When a loved one passes away, tax compliance may be the last thing anyone wants to think about. However, ensuring that various deadlines are met is an important step for an estate’s executor, also known as a personal representative, to complete.
Estate Tax Return (Form 706)
The estate tax return is often different than any tax return most people have ever encountered. Estate tax returns are used to report the value of a decedent’s assets, less any debts or deductible expenses. This resulting value determines the estate tax liability owed. However, many decedents may not owe any estate tax at all. This is because a lifetime gift and estate tax exemption is available to offset any taxable gifts made during life, and any taxable estate value at death. So, if you haven’t used up all of your exemption making gifts to others during your life, your estate could be tax-free upon your death. The current federal exemption is $12.92 million and is adjusted each year for inflation. However, this amount is going to sunset at the end of 2025 and will go back to $5 million, also indexed for inflation.
Estate tax returns can also be filed to establish the appropriate basis step up for assets or elect portability of a deceased spouse’s unused exemption over to the surviving spouse for them to use upon their death.
Minnesota also has its own estate tax. The exemption is currently $3 million. So, if a decedent dies a Minnesota resident or a non-resident who owns real property in Minnesota, their estate may have a filing requirement (even if their estate isn’t above the federal exemption limit).
Estate Income Tax Return (Form 1041)
Similar to how every individual that earns income has to file an individual tax return, a decedent’s estate must file an estate income tax return. The estate’s executor will report income earned after date of death, but prior to distribution of the assets to beneficiaries. Estate income tax returns have more compressed tax brackets than individuals, but can often include a wider variety of deductible expenses. Once the assets have all been distributed to the estate’s beneficiaries, the estate can file a final income tax return and will not need to continue filing after that point in time.
The intricacies of the tax compliance related to a decedent’s estate can be complex. It’s important to hire advisors who specialize in this area since it differs from general individual or business taxation. At Boulay, we have an estate and trust planning department with a team dedicated to working only in this highly specialized area. Contact us today to learn more about our estate and trust planning services.