand. What should I do? Be sure to make an appointment to discuss more complex situations to insure that proper tax planning is done if necessary. It may also be necessary to seek investment related advice depending on the types of assets and types of questions that you have.
The decedent had debts that are unpaid. Am I responsible to repay those debts? Check with an attorney for the answer to this question.
How long do I need to retain the decedent's tax and other financial records? See our document retention checklist - do not destroy important documents until you are sure they won't be needed for any purpose. Routine household bills can usually be destroyed after the estate is closed.
What is probate? Probate is the orderly distribution of a decedent's estate. An attorney can assist you with specific questions including costs and timeline. While probate may involve modest costs and some time to work it's way through the legal process, it may be seen as an efficient process of executing the decedent's final wishes.
What are "letters of testamentary?" LINK to Flanders law firm.
As a surviving spouse, what concerns should I have after losing my husband/wife?
1) Change title on real estate to reflect the change from joint to single ownership. (if applicable)
2) Rollover your spouse's IRA and retirement accounts into your own IRA accounts.
3) Have your will updated.
4) If significant real estate assets are involved, get a market analysis or appraisal, establishing the value of those assets on the date of death. You will most likely receive a "step up" in basis on your spouse's half of those assets that you have now inherited. This translates often into lower capital gain taxes in the future if you sell assets.
5) Re-evaluate your insurance needs with a qualified agent.
My family member created a trust and I need assistance in administering the trust. Who should I contact? An attorney can assist you with questions regarding the trust documents.
Todd's Tax Service LLC
Todd's Tax Service LLC