Revised Limited Liability Company Act

When dealing with the death of a loved one, the amount of information to be processed and documents to be sorted through might seem overwhelming. Faced with unfamiliar concepts, terminology, and deadlines along with one’s own grief, the trust and probate administration process can be a daunting prospect. Perhaps one of the most intimidating parts of the process is dealing with the various tax returns that need to be filed, especially since taxation is an area outside many people’s comfort zone.

If you’re administering the estate (and possibly trust) of someone who’s recently passed away, there are a few key tax returns that you might need to file:

1. Final individual income tax return(s). Typically, at least one income tax return will need to be filed for the individual who has passed, assuming they earn enough income to require filing a personal income tax return each year. The federal form is called Form 1040; depending on where the deceased individual lived, one or more state income tax returns might also need to be filed. This return will report any income earned prior to and up through the date of death and will also notify the IRS that the individual has died. Generally, this return is due on the same date that the return would have been due if the individual hadn’t died (typically April 15 of the calendar year following the tax year for which the return is filed).

Depending on the time of year when the individual died, two sets of individual returns might need to be filed. For instance, if someone dies on February 23, 2022, there will likely need to be two sets of individual income tax returns filed: one will report income for the tax year 2021 and will be due on or around April 15, 2022. The second will report income from January 1, 2022, through February 23, 2022, and will be due on or around April 15, 2023.

If the deceased individual wasn’t up-to-date on their personal income tax filings, the Personal Representative is responsible for making sure that returns are filed for any outstanding years and that any outstanding taxes, penalties, and interest are paid.

2. Fiduciary income tax returns for the estate and/or trust. Depending on the amount of income earned by assets that are part of the estate and/or trust following someone’s death, a separate income tax return might need to be filed to report the income of the estate and/or trust. This is generally referred to as a “fiduciary” income tax return (Form 1041), as opposed to the individual income tax return (Form 1040). The determination of whether a fiduciary income tax return is required (or even if not required, whether it’s advisable to file one anyway) is fact-specific and often complex, so it’s highly recommended to discuss this issue with your estate attorney and to engage the services of someone experienced in preparing not just income tax returns generally, but specifically fiduciary income tax returns.

The deadline for filing a Form 1041 varies depending on whether the entity for which the return is filed elects a fiscal year or files based on a calendar year. Estates typically elect a fiscal year, which begins on the date of death and ends on the last day of the month prior to the month in which the individual died. For instance, for someone who dies on February 23, 2022, the fiscal year would be February 23, 2022, through January 31, 2023. If the individual had a revocable living trust, it might be possible to elect to have the trust income reported on the same return as the estate’s return for the first two years following death. Otherwise, generally, a trust must report its income based on a calendar year.

Whether a fiscal year or calendar year is used, the return generally will be due three months and fifteen days after the close of the tax year. For the fiscal-year return referenced above with the end date of January 31, 2023, the due date would be May 15, 2023. For a calendar year return ending on December 31, the due date is April 15. A return will need to be filed for each year that the estate and/or trust remains open, and a final return will be filed for the year in which any remaining estate and/or trust assets are fully distributed to the beneficiaries. The beneficiaries will receive a Schedule K-1 that reflects any items of income or deduction that they will need to report on their own personal income tax returns.

There are a variety of factors and potential elections to make when filing a fiduciary income tax return which could affect not only the overall amount of tax due but which could also determine the timing and manner in which an estate or trust needs to be administered. Even though the first fiduciary income tax return generally isn’t due for at least a year following the date of death, it’s important to discuss the potential need to file fiduciary income tax returns with your estate counsel early in the administration so that you can plan and manage the estate and/or trust assets appropriately.

3. Estate tax return. An estate tax return, known as Form 706, reports the value of assets owned by an individual at his or her death and assesses an estate tax based on that value. Currently, there is an estate tax exemption of $11,700,000 in place for individuals (though this might be greatly reduced in the near future if Congress passes currently proposed legislation). The actual exemption available to an individual at his or her death will depend on (1) the exemption amount in place for the year in which they die, (2) the amount of exemption the individual used during his or her lifetime on transfers by gift, (3) the recipients of the individual’s assets upon his or her death, and (4) whether the individual received any “Deceased Spousal Unused Exclusion” (DSUE) from a deceased spouse. The DSUE amount is claimed by electing “portability” of the remaining unused estate tax exclusion amount of one’s deceased spouse through a timely filed Form 706. Thus, if your spouse dies before you and the Personal Representative of your spouse’s estate made a timely election for portability of his or her remaining unused exclusion by filing a Form 706 on or before the due date, then you could increase the amount of estate tax exemption available at your own death by up to an additional $11.7 million (under current law). Form 706 is considered timely filed if it is filed on or before the date that is nine months after an individual died; a six-month extension may also be applied for.

If an estate is considered taxable such that Form 706 is required to be filed, then a Form 8971 and Schedules A to that form likely will also need to be filed, though some exemptions might apply. If Form 8971 is required, then it will be due no later than the earlier of the date that is 30 days after the date on which Form 706 was due or was actually filed. In addition, a copy of the appropriate Schedule A must be provided to each beneficiary by the same deadline.

In addition to reporting the value of assets for assessment of potential estate tax due, Form 706 is also used to calculate the generation-skipping transfer tax (GSST) that might be due to certain transfers.

While North Carolina does not currently have an estate or other inheritance tax in place, it’s possible that a state estate or inheritance tax might be assessed by another state in which the deceased person lived or owned property. You should consult with your estate attorney to determine whether an estate tax return is required, or whether one should be filed to preserve the portability of DSUE for a surviving spouse even if it’s not otherwise required.

4. Gift tax return(s). If the deceased individual made a taxable gift in the year of death, the Personal Representative will need to report this gift on a gift tax return (Form 709), which generally is due on or about April 15 of the year following the gift. Gift tax returns do not need to be filed unless the deceased individual gave someone other than their spouse money or property worth more than the annual exclusion for that year, which in 2021 is $15,000 and increases to $16,000 in 2022. For individuals who die early in the year, it’s possible that gift tax returns will need to be filed for both the year preceding death and the year of death, assuming the deceased individual made taxable gifts in those years.

Missing a deadline for a tax filing can be a costly mistake that could lead to penalties, missed tax planning opportunities, and personal liability for the Personal Representative. At Strauss Attorneys, we provide guidance throughout the administrative process to determine whether and when tax returns might need to be filed. We can also provide assistance in preparing a variety of tax returns or finding an experienced preparer. Contact our Asheville office at 828-258-0994, or to make an appointment with our Hendersonville office call 828-696-1811. We now also have our newest location in Raleigh, North Carolina. To make an appointment with our Raleigh team, call 919-825-0932.