Benjamin Franklin once said: “in this world, nothing is certain except death and taxes.” As time has moved forward truer words have never been spoken.
In the United States, we have two types of taxes as they relate to death–Form 706, often referred to as an estate tax return, and Form 1041, an income tax return for estates and trusts. These two forms serve different purposes and both, one, or neither may need to be filed when someone passes away.
The estate tax return is what I refer to as a balance sheet return. It is a snapshot of the assets and liabilities of a decedent on the date of their death. Everything they owned, from their home to their retirement accounts to partnership or LLC interests and their personal property are items that can be in their estate. Each asset they own individually, with their spouse, or with someone else must be examined to determine the ownership and inclusion in the decedent’s estate.
Like the assets of the deceased, their liabilities must also be considered for inclusion in the estate. These items may help reduce the overall estate tax but do not affect the filing requirement of the gross assets.
Once the assets and liabilities have been identified, a determination must be made about the filing requirements. For federal estate tax purposes in 2023, an estate has a requirement to file when the gross assets of the decedent exceed $12.92 million. For Minnesota residents, the amount is $3 million.
If the determination is made that the estate has a requirement to file an estate tax return, whether Federal or in Minnesota, then the return must be filed within nine months from date of death.
Income Tax Returns, on the other hand, are filed by the fiduciary of a domestic decedent’s estate or trust to declare any taxable income.
A separate legal entity, referred to as an estate trust or trust, is created when an individual passes away. Their assets and liabilities become part of their estate and they no longer have an individual, Form 1040 filing requirement. The personal representative for their estate, also referred to as a fiduciary, is responsible for filing the Form 1041 and determining if the estate has a requirement to do so. The Form 1041 is required when the annual gross income exceeds $600, and it can be filed using a fiscal year end.
Form 1041 focuses on the income earned by an estate or trust from the time of the decedent’s death until the moment the assets are distributed to the beneficiaries. Additionally, many expenses created in managing the estate can be deducted on this return and should be considered prior to filing.
As with a Form 1040, if a Form 1041 is filed with a December 31 year-end, then this income tax return is due April 15. Alternatively, if a fiscal year end is selected, then the Form 1041 is due the 15th day of the fourth month after the close of the estate’s tax year.
Besides the tax return possibilities for an estate, there are many other issues that can arise when administering an estate for a loved one. Reach out to the Estate and Trust professionals at Boulay to help you with this process. Our experienced staff can guide you through the assessment and administration process.
Legal services provided by Andrew Kremer Law