Decedents: Dealing with the death of a family member

06 Dec, 2015 TAX LAW 0

Chapter 43
Decedents: Dealing with the death of a family member

Reminders

Consistent treatment of estate items. Beneficiaries must generally treat estate items the same way on their individual income tax returns as they are treated on the estate’s income tax return. For more information, see How and When to Report under Distributions to Beneficiaries From an Estate in Publication 559, Survivors, Executors, and Administrators.

This chapter discusses the tax responsibilities of the person who is in charge of the property (estate) of an individual who has died (decedent). It also covers the following topics:

Filing the decedent’s final return.
Tax effects on survivors.

This chapter does not discuss the requirements for filing an income tax return of an estate (Form 1041). For information on Form 1041, see Income Tax Return of an Estate—Form 1041 in Publication 559. This chapter also does not discuss the requirements for filing an estate tax return (Form 706). For information, see Form 706 and its instructions.

EXPLANATION

Though this chapter mainly discusses the filing requirement of a final individual income tax return for a decedent, an explanation of the various potential filing requirements may be helpful. Generally, upon an individual’s death, there are three types of taxes that should be addressed: estate tax, gift tax, and income tax.

The estate tax is reported on Form 706, U.S. Estate Tax Return. Form 706 is a return that is generally based on the value of the net assets of the decedent’s “estate” at the date of death. The filing deadline for Form 706 is nine months after the date of death, unless a six month extension of time to file is requested. Form 706 is generally required to be filed if the gross estate (the value of the estate without subtracting debts and liabilities) is over the applicable estate tax exemption.

In addition to an estate tax return, the decedent’s personal representative may be required to file a gift tax return (Form 709) on the decedent’s behalf. This return would report any gifts made by the decedent in the year of death and indicate the amount, if any, of gift tax due.

There are two possible income tax returns that may need to be filed: Form 1040, U.S. Individual Income Tax Return, and Form 1041, U.S. Income Tax Return for Estates and Trusts. Form 1040 is generally used to report all the income that the decedent earned and received prior to death. Any income that was earned and received after the date of death is generally reported by the estate (or the trust, if the asset was held in trust) and is reported on Form 1041. This chapter focuses mainly on Form 1040 issues.

Useful Items

You may want to see:

Publication

3 Armed Forces Tax Guide
559 Survivors, Executors, and Administrators

Form (and Instructions)

56 Notice Concerning Fiduciary Relationship
1310 Statement of Person Claiming Refund Due a Deceased Taxpayer
4810 Request for Prompt Assessment Under Internal Revenue Code Section 6501(d)

Personal Representative

A personal representative of an estate is an executor, administrator, or anyone who is in charge of the decedent’s property.

Executor. An executor (or executrix) is named in a decedent’s will to administer the estate (property owned and debts owed by the decedent) and distribute property as the decedent’s last will and testament directs.

Administrator. An administrator (or administratrix) is appointed by the court if no will exists, if no executor was named in the will, or if the named executor cannot or will not serve.

Personal representative. In general, an executor and an administrator perform the same duties and have the same responsibilities. Because a personal representative for a decedent’s estate can be an executor, administrator, or anyone in charge of the decedent’s property, the term personal representative will be used throughout this chapter.

The surviving spouse may or may not be the personal representative, depending on the terms of the decedent’s will or the court appointment.

Duties

The primary duties of a personal representative are to collect the decedent’s assets, pay creditors (including any taxes due), and distribute the remaining assets to the heirs or other beneficiaries.

The personal representative also must perform the following duties:

Notify the IRS (as discussed below) that he or she is acting as the personal representative (or in a fiduciary capacity).

File any income tax and estate tax return when due. (See Final Return for the Decedent, later.)
Pay any tax determined up to the date of discharge from duties.
Provide the payers of any interest and dividends the name(s) and identification number(s) of the new owner(s). (See Interest and Dividend Income [Forms 1099], later.)

For more information on the duties and responsibilities of the personal representative, see Duties under Personal Representative in Publication 559.

Notifying the IRS. If you are appointed to act in any fiduciary capacity for another, you must file a written notice with the IRS stating this. Form 56 can be used for this purpose. The instructions and other requirements are given on the back of the form.

Explanation

Form 56, Notice Concerning Fiduciary Relationship, is used to notify the IRS of the creation or termination of a fiduciary relationship. If notification is not given to the IRS, notices of taxes due will be sent to the last known address of the decedent. This is considered sufficient notice by the IRS. Therefore, Form 56 should be filed in a timely manner so that the personal representative is not considered personally liable for the taxes due, along with possible interest and penalties. Form 56 should be filed with the IRS Center where the decedent was required to file tax returns while alive.

Final Return for the Decedent

The same filing requirements that apply to individuals determine if a final income tax return must be filed for the decedent. Filing requirements are discussed in chapter 1, Filing information.

Filing to Get a Refund

A return should be filed to obtain a refund if tax was withheld from salaries, wages, pensions, or annuities, or if estimated tax was paid, even if a return is not required to be filed. See Claiming a refund, later. Also, the decedent may be entitled to other credits that result in a refund. See chapter 37, Other credits including the earned income credit, for additional information on refundable credits, and see chapter 35, Child tax credit for information on the child tax credit.

Determining income and deductions. The method of accounting regularly used by the decedent before death generally determines what income must be included and what deductions can be taken on the final return. Generally, individuals use one of two methods of accounting: cash or accrual.

Cash method. If the decedent used the cash method of accounting, include only the items of income actually or constructively received before death and deduct only the expenses the decedent paid before death. For an exception for certain medical expenses not paid before death, see Decedent in chapter 22, Medical and dental expenses.

Explanation

Examples of income actually or constructively received include such items as uncashed payroll and dividend checks, if they were received or were available to the decedent before death.

Example. If the decedent’s payroll check for June 1 through June 15 is available on Friday, June 14, but she fails to pick it up and dies on Sunday, June 16, the income is included on the decedent’s final individual income tax return. However, if the decedent would not have been paid until Monday, June 17—that date appears on the check and that is the first day it could have been picked up—the income is reported as part of the estate and not on the final Form 1040. In the latter case, the income is called income in respect of a decedent (IRD) and is discussed in the following section.

If the decedent was married and lived in a community property state—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin—half of the combined income and expenses of husband and wife up to the date of death may be attributable to the decedent. Wisconsin has a marital property law that is similar to community property law.

TAXSAVER

The person filing the decedent’s final return may elect to include as income on that return all of the U.S. savings bond interest that had accumulated but had not been reported. If the decedent otherwise had low taxable income to report on his or her final return, this return could be the best one in which to recognize the interest income. To determine whether or not this is advantageous, you have to compare the tax rate of the decedent on the final individual income tax return with the tax rate of the recipient of the bonds. (For a further discussion of this point, see chapter 7, Interest income.)

Accrual method. If the decedent used the accrual method of accounting, report only those items of income that the decedent accrued, or earned, before death. Deduct those expenses the decedent was liable for before death, regardless of whether the expenses were paid.

Additional information. For more information on the cash and accrual methods, see Accounting Methods in chapter 1, Filing information.

Who must file the return? The personal representative (defined earlier) must file the final income tax return (Form 1040) of the decedent for the year of death and any returns not filed for preceding years. A surviving spouse, under certain circumstances, may have to file the returns for the decedent. See Joint return, later.

Example. Samantha Smith died on March 21, 2015, before filing her 2014 tax return. Her personal representative must file her 2014 return by April 15, 2015. Her final tax return for 2015 is due April 15, 2016.

Explanation

If the decedent had not yet filed a return for the previous year, the personal representative or surviving spouse should prepare and file the return, just as the decedent would have. The only differences are (1) the personal representative signs the return (see Signing the return, later) and (2) the estimated tax payments that are due after the decedent died are not required to be made. If a joint return is being filed, see the discussion of estimated tax payments under Joint return, later.

For the year of death, the decedent’s final return covers income received and deductible items paid during the period from January 1 through the date of death (assuming that the decedent was a cash-basis taxpayer).

TAXSAVER

A surviving spouse may be able to reduce the tax on his or her income by filing a joint return with the decedent. Even if a taxpayer died on January 1 with no income earned by that date, the availability of joint tax rates to the surviving spouse could be beneficial. However, if the surviving spouse remarries before the end of the year, the decedent must file as married filing separately.

Filing the return. The word “DECEASED,” the decedent’s name, and the date of death should be written across the top of the tax return. In the name and address space, you should write the name and address of the decedent and, if a joint return, of the surviving spouse. If a joint return is not being filed, the decedent’s name should be written in the name space and the personal representative’s name and address should be written in the remaining space.

Example. John Stone died in early 2014. He was survived by his wife, Jane. The top of their final joint return on Form 1040, which includes the required information, is illustrated below.

Signing the return. If a personal representative has been appointed, that person must sign the return. If it is a joint return, the surviving spouse must also sign it.

If no personal representative has been appointed, the surviving spouse (on a joint return) should sign the return and write in the signature area “Filing as surviving spouse.” See Joint return, later.

If no personal representative has been appointed and if there is no surviving spouse, the person in charge of the decedent’s property must file and sign the return as “personal representative.”

**Figure 43-A**. Surviving Spouse Filing Joint Return with Decedent

TAXORGANIZER

After a person dies, it may be difficult for the family or personal representative to locate the information necessary to file the final tax return (e.g., charitable contribution receipts, interest payments, pay stubs, or Form 1099s). However, it is important to make a diligent search and to organize carefully the items located. See chart entitled “Important Tax-Related Actions to Take After a Death,” on the next page.

Example. Assume in the previous example that no personal representative has been appointed. The bottom of the final joint return, which shows that Jane is filing the return as the surviving spouse, is illustrated on the Form 1040 example.

Third party designee. You can check the “Yes” box in the Third Party Designee area of the return to authorize the IRS to discuss the return with a friend, family member, or any other person you choose. This allows the IRS to call the person you identified as the designee to answer any questions that may arise during the processing of the return. It also allows the designee to perform certain actions. See your income tax package for details.

Claiming a refund. Generally, a person who is filing a return for a decedent and claiming a refund must file Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, with the return. However, Form 1310 is not needed if the person claiming the refund is a surviving spouse filing a joint return with the decedent, or a court-appointed or certified personal representative filing an original return for the decedent. The personal representative must attach to the return a copy of the court certificate showing that he or she was appointed the personal representative.

If the personal representative is filing a claim for refund on Form 1040X, Amended U.S. Individual Income Tax Return, or Form 843, Claim for Refund and Request for Abatement, and the court certificate has already been filed with the IRS, attach Form 1310 and write “Certificate Previously Filed” at the bottom of the form.

Example. Mr. Green died before filing his tax return. You were appointed the personal representative for Mr. Green’s estate and you file his Form 1040 for the prior year showing a refund due. You do not need Form 1310 to claim the refund if you attach a copy of the court certificate showing you were appointed the personal representative.

Important Tax-Related Actions to Take After a Death
Action	Comments
Obtain at least 10 death certificates from the local county clerk, mortuary, or funeral director.	The executor or personal representative (referred to as the “executor” in this chart) must file the death certificate with the estate tax return (Form 706) for the decedent. Also, death certificates will be needed to claim life insurance proceeds, change title to bank accounts, and transfer title to other assets. Death certificates usually will not be available until a week or two after the death.
Contact life insurance companies to claim the proceeds. The executor can usually find the telephone number on the most recent life insurance policy statement.	Contact the insurance company as soon as possible. The decedent’s family may need the insurance proceeds for support.
Notify the Social Security Administration of the death. Also notify banks and investment brokers.	The telephone number for the Social Security Administration is 1-800-772-1213.
Contact an estate planning or probate attorney to determine what court filings are necessary.	Select an attorney who has at least 5 years of significant experience handling the administrations of estates. See the attorney as soon as possible after the death. Referrals to attorneys can be obtained from friends or relatives, or often from a local bar association referral service.
Contact an accountant regarding all tax filings that will be necessary.	The personal representative or surviving spouse must file a final income tax return for the decedent (Form 1040). No further estimated taxes for the decedent must be paid after the death of the decedent.
	The “probate estate” (if a probate is necessary) becomes a new taxpayer and the personal representative must file a tax return (Form 1041). The estate may select a fiscal year that may result in beneficial tax deferral.
	If the decedent funded a “revocable living trust” during life, that trust, which becomes irrevocable at death also becomes a new taxpayer and may also be required to file a Form 1041. However, in certain cases, the probate estate and the trust may file consolidated income tax returns.
Obtain an Employee Identification Number (EIN) for the estate.	The estate will need an EIN to file tax returns and to open a bank account. In addition, the estate will be required to get a new EIN if the funds from the estate are used to establish a trust. The IRS provides an online application with an interactive, interview-style questionnaire that will guide you through the application process. There is no charge to obtain an EIN. The estate’s attorney or accountant can also help with this process.
Open an estate checking account as soon as possible—deposit all checks due to the decedent and pay all debts and expenses owed (including funeral expenses and taxes) from this account.	It is critical to keep accurate records. Do not commingle anyone else’s income or expenses with the decedent’s income and expenses, including income earned and expenses paid after date of death. The executor will need accurate information to file the decedent’s final income tax return, the estate’s and/or trust’s income tax return, and the estate tax return.
Search through the decedent’s desk, office, safe deposit box, and files to locate information that is needed for the tax returns.	Specifically, look for the following: will, codicils to the will and trust agreements; addresses and Social Security numbers of beneficiaries; checking, savings, money market, and CD statements; checkbook registers; brokerage statements; stock certificates; bonds; retirement plan and IRA benefit statements; life insurance and annuity policies; the last 3 years of state and federal income tax returns and all prior gift tax returns; property tax bill and deed for real estate; buy-sell or operating agreements for businesses; all outstanding bills (including last illness and funeral bills); and any undeposited checks.
Review the decedent’s company retirement and benefit plans, as well as IRAs, with a tax advisor or attorney.	The beneficiary of these assets must make certain decisions regarding distributions from these plans and IRAs; the decisions made can have significant income tax consequences.

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