Regardless of which route you take to get there, your duties as executor or administrator are essentially the same. The executor’s or administrator’s job is to identify the estate’s assets, pay off its debts and then distribute whatever is left to the rightful heirs and beneficiaries. The executor or administrator is also required to file any necessary tax returns and pay any taxes. Should this not be handled properly, the IRS can come after the executor or administrator personally for tax underpayments (plus penalties and interest) — even if he or she has hired a professional to deal with the paperwork. So if you find yourself in this role, you need to take the responsibility seriously.

Here’s an overview of four major steps an executor or administrator needs to consider:

1. Filing the Final 1040

The first step is to file the decedent’s income taxes for the year of his or her death on IRS form 1040 (and any applicable state tax forms). This final 1040 covers the period from Jan. 1 though through the date of death. The return is due on the standard date, meaning April 15 of the following year. If the decedent was unmarried, the final 1040 is prepared in the usual fashion. When there’s a surviving spouse, the final 1040 can be a joint return filed as if the decedent were still alive as of year’s end. The final joint return includes the decedent’s income and deductions up to the time of death plus the surviving spouse’s income and deductions for the entire year.

2. Filing the Estate’s Income-Tax Return

In addition to filing the decedent’s final income taxes, the executor or administrator may have to file the estate’s income taxes as well. Note that this is entirely different from the federal estate tax, addressed below. Essentially, what happens here is that once the individual has died, any income generated by his or her holdings after death now becomes part of the estate, and that income doesn’t escape the reach of the IRS.

The estate’s first income-tax year begins immediately after death. The year-end can be December 31 or the end of any other month that results in an initial tax period of 12 months or less. The executor or administrator must file Form 1041 (U.S. Income Tax Return for Estates and Trusts) by the 15th day of the fourth month after the year-end. So for a person who dies in 2013, the deadline will be April 15, 2014, when the “standard” December 31 year-end is chosen.

If the executor or administrator is dealing with an estate that has an annual gross income below $600, the executor or administrator doesn’t need to worry about Form 1041. Small/tiny estates are off the hook, as are those that can be wrapped up very quickly, before $600 worth of income accumulates. There is also no need to file Form 1041 when all the decedent’s income-producing assets bypass probate and go straight to the surviving spouse or other heirs by contract or operation of law. This is what happens, for example, with real estate owned jointly with the right of survivorship, with retirement accounts and IRAs that have designated account beneficiaries and with life-insurance proceeds paid directly to designated policy beneficiaries.

If the executor or administrator is in charge of a large estate which necessitates the need to file Form 1041, it is recommended that the executor or administrator hire a tax professional with plenty of tax experience.

3. Filing the Estate’s Estate-Tax Return

The federal estate-tax return is filed on Form 706 (United States Estate Tax Return). Assuming the decedent didn’t make any sizable gifts before dying, no estate tax is due, and no Form 706 is required, unless the estate is worth over $5.25 million for a person who dies in 2013. Sizable gifts are those in excess of $14,000 in 2013 to a single gift recipient in a single year ($13,000 for gifts in 2009-2012). If sizable gifts were made, the excess over the $14,000 (or $13,000) threshold is added back to the estate to see if the $5.25 million threshold is surpassed.

Form 706 is due nine months after death, but the deadline can be extended up to six months. Remember: While life-insurance proceeds are generally free of any income tax, they are usually included in the decedent’s estate for estate-tax purposes — even though the money may go directly to policy beneficiaries. In fact, life-insurance proceeds are the most common cause of unexpected estate-tax bills. An exception to this rule though is if the beneficiary is the surviving spouse since assets inherited by a surviving spouse (including life-insurance payouts) are not included in the decedent’s estate, as long as the surviving spouse is a U.S. citizen. This is the so-called unlimited marital-deduction privilege, and it’s the most common reason why many large estates don’t owe any federal estate tax.

As mentioned, it is recommended that the executor or administrator hire a tax professional even if the executor or administrator is fairly certain that no estate tax is actually due. If the executor or administrator is correct, the cost to confirm such conclusions will be minimal. Furthermore, a good estate-tax professional may be able to find some perfectly legal way to substantially reduce the tax bite or even make it disappear completely.

4. The Miscellaneous Details

If the executor or administrator will be filing Form 1041 and/or Form 706, the executor or administrator will need to get the estate a federal employer identification number (EIN). This is analogous to an individual’s Social Security number. The executor may apply for the EIN by filling out Form SS-4 (Application for Employer Identification Number) which can be downloaded from the IRS web site.

Next, the executor or administrator should file Form 56 (Notice Concerning Fiduciary Relationship), which notifies the IRS that the executor or administrator will be acting on behalf of the estate with respect to tax matters. It ensures that the executor or administrator will receive any notices shipped out by the IRS (lucky you!).

At this point, the executor or administrator will have legal power to open a checking account in the name of the estate (using the estate’s EIN that was obtained) and transfer some funds from the decedent’s accounts. The executor or administrator should use the new account to accept deposits from income earned by the estate and to pay expenses — such as outstanding bills, funeral and medical expenses and of course those darned taxes.

Unfortunately, once the executor or administrator has done all this, the executor’s or administrator’s work might not be finished. The executor or administrator may also have to file state income-tax returns and perhaps a state estate-tax return as well. As mentioned, acting as an executor or administrator is a great responsibly and such a role should not be taken lightly. I am sure that the deceased looks down from heaven at the executor or administrator and appreciates all the hard work the executor or administrator has to go through. The best advice is to have the executor or administrator retain a trusts & estates attorney to guide him/her through the complex process. May we all only know of happiness – amen!

The attorneys in the Trust & Estates Practice Group at Yedid & Zeitoune have a combined 15 years of legal experience and are ready to assist you with all your estate planning needs.

Isaac Yedid, Esq. and Raymond Zeitoune, Esq.

Yedid & Zeitoune, PLLC 

1172 Coney Island Avenue Brooklyn, New York 11230

Phone: (347) 461-9800    Fax: (718) 421-1695   Email: [email protected]

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