Taxes and Estate Planning

People are fond of saying that the only sure things in life are death and taxes. However, most people don’t really understand how death and taxes work together. Two stated in a different way, most people don’t understand the kinds of taxes that are involved after a person dies. Our Idaho estate planning team of attorneys has been helping clients for over 70 years navigate the problems that can arise through death and the taxes associated with a person’s estate. We are confident that we can help you too!

Our team of Idaho estate planning attorneys consists of partners Randy Budge and Lane Erickson and attorneys Nate Palmer and Dave Bagley who have each earned the highest rankings possible through well-known and long established legal rating services including Martindale and Hubbell, Justia, and AVVO. These rankings are determined based upon a person’s experience, legal skills and knowledge, and ethics in working with clients and other attorneys. We take pride in achieving such high rankings based upon reviews from our peers and clients.

Well it is true that death and taxes are applicable to everyone, they don’t affect everyone the same way. Here are three specific things that you should understand about how taxes are applicable when a person dies.

Most people understand that a tax filing must be done for the individual who passed away following their death. However, most people don’t really understand how the timing of taxes works. Take for example an individual who dies on December 31st of any given year. In this instance an individual tax return must be filed for the year in which they died. This works out well because the person died right at the end of the year and therefore likely individually earned income of some sort during that year.

However, let’s change the example of little bit. Let’s say, for instance, that an individual passed away on January 1st of a given year. In this instance the family of the deceased individual will still need to file tax returns. In fact, two individual tax returns will be filed. The first tax filing will be for the previous year like normal. Additionally, because the individual lived into the new year (even though it was only for 1 day) there will need to be a tax filing for the new year as well, to list any income the individual earned during their one day of life in the new year. Unless the individual who died was immensely wealthy, it is likely that there will be no income or marginal income to report in the final tax filing. In fact, it may be likely, that there is no income to report and that there is no tax liability. However, the filing was still need to be made to indicate that the person passed away and that this will be the final tax filing for that individual.

Now let’s talk about tax returns that must be filed for an estate after a person passes away. Keep in mind that individual tax filing and a tax filing for an estate are two different things. To illustrate how this works, let’s use the same two examples that we used above and let’s assume the estate holds income producing assets.

In the first example, where an individual passed away on December 31st, there will be no estate income that will have been earned in the year that the individual died. However, if the individual left income-producing properties or assets then the decedent’s personal representative will need to file an estate tax return for the following year after the individual’s death. In other words, beginning January 1st after the individual dies income will be earned by the estate through the assets it holds. As a result, the estate will need to file tax form 1041 to declare any income that is earned in that year above the amount of $600.

More than likely there will be a probate of the estate of the individual who passed away. This may take a few months to complete. When probate is completed, the assets in the estate, including those assets that produce income, will be distributed to other individuals. As a result, the tax filing for the estate includes only the income that was produced by the estate, during the existence of the estate, and before those income producing assets are distributed to other individuals. Once the assets are distributed, the estate is no longer earning income. As a result, the estate must only report the income that was earned while the estate held the income-producing asset.

The final thing to know about death and taxes is how the dreaded estate tax, which some people also called death tax, works. This is a tax that is different than the income tax which is discussed in sections 1 and 2 above. Rather, the death tax is an additional tax designed to allow the IRS to tax wealthy estates.

For the last several decades the exempt limits on the amount owned by an estate before a tax is owed has grown substantially. At the end of 2017 the exempt amount was $5.49 million per individual or nearly $11 million for a married couple. Most people are aware that beginning in 2018 President Donald Trump’s new tax plan doubles these amounts. As a result, it is only the wealthy who could be hit with the death tax. All other individuals whose estates are lower than 11 million dollars individually or 22 million dollars collectively will not owe a “death tax” on their estate.

For those who might owe a death tax, there are other estate planning strategies and options available that will help minimize or eliminate the death tax. For these reasons we always recommend that our clients speak with us when it comes to any concerns associated with the death tax.

Our team of Idaho lawyers can help you with any of your estate planning needs if your spouse has passed away. Whether you are seeking to create or review an estate plan for yourself or would like to help a loved one, we are available to discuss your options and answer your questions at an initial consultation. Call us toll free at 877.232.6101 or 208.232.6101 for a consultation. You can also email us directly at racine@racinelaw.net. We will answer your questions and help you solve your Idaho Estate Planning problems.