Understanding Estate Taxes: A Guide for Executors

Note: Our content team has not yet finished the review process for this article. It may contain inaccuracies or incomplete information.

An in-depth exploration of the responsibilities executors have regarding estate taxes and how to manage them.

Estate tax definition with house icon and dollar sign

What are Estate Taxes and Who Pays Them?

Estate taxes are taxes imposed on the transfer of a deceased person's estate to their heirs and beneficiaries. The estate tax is sometimes referred to as the "death tax." If an estate is subject to estate taxes, those taxes must be paid before the assets can be fully distributed to the heirs.

Not every estate is subject to estate taxes. For the 2023 tax year, only estates with values exceeding $12.92 million are subject to federal estate tax. This threshold is known as the "lifetime exemption."

Even if an estate is under the federal exemption threshold, it may still owe state estate taxes. As of 2023, 12 states and the District of Columbia impose their own estate taxes. Each state sets its own exemption thresholds, which may be lower than the federal exemption. So it's important to research the specific estate tax laws in the state where the decedent lived or owned property.

If estate taxes are due, they are paid from the assets of the estate before distribution to the heirs. The executor or personal representative is responsible for filing the estate tax return and paying any taxes due from estate funds.

🔝
Map showing states with estate taxes and list of exemption amounts

Current Federal and State Estate Tax Thresholds

For 2023, the federal lifetime exemption is $12.92 million per individual. With portability between spouses, that means a married couple can shield up to $25.84 million from federal estate taxes.

The 12 states and D.C. that impose state-level estate taxes set their own exemption thresholds, ranging from $1 million to $9.1 million:

  • Connecticut: $12.92 million
  • District of Columbia: $5.8 million
  • Hawaii: $5.51 million
  • Illinois: $4 million
  • Maine: $6.41 million
  • Maryland: $5 million
  • Massachusetts: $1 million
  • Minnesota: $3 million
  • New York: $6.58 million
  • Oregon: $1 million
  • Rhode Island: $1.65 million
  • Vermont: $5 million
  • Washington: $2.19 million

If an estate exceeds the state exemption threshold, a state estate tax return must be filed. This is in addition to the federal estate tax return for estates that exceed the $12.92 million lifetime exemption.

As the executor, it's crucial to determine if the estate exceeds the federal or state exemption and has an estate tax liability. Consult with an estate tax professional to properly calculate the gross taxable estate.

🔝
Checklist of estate tax responsibilities for executors

Estate Tax Responsibilities of the Executor

As the executor, you are responsible for handling estate taxes. Some key duties include:

  • Determining the gross value of the estate and whether the estate exceeds federal or state exemption thresholds
  • Filing federal and/or state estate tax returns (IRS Form 706 and state equivalent)
  • Paying estate taxes due from estate funds before distributing assets to heirs
  • Defending the estate return in case of audit

Important due dates:

  • Federal estate tax returns are due 9 months after the date of death
  • State deadlines vary, but are generally 9-12 months after the date of death
  • Extensions of time to file are available if requested before the original due date

If significant assets like real estate or a business must be liquidated to pay estate taxes, the executor must arrange for sale or transfer and ensure taxes are paid on time.

Work closely with an estate tax attorney or CPA to accurately value the estate, prepare the returns, and minimize taxes through available deductions and strategies.

🔝
Tax forms and documents needed to file estate tax returns

How to File Estate Tax Returns and Pay Taxes Due

For federal taxes, the executor must file IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. This return is due 9 months after the date of death. You can request a 6-month extension by filing Form 4768 on or before the original due date.

States have their own estate tax forms. Check with the state's Department of Revenue or tax agency for the specific form required. Like federal returns, state returns are generally due 9-12 months after the date of death. Extensions may be available.

To prepare the returns, you'll need to gather substantial financial records, including:

  • Will and trust documents
  • Bank, brokerage, and retirement account statements
  • Deeds and property valuations
  • Business ownership and valuation documents
  • Life insurance policies
  • Loan, debt, and mortgage information

You must obtain tax ID numbers from the IRS and state to file returns. Use IRS Form SS-4 to obtain a federal Employer Identification Number (EIN) for the estate.

The estate tax is due by the filing deadline of the return. Payments are made from the estate's funds under the executor's authority. Consult with your estate tax professional and probate attorney to arrange for timely payments.

🔝
Icons representing key strategies to reduce estate taxes

Strategies to Minimize Estate Taxes

With advance planning, there are several strategies that can be used to minimize estate taxes, such as:

  • Making annual tax-free gifts up to $17,000 per recipient
  • Using the unlimited marital deduction to leave assets to a spouse tax-free
  • Creating an irrevocable life insurance trust (ILIT) to remove policy proceeds from the estate
  • Establishing a qualified personal residence trust (QPRT) to remove a primary home from the estate
  • Transferring assets to a grantor retained annuity trust (GRAT) to minimize taxes on appreciating assets
  • Making charitable donations from the estate
  • Using a family limited partnership (FLP) or LLC to transfer assets at a discount
  • Selling assets to an intentionally defective grantor trust (IDGT) to freeze values and remove appreciation

As executor, work with the estate planning attorney to implement any tax-saving strategies that were put in place. It's also important to get valuations right. Don't overvalue assets, and consider discounts for lack of marketability or control where applicable.

Meticulous recordkeeping is also essential to minimize taxes and defend against an audit. Keep detailed records of asset valuations, transfers, and discounts applied.

🔝
Icons representing estate tax professionals - attorney, CPA, appraiser, financial advisor

Getting Professional Help with Estate Taxes

Given the complexities of estate tax laws and potential for substantial taxes due, it's wise for executors to engage professional help. Consider hiring:

  • An estate tax attorney to provide legal guidance on filing requirements, calculate taxes owed, and represent the estate in case of audit or disputes with tax agencies

  • A certified public accountant (CPA) with estate tax experience to prepare the returns, manage tax payments, and assist with tax planning strategies

  • Qualified appraisers to provide valuations for real estate, personal property, and business interests included in the estate

  • A financial advisor to optimize tax strategies, assist with liquidation of assets, and advise on tax-efficient ways to distribute assets to heirs

The costs of professional advisors are paid from the estate, not out of pocket by the executor. It's money well spent to ensure estate taxes are properly handled and minimize executor liability.

Start interviewing tax professionals soon after taking on executor duties. Ask for recommendations from the estate planning attorney, or contact the American Academy of Estate Planning Attorneys or National Association of Estate Planners & Councils for referrals.

🔝
Checklist of key estate tax tips for executors

Wrapping Up - Estate Tax Tips for Executors

Managing estate taxes is one of the most complex and important duties for executors. Missteps can trigger audits, penalties, and even personal liability. Here are some key tips to manage the process:

  • Consult professionals early for guidance and to prepare necessary tax returns
  • Determine whether the estate owes federal or state estate taxes based on current exemption amounts
  • File IRS Form 4768 for a 6-month extension if more time is needed to file IRS Form 706
  • Arrange for timely payment of estate taxes owed from estate funds by the return due date
  • Meticulously document asset valuations and any discounts applied
  • Take advantage of available strategies to minimize estate taxes, such as annual tax-free gifting, charitable bequests, and trusts
  • Keep beneficiaries informed about estate tax liabilities and any delays in distribution to pay owed taxes
  • Get professional valuations of unique assets like real estate, collectibles, or private business interests
  • Consider tax implications of liquidating assets to pay estate taxes
  • Don't distribute assets to heirs until estate taxes and returns have been settled

While estate taxes can be daunting, tapping professional support and having a clear action plan can ease the burden. Work closely with your estate tax attorney and CPA to resolve estate tax issues correctly and efficiently. With good planning and advice, you can minimize taxes, avoid penalties, and move forward to final distribution.

🔝
Note: Our content team has not yet finished the review process for this article. It may contain inaccuracies or incomplete information.