by Joe Ben Combs, CPA
Tax Supervisor @ Atchley & Associates, LLP
Handling the estate of a family member or friend who has passed away can be one of the most difficult things you may be asked to do, both emotionally and logistically. You have to navigate a complex tax system, a treacherous legal system and a bureaucratic financial system all while managing relationships with beneficiaries eager for their inheritance, not to mention the task of dealing with your own personal loss.
Our team has walked many people through this process and we thought it would be helpful to share a few items that our clients often need to be reminded of.
- Notifications. There are a number of individuals, businesses and institutions that are impacted when someone passes away and will need to be notified. Depending on the situation, these can include the Social Security Administration, heirs, beneficiaries, creditors, financial institutions, insurance companies, and utilities providers, among others.
- Obtain an EIN. The employer identification number is the tax ID used by an estate or trust. This will be required to open an estate or trust bank account as well as for any tax filings.
- Change of address. The United States Postal Service allows you to request a change of address online at usps.com. This is important in order to avoid a pile of mail in the decedent’s mailbox which can pose a security risk but it also allows you as the person responsible for the estate to stay on top of bills and identify businesses or financial institutions with which the decedent may have had accounts.
- Taxes. As the personal representative, you may be responsible for filing a number of tax returns for the decedent. These might include an estate tax return (form 706) an income tax return for the estate (form 1041) and the individual’s final income tax return (form 1040) or gift tax return (form 709) as well as unfiled returns from prior years. With all of these come a host of possible tax elections and post-mortem planning opportunities that should be discussed with a tax professional. And while Texas does not have any corresponding state returns for these federal filings, many decedents will have filing obligations in other states.
- Search for unclaimed property. One of the primary responsibilities of the executor, administrator or trustee handling an estate is to identify, collect, value, manage, and dispose of or distribute the decedent’s assets. An often overlooked source of assets is the state itself. In Texas, the Comptroller provides a website (https://mycpa.cpa.state.tx.us/up/Search.jsp) where individuals and business can search for unclaimed property by name.
- Value all assets. This was alluded to above but it is worth repeating. Even if the value of a decedent’s estate is below the threshold to generate any estate tax, obtaining date-of-death values (or values as of the alternate valuation date if applicable) is crucial to ensure correct income tax reporting when that property is subsequently disposed of. This is because the basis (tax-speak for the starting point in a gain or loss calculation) of an asset gets stepped up to the date of death value and is often difficult to track down later on when the asset is sold.
- Disclaiming an inheritance. Many beneficiaries find it advantageous for various reasons to allow assets that they would have otherwise inherited to pass to someone else. This can be an effective post-mortem planning technique. Keep in mind however that the assets must then be distributed as if the beneficiary had predeceased the decedent. In order to be effective for tax purposes a disclaimer generally must be made within 9 months of the date of death and the original beneficiary must not have received any benefit from the disclaimed assets.
- IRAs. Decedents’ assets at death will often include retirement accounts, particularly IRAs. The full range of options available for handling IRAs is beyond the scope of this piece and it is often not the executor’s decision what happens to these accounts but simply keep in mind that withdrawing the funds immediately is often the least advantageous option. Consulting a CPA or financial advisor is highly recommended when making these decisions.
- Hire professionals. At the risk of sounding self-serving, we could not in good conscience omit this simple piece of advice. There are simply too many moving pieces and too much at stake to not at least consult with a CPA and/or attorney who is experienced in dealing with estates.