Taxation of an Estate Account
Annual income taxes. Any income earned from the estate assets that is not distributed to the beneficiaries, minus any brokerage commissions or fees, will be taxed, and the funds from the estate will be used to pay the taxes. If the income was distributed to the beneficiaries it will be included on the beneficiaries’ individual returns. Taxes will be filed on a Form 1041.
Estate taxes. Estate taxes are due nine months from the date of death. They will be filed by the executor on Form 706, and once the taxes have been paid, the IRS will issue an estate closing letter.
To get the total value of the estate, all assets must be valued, including house, other property, investment accounts, insurance policies, annuities, art, furniture, and any assets held in a revocable trust. Then any funeral or administrative costs, debts owed at the time of death, any charitable gifts made at the time of death, and any deduction passed on to a spouse (marital deduction) subtracted off. Taxes will be owed from the estate on any remaining value above $11.4 million (for 2019). The $11.4 million is called the lifetime gift tax exclusion or unified credit, and it often changes from year to year. This number is smaller if a person has made annual gifts above the annual gift tax exclusion in their lifetime. The annual exclusion is currently $15,000.
Marital deduction. A married person can pass their assets on to their spouse without paying any estate taxes. Once the surviving spouse dies, however, estate taxes will need to be paid on those assets. When a person passes on their assets to their spouse, the spouse also receives any unused portion of their spouse’s lifetime exclusion. Thus, a surviving married person could receive a lifetime exclusion of up to $22.36 million. This ability to pass on your unused lifetime exclusion to your spouse is called portability.
Example Question
Debbie dies suddenl