Tax Issues on Death

When a person dies, the executor of a will or the trustee of a trust has certain responsibilities to settle and close the estate, including addressing tax issues.

Executors and trustees, as fiduciaries of the estate, must identify, manage and protect estate assets, pay off creditors, distribute the remainder estate to beneficiaries, and file tax returns as needed. Any of the following possible federal and state tax returns may be required. Fiduciaries are held to a high standard - - that of the utmost good faith.

Personal Income Tax Return. If the deceased person (called a decedent) had an obligation to file a personal income tax return in the year of his or her death, then the fiduciary must file a personal tax return for the decedent.

Estate or Trust Income Tax Return. The fiduciary may also have to file an income tax return for the probate estate or the trust estate. From the date of death, any income generated by any of the decedent’s probate or trust assets is income of the estate or the trust. If the estate or trust income is $600 or less from the date of death, then no return is required.

Estate Tax Return. The fiduciary may also need to file an estate tax return, but only if the decedent’s estate is worth more than the estate tax exemption amount. The federal exemption amount is $12.06 million per person for 2022. The New York State estate tax exemption is $6.11 million.

Many rules, deadlines, exemptions and exceptions apply to income tax and estate tax reporting requirements. It is important to consult with a professional to properly govern the process and possibly plan ahead to avoid costly tax liability. For example, New York does not have a gift tax and by planning ahead gifts can be made so that once a person dies, their estate will be under the New York estate tax limit. However, the sooner you act the better, since if you die within three years of making the gift, New York has a “claw-back” that brings the gift back into your estate.