Filing an estate tax return is complex and difficult to navigate while you are still grieving the loss of a beloved friend or family member. Executors of the estate have minimal time to process their loss because they must take care of the minutiae of managing the taxes surrounding an estate.
Which forms are you required to fill out and when?
Both Form 706 and Form 1041 are usually required before you can close out an estate. Here is what you need to know about Form 706 and how it differs from Form 1041 so that you can rest easier knowing that you have done everything necessary by IRS standards.
What is IRS Form 706?
There are many forms that you may be required to fill out at the end of the tax year, but there is one that hits families particularly hard when a loved one has passed. The executor of that estate will have to file Form 706 with the Internal Revenue Service to help them calculate the estate tax laid out in Chapter 11.
Form 706 can also be used to compute a generation-skipping transfer tax. If you are more than a single generation away from the deceased and inherit something from the estate, the executor will need to fill out this form and include your inheritance. For example, bequests to grandchildren and great-grandchildren are required to be disclosed on this form with a few exceptions.
Form 706 is not filed with your annual taxes but must be filed within nine months of the death of your loved one if the estate exceeds the federal exemption amounts, which changes every year. Even if the estate does not owe any taxes, the IRS wants to see the calculations.
What is the Difference Between Form 706 and Form 1041?
It’s important to note that there are major differences between Form 706 and Form 1041, both required to be filed to calculate estate taxes. Where do the two forms diverge, and what can you expect when filing each with a legal or tax representative?
Form 706 captures the value of all assets and liabilities on the precise day that a loved one passes. This sets the baseline for what the estate was worth and allows you to fill out Form 1041 more easily. The key is to recognize that in most situations, both forms are going to be required by the IRS at different times based on how the estate performs as you close it out.
On the other hand, Form 1041 denotes all income generated by the assets in the estate after they have passed. Income is tracked right after their final 1041 reporting period and is only required if the estate makes more than $600 in gross income for the tax year. You may also use this if any of the beneficiaries are nonresident aliens.
As long as the estate earns income and remains open, you must file Form 1041 annually. This only ceases to be a part of the annual taxes when the assets are distributed to the proper beneficiaries. However, you should keep in mind that you can deduct expenses for managing the estate from the income on Form 1041 to lessen the tax burden.
Who Should File Form 706?
The question for many people is: Who is responsible for filing Form 706 on behalf of a deceased person’s estate?
The answer is fairly clear-cut. The executor of the estate is the one responsible for the management of the estate and, thus, must file the forms required by the IRS until the time comes when these forms are no longer required.
The form must be filed within nine months of the death, which is the same time taxes are due on the estate. Extensions can be granted for an additional six months to give you time to grieve and get organized for the IRS to deep-dive into the estate’s value.
Payments for tax liabilities can be paid either in installments or in a lump sum as you work through the remainder of the estate. It is recommended that you work with a legal or tax professional to minimize out-of-pocket spending associated with Form 706. This is not something every tax preparer sees on a regular basis, so be sure to ask if they have experience with this form, or you could end up regretting it.
Let Magellan Help with Estate Planning
After the passing of a loved one, dealing with the various bank accounts, assets, and credit cards they’ve left behind can at times feel overwhelming to get in order! Trusts play a crucial role in estate planning, as they can help the estate avoid probate while also providing tax benefits.
Magellan can be a trusted resource for anyone seeking help with four main areas: estate, financial, legal, or tax planning. We offer it all under one roof so you can have a one-stop shop and rest easy knowing that your loved ones and your estate will be taken care of after your passing.
Let us help you establish a revocable trust, irrevocable trust, or even a charitable remainder trust that makes estate planning easier on your loved ones now!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.