When someone passes away, his (her) assets become property of his (her) estate. Any income those assets generate is also part of the estate and may trigger the requirement to file an estate income tax return.

There are two kinds of taxes owed by an estate: one on the transfer of assets from the decedent to his (her) beneficiaries and heirs (the estate tax), and another on income generated by assets of the decedent’s estate (the income tax).

The decedents and their estates are separate taxable entities. Before filing Form 1041, you will need to obtain a tax ID number for the estate.

The income tax return of the decedent

In general, the final individual income tax return of a decedent is prepared and filed in the same manner as when s(he) was alive. All income up to the date of death must be reported and all credits and deductions to which the decedent is entitled may be claimed.

The income tax return of the estate

A decedent’s estate figures its gross income in much the same manner as an individual. Most deductions and credits allowed to individuals are also allowed to estates and trusts. However, there is one major distinction. A trust or decedent’s estate is allowed an income distribution deduction for distributions to beneficiaries. Income distributions are reported to beneficiaries and the IRS on Schedules K-1 (Form 1041). Usually the beneficiaries pay the taxes.

The estate tax return

Internal Revenue Code section 6324 provides that on the day someone dies, a federal estate tax lien comes into existence. The lien attaches to all assets of the decedent’s gross estate that are typically reported on form 706. This estate tax lien does not have to be publicly recorded in order to be valid.  An “assessment lien” arises when tax is assessed and may be recorded in addition to the lien.

Before you sell real property of a decedent’s estate you typically need the IRS to “discharge” that property from either the estate or the assessment tax lien and obtain a transfer certificate. To discharge property from a lien is to remove the lien’s effect. This allows the buyer to take title to the property free and clear of the tax lien.

The executor will be asked to provide:

  • The listing of the worldwide assets of the decedent, valued at the date of death.
  • The death certificate
  • The certificate of citizenship of the decedent
  • An affidavit: written declaration under oath before a notary public, signed by the executor stating that under penalty and perjury and at his/her best knowledge the declaration is true and correct.
  • A copy of the will
  • Copies of documents related to the sale of property

There is no tax if the value of the decedent’s worldwide gross estate and the lifetime gifts of the decedent do not exceed $5,490,000 for 2017. This is called the “Unified credit exemption”. Over the exemption amount, the value is taxed at a 40% rate.

I created this blog to help understand certain basic aspects of U.S. tax law. Of course, each situation is unique and nothing that is on this site will ever replace the expert advice of a tax professional.

Please do not hesitate to contact me should you have any question.