Yyou wait The death of a spouse, parent, or other close relative is emotionally devastating. What surprises many survivors is the daunting and tedious administrative, tax and practical work that follows – from tax returns and validation to sifting through a lifetime of paperwork and assets. When my father died suddenly last October, I was mentally prepared for these duties, being a taxman and estate agent as well as a journalist. However, my family’s experience reminded me that complicated rules don’t always line up or work smoothly. After I wrote about how my widowed mother went five months without benefits because of the problems she faced with a short Social Security Administration, I received emails and messages from families struggling with similar or worse problems, as well as all kinds of practical questions about estates.
These messages led me to create this guide as a starting point for families, executors, surviving spouses and beneficiaries. It’s a way to identify difficult issues and points you to resources (including a checklist, tables and a map) on the issues that commonly lead to taxes and other unpleasant surprises after death. It also offers readers suggestions on ways to reduce the tax and administrative burden on their heirs.
Illustrated by CJ Burton for Forbes
Where someone dies can change the cost
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Most families don’t have to worry about federal estate tax. The current federal tax exemption ($15 million per individual or $30 million per married couple) is high enough that just over one in a thousand estates are hit by the federal levy
State taxes are different. Twelve states and the District of Columbia impose estate taxes, and all but one have much lower exemptions – three are $2 million or less. Five states levy inheritance taxes that can hit almost every penny depending on who the heir is. A couple can live together for years and buy a house together, but the surviving partner could face a hefty inheritance tax because they were never married.
Other states do not impose a death tax, but have expensive probate systems or mandatory attorney fees. We have details by stateas well as ideas for minimizing government burden.
Illustrated by CJ Burton for Forbes
Death does not cancel income tax liabilities or debts
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A common misconception is that tax problems disappear when someone dies. They don’t. Old tax bills and liens don’t just disappear. And a final Form 1040 is generally required for the year of death if the decedent would have had to file one if he were alive. This statement reports income earned or constructively received before death and medical and other deductions attributable to the decedent before death.
The final 1040 may not be the only tax return that needs to be filed. An estate can become a separate taxpayer, and if it has enough income after death (including interest and dividends), it may need to file a Form 1041. You’ll have to sort out what needs to be reported, when it needs to be reported, and who is responsible for reporting it. Mistakes can follow the executor, surviving spouse or beneficiaries long after the funeral. Here is more help on the taxation front.
Illustrated by CJ Burton for Forbes
Retirement accounts can be complicated
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Legacy retirement accounts may seem simple. Many taxpayers name their beneficiaries when they open an IRA or a workplace account like a 401(k) and then largely forget about it. On death, the account is transferred to the beneficiary, who may also be tempted to forget about it.
Such a thing is dangerous. The SECURE Act and SECURE 2.0 — signed into law on December 20, 2019 and December 29, 2022, respectively — changed and complicated the options for managing inherited retirement accounts. For many non-spousal beneficiaries, the old “stretch IRA” option that allowed you to spread distributions over your lifetime is no longer available. Conversely, if the account owner died in 2020 or later, those beneficiaries must now empty a legacy account within 10 years.
The 10-year rule is so confusing that beneficiaries have made many mistakes. A common: Assuming no annual distributions are required over the 10 years. We explain this and other common mistakes and how to avoid them here.
Illustrated by CJ Burton for Forbes
Don’t ignore things at home
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Furniture, jewelry, art, collectibles, family records and decades of photos, including those stored in boxes in the basement (and in my dad’s case, in cubbies throughout the house), also need to be considered. Some items may have financial value, while others may simply have sentimental value. Some may be donated. Some may be sold. And some may have to be thrown away, which can be more emotionally difficult than families expect.
For tax purposes, inherited property generally receives a step-up in basis equal to its fair market value at death. This means that heirs who sell inherited property shortly after death may have little or no capital gain if the sale price is close to the date of death value. But collectibles have their own rules, including a higher maximum federal long-term capital gains rate. Donations can also be difficult, both when it comes to finding a charity that wants your family’s belongings and when it comes to tax deductions.
We’ve got advice on all of that, as well as practical tips for estate sales and 10 steps to take care of your own stuff now so your kids don’t have to later.
Illustrated by CJ Burton for Forbes
And don’t throw discs too fast
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Along with all the possessions, many people (my dad included) leave behind decades of tax and financial records, often tucked away in the oddest of places. You may be tempted to throw in the lot. But be careful: Financials are different from ordinary clutter. Old tax returns, W-2 forms, brokerage statements and account statements may still be relevant.
For ordinary income tax records, the general rule is to keep the returns and supporting documents until the statute of limitations expires. If a return was filed correctly and on time, the IRS generally has three years from the filing date to determine the additional tax. However, there are exceptions, such as omitted income, foreign asset reporting issues, fraud and failure to file. In these cases, records should be kept much longer.
Along with all old records, many new ones are created during the process of managing an estate. You should keep some of those too. We’ve got the details on what to throw away or save here, as well as tips on scanning paper documents and shredding them.
Go slow the first few weeks
After a death, families often want to move quickly. This is natural. But for tax purposes, the best first step is to slow down and make sure you understand the rules before you do anything—before you distribute assets, sell real estate, close accounts, or take retirement distributions.
Take a look at your existing documents and records, including your will, trust (if any), beneficiary designations, account statements, and previous tax returns. Consider contacting a tax professional for help before deadlines pass or assets are distributed.
Many estates are simple. But even simple estates can have an issue or two that create tax consequences. While the tax system doesn’t stop for grief, a careful process can make the months after a death less chaotic, less costly and less likely to cause painful surprises.
