There are a handful of different tax obligations that may arise during estate administration. These taxes typically take priority over inheritance rights, making them a key consideration when developing an estate plan.
Many people worry about estate taxes in particular, as these taxes can consume a large amount of the estate. California does not impose an estate tax or an inheritance tax, but federal estate taxes may apply to larger estates. Others worry about capital gains taxes if they expect their beneficiaries to sell certain resources after inheriting them.
While both of those taxes may require careful planning, testators need to think about income taxes. There are actually two separate income tax obligations that could diminish the value of an estate after someone dies.
What taxes may be due from the estate?
People accrue income tax liability through various sources of revenue. It is common practice to have the personal representative of an estate file an income tax return on behalf of the decedent.
Even if they hadn’t worked in years prior to their passing, a final return provides an opportunity to reconcile tax obligations before distributing estate resources. Any residual income tax responsibilities typically require payment using estate resources.
The estate itself might also owe income taxes. Many estate plans require the sale of assets. People hold estate sales or sell large assets to divide the proceeds among specific beneficiaries. If the sale of resources generates $600 or more in revenue, then the estate may owe income taxes.
Planning in advance for various tax obligations can help people maximize their impact on others after they die. Income taxes can diminish the value of a estate if a testator doesn’t address their obligations in their estate plan.
