Do I Have to Pay Deceased Loved One’s Taxes?

Sooner or later, someone has to resolve the tax liabilities when a loved one dies. It is usually a family member who faces this task. For one woman, the unexpected passing of her father in early 2018 left her the task of filing his 2017 return and the family’s estate planning attorney filed the 2018 return through the father’s estate. The family is still waiting for the 2017 tax refund from the IRS, and needs to resolve a stimulus check for $1,200 her family received last spring that had to be sent back.

Many families are facing similar situations, as reported in this recent article “Death and taxes: Americans grapple with filing the final tax return for deceased relatives in a pandemic year” from USA Today. Survivors are anxious about complex tax issues at the same time they are in mourning for a loved one.

The final tax return uses IRS Form 1040, the same one that would have been used if the taxpayer were living. The major difference: the word “deceased” is written after the taxpayer’s name.

If the taxpayer was married, the surviving spouse may file a joint return for the year of death. For two years after the taxpayer’s death, the surviving spouse may file as a qualifying widow or widower, which lets them continue to use the same tax brackets that apply to married-filing-jointly returns.

The larger the estate and income for a decedent, the more complicated taxes after death can become. Estate planning attorneys recommend naming an executor in the will and tasking them with taking care of final taxes.

The estate tax is paid on assets owned at the time of death. As of this writing, estates valued at more than $11.7 million (or $23.4 million per married couple), pay a 40% federal tax, in addition to state estate or inheritance taxes, if there are any. It is generally expected that the coming months will see a large reduction in the federal estate tax exemption.

The deadline to file a final return is the tax filing deadline of the year following the taxpayer’s death. The executor or administrator is usually the person who signs the tax return, although a surviving spouse signs the joint return. If there is no executor, whoever is responsible for filing the return signs it and should note that they are signing on behalf of the decedent. For a joint return, the spouse signs the return and writes “filing as surviving spouse” in the space for the other spouse’s signature.

There’s one more step if a return is due. If the deceased is owed money, the IRS Form 1310 should be used. That’s the Statement of a Person Claiming Refund Due a Deceased Taxpayer. The IRS says that surviving spouses signing a joint return don’t have to file this form, but tax experts think it’s a good idea to try to proactively prevent any delays.

If the decedent owes taxes, the tax bill is to be settled by the estate’s executor. If there are insufficient funds to pay the federal income and estate taxes, relatives are not responsible for the remaining balance.

Note that the executor may be held liable if the assets are distributed before paying the taxes, or if the debts of the estate are paid before taxes are paid. The same is true if the executor is aware of the insufficient funds and inability to pay the taxes but spends assets anyway.

Talk with an estate planning attorney about the taxes that will need to be paid from an estate. You don’t want to leave a legacy of tax pain for the family. My office is fully open to to schedule a consultation to discuss these or any other estate planning issues.

Reference: USA Today (April 22, 2021) “Death and taxes: Americans grapple with filing the final tax return for deceased relatives in a pandemic year”

 

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I am Concerned That My Son-in-Law will get My Estate

A frequently question people have when updating their wills with an experienced estate planning attorney, is whether they still need a trust for an adult child. The child has graduated college, is on her second well-paying job, is married and has children of her own. The child is a responsible young adult. However, an issue may arise with the adult child’s spouse and the potential for divorce.

Kiplinger’s recent article entitled “Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer” says that people do not want money they have worked hard for to be directed to their son’s or daughter’s ex-spouse, if a divorce occurs. If an adult child receives an inheritance and commingles it with assets owned jointly with their spouse—like a joint bank account—depending upon the state where they live, the inheritance may become a marital asset and subject to marital property division, if the couple divorces.

The current federal estate tax exemption in 2021 is $11.7 million per person or $23.4 million for married couples, so creating a trust to save taxes upon death isn’t as big a factor as it used to be. The larger question is how well we think our children will handle receiving a large sum of money. Some parents want a trust because they worry about their adult child losing thousands of dollars of their inheritance as a result of a failed marriage. By creating a trust as part of their estate plan, these parents can help protect their child’s assets in a divorce settlement.

In many situations, if a child receives an inheritance and combines it with assets they own jointly with their spouse, like a bank account, car or house, depending on where they live, the inheritance may become subject to marital property division, if the adult child and spouse later divorce. However, if the child’s inheritance is in a trust account, or they use trust funds to pay for assets only in their name, the inherited wealth can further be protected from a divorce.

Trusts can be complicated and require more administrative work and costs, which may cost more than just leaving assets outright to your children. This is worth it for those who want to protect their child’s wealth. If your child is under 18, you’re not thinking about divorce, but because of their youth, leaving assets in trust for them is often a good idea. A trustee will oversee the child’s assets and will be able to guide them to make sound decisions with any inherited funds. If your child is newly married, rather than creating a trust right after your child’s marriage, see how the marriage goes over the next five to 10 years. Then ask yourself how comfortable you are with your child’s relationship and how you feel about your son-in-law or daughter-in-law.

Consider your estate plan as a five-year plan. Review your will, trust and other estate planning documents at least every five years. This can help you carefully evaluate relationships, finances and the emotional dynamics of your family. An experienced estate planning attorney can also adjust or cancel the trust during your life, as your family situation changes.

My office is fully open if you would like to schedule a consultation to discuss these issues or any other estate planning matter.

Reference: Kiplinger (April 16, 2021) “Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer”

 

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Should Young Families have an Estate Plan?

Young families are always on the go. New parents are busy with diapers, feeding schedules and trying to get a good night’s sleep. As a result, it’s hard to think about the future when you’re so focused on the present. Even so, young parents should think about estate planning.

Wealth Advisor’s recent article entitled, “Why Young Families Should Consider an Estate Plan,” explains that the word “estate” might sound upscale, but estate planning isn’t just for the wealthy. Your estate is simply all the assets you have when you die. This includes bank accounts, 401(k) plan, life insurance, a home and cars. An estate plan helps to make certain that your property goes to the right people, that your debts are paid and your family is cared for. Without an estate plan, your estate must go through probate, which is a potentially lengthy court process that settles the debts and distributes the assets of the decedent.

Estate planning is valuable for young families, even if they don’t have extensive assets. Consider these key estate planning actions that every parent needs to take to make certain they’ve protected their child, no matter what the future has in store.

Purchase Life Insurance. Raising children is costly, and if a parent dies, life insurance provides funds to continue providing for the surviving spouse and children. For most, term life insurance is a good move because the premiums are affordable, and the coverage will be in effect until the children grow to adulthood and are no longer financially dependent. Having as much as 10 times your income may not be excessive.

Make a Will and Name a Guardian for your Children. For parents, the most important reason to make a will is to designate a guardian for your children. If you fail to do this, the courts will decide and may place your children with a relative with whom you have not spoken in years. However, if you name a guardian, you choose a person or couple you know has the same values and who will raise your kids as you would have.

Review Your Beneficiaries. You probably already have a 401(k) or IRA that makes you identify who will inherit it if you die. You’ll need to update these accounts, if you want your children to inherit these assets.

Consider a Trust. If you die before your children turn 18, your children can’t directly assume control of an inheritance, which can be an issue. The probate court could name an individual to manage the assets you leave to your child. However, if you want to specify who will manage assets, how your money and property should be used for your children and when your children should directly receive a transfer of wealth, consider asking an experienced estate planning attorney about a trust. With a trust, you can name a designated person to manage money on behalf of your children and provide direction regarding how the trustee can use the money to help care for your children as they grow. Just because a child is over 18 or 21 doesn’t mean they must receive their inheritance in a lump sum. Trusts aren’t just for the very well-to-do. Anyone may be able to benefit from a trust.

My office is fully open to schedule a consultation to discuss these matters.

Reference: Wealth Advisor (April 13, 2021) “Why Young Families Should Consider an Estate Plan”  

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