An in-depth exploration of the responsibilities executors have regarding estate taxes and how to manage 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.
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:
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.
As the executor, you are responsible for handling estate taxes. Some key duties include:
Important due dates:
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.
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:
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.
With advance planning, there are several strategies that can be used to minimize estate taxes, such as:
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.
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.
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:
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.