Houston estate planning with a Roth IRA
February 17, 2015
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February 18, 2015
Dealing with the death of a loved one is difficult. During this trying time, it can be especially difficult to focus on things like administering the estate and taking care of any tax issues surrounding the decedent. However, someone will inevitably have to deal with these issues. If the decedent has a valid Texas will that is admitted to probate, the executor assigned by the probate court is usually the person responsible for this. If there is no will or other testamentary document dealing with the decedent’s estate (meaning that the person died “intestate”), then a court will often appoint an administrator to handle the estate who serves essentially the same purpose as an executor. In addition to identifying the assets of the estate, paying any debts, and distributing the remaining assets to the beneficiaries, the executor is required to file any necessary tax returns and pay any taxes the decedent may owe. If the executor fails to file any required tax returns or pay any tax due, the IRS may come after the executor personally for any tax due, plus any penalties and interest that may have accrued. So, if you are an executor or administrator of an estate, here are some things you need to consider:
- Filing the decedent’s final 1040. The first step is to file the decedent’s federal income tax return for the year of his or her death. If the decedent died in 2014, the tax return is due on the standard date, meaning April 15, 2015, unless an extension is filed. If the decedent was married, the return can be a joint return filed as if the decedent were alive at the end of the year. The return would include the income and deductions for the decedent up to the date of death, and the income and deductions for the entire year for the surviving spouse. If there were large medical expenses that occurred during the final year of the decedent’s life and the decedent has a taxable estate (more than $5,430,000 in 2015) , you may have different options on how to treat these items as deductible expenses on the income tax return vs. the estate tax return, so you should speak with a qualified accountant or other tax adviser for assistance.
- Filing the estate’s income tax return. After a person dies but before the administration of the estate is complete, his or her assets may continue to accrue income, which is taxable. For this reason, you may need to file an income tax return for the estate itself (this is NOT the same as an estate tax return, which doesn’t have to be filed unless the decedent had an estate large enough to be taxable). The estate’s first year for income tax purposes begins immediately upon the decedent’s death. The first tax year can end on either on December 31 of the year the decedent died or the last day of any other month that results in an initial tax year of twelve months or less. This income tax return (IRS Form 1041) must be filed by the 15th day of the fourth month following the end of the tax year. If it takes multiple years to administer the estate, a tax return must be filed for each tax year. Generally, speaking, an income tax return for an estate only needs to be filed if the estate has gross income of $600 or more. Income from non-probate assets that pass by beneficiary designation is not generally included in this total, unless the estate is the beneficiary. Examples of common non-probate assets are life insurance policies, annuities, and retirement plans such as 401(k) plans and Individual Retirement Accounts (IRAs).
- Filing the estate’s estate tax return. As mentioned above, if the decedent has a taxable estate (more than $5,340,000 if he died in 2014 or $5,430,000 if he died in 2015), then an estate tax return will need to be filed, which is IRS Form 706. Also, if the decedent made large gifts in prior years that were greater than the annual exclusion amount for gift tax purposes, then those gifts are added to the estate to determine if it is large enough to be taxable. Some estimates state than over 99% of estates will not be subject to estate tax with the current large exemption amounts. However, there may occasionally be another reason to file an estate tax return even if the estate is not taxable. This is to take advantage of spousal portability of estate tax exemptions, which you can read more about here.
- Miscellaneous items. You’ll need a federal employer identification number (EIN) for the estate if you have to file Form 1041 or Form 706. This is similar to a social security number for an individual. You can obtain an EIN by completing IRS Form SS-4. You will also want to file form 56 (Notice Concerning Fiducicary Relationship) to let the IRS know that you are responsible for dealing with the estate’s tax issues. After you have an EIN, you will need to open a checking account in the name of the estate. You can deposit the funds from the decedent’s accounts into the new estate account. You will also use this new account to deposit any income earned by the estate and to pay expenses of the estate, such as outstanding bills, funeral and medical expenses, and taxes owed by the decedent or the estate.
The steps involved in your specific case may vary depending on circumstances, so you should always consult with an estate planning attorney and possibly a CPA or other tax adviser for advice specific to your case.
Reference: Bill Bischoff, 4 Tax Issues to Consider When You Close an Estate, Market Watch, Feb. 17, 2015.
