While I am not a CPA or tax attorney, I am often confronted with tax matters in my estate planning and estate administration practice. In this blog, I will focus on federal income tax returns for estates (Form 1041) versus federal Estate (and Generation-Skipping Transfer) tax returns (Form 706). As a disclaimer, this blog should not be taken to provide tax advice and is intended only as general information on the types of returns. Information in this blog is gathered and, in some places, quoted directly from irs.gov. Consultation with a CPA is highly encouraged before any filing decisions or submission of returns.
First, a fiduciary income tax return for estates and trusts (Form 1041) may be required if an estate generates more than $600 in income during its taxable year. An estate does not provide a product or service, nor does it become employed and receive salary or wages, but there are many instances where it can be issued a 1099 or otherwise produce income. While in many cases the heirs or devisees are the sellers of a decedent’s real property, depending on language in the Will or due to the personal representative of an estate obtaining a court order, an open estate may be the seller of real estate and, will therefore, be issued a 1099-S for real estate proceeds. Additionally, there are certain cases where an open estate may be the seller of stocks, bonds, business assets, valuable personal property and other appreciated assets since date of death where a taxable capital gain may occur. Personal Representatives of estates may also negotiate the final debts of the decedent and acquire a write-off in which case a 1099 for debt forgiveness may be issued to the estate. An estate may own assets which accrue interest, dividends, or otherwise receives taxable income.
Any income a decedent would have received but for their death which is not properly included on their final individual return is “income in respect of a decedent.” Income in respect of a decedent must be included in the income of the decedent’s estate, if the estate receives it, the beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it, or any person to whom the estate properly distributes the right to receive it. One instance where this arises is with inherited IRAs or other tax-deferred accounts. When the beneficiaries take distributions from the inherited IRA the income will generally be included as part of the beneficiary’s individual tax return. There are also other examples of income payable to the decedent which occur after the date of death which are income in respect of decedent. This income may sometimes be included on an estate income tax return if the estate receives the income.
On the other hand, a federal estate tax return (Form 706) is required for estates over 12.92 million for 2023. While this does not apply to most estates, Form 706 is also required for certain elections related to estate tax such as to elect portability for a surviving spouse wishing to carry over the deceased spouse’s unused estate tax exemption as well as for other elections such as the qualified terminable interest property election. Form 706 is due within 9 months from the date of death.
If you are a court-appointed personal representative for an estate, you need to assemble your “board of advisors” which should, at a minimum, include an attorney and CPA. We can help so please call our office to speak with an estate administration attorney.