Thinking about or planning for your death is surreal, but it’s worth the effort. You’ll be less anxious knowing you have the plan to cover the unexpected. For your family, the burden of your loss, funeral plans, and other estate expenses will be a little lighter when you can detail what you’d like to happen.
You can make your later life event less stressful with a good plan and provisions to help them tie up loose ends and simply remember the time they spent with you.
Of course, there are assets to divvy up and funds to settle on your descendants, but there are also many administrative tasks to finish, like paying any outstanding taxes. Read on to learn how taxes are paid after you pass and how to prepare your family to take care of it.
Key Takeaways
- The estate is responsible for any taxes you owe for the current tax year or back taxes.
- You can designate an estate administrator, or the probate court will do so.
- To cover your taxes and other final expenses, the estate administrator will need access to your information and accounts or cover the costs from their pocket.
- When you prepare a robust estate plan, you ensure that your wishes are fulfilled and your administrator has what they need to settle your estate.
Filing Taxes After You Pass
It’s probably one of life’s great ironies that you still have to pay taxes after you die. Technically, your estate will, but the irony is still there.
Your estate administrator is ultimately responsible for filing your final tax return for your last year of life. Filing taxes for a deceased person is similar to filing your own.
- The administrator will report all of the income you made during the year before your death and file the necessary tax return.
- They can claim credits and deductions as you usually would.
- If taxes are owed, they will need to pay them. They can also receive a refund if your estate qualifies.
If you owe taxes, the estate can be pursued by the IRS until all outstanding amounts are paid for up to 10 years. This applies to past and current tax years.
Helpful Tip: Your administrator may need access to your previous financial information and tax returns. You can request previous transcripts with this handy IRS form.
Who Is The Estate Administrator?
Typically, this person is named in your estate plan as the administrator, appointed legal representative, next of kin, or surviving spouse. Whoever you name will have access to all information and accounts they need to pay outstanding taxes and coordinate refunds.
They are also responsible for the management and distribution of your estate.
If you don’t have an estate plan or will, your state’s probate court decides the issue of inheritance and executorship. In our home state of Pennsylvania, it can get pretty complicated. Working through probate court is also time-consuming and potentially expensive.
Designating a taxpayer is more straightforward. The responsibility will typically go to the next of kin. They will simply note that they’re filing on your behalf. If taxes aren’t filed, the IRS can place a federal lien against the estate so that taxes are paid before closing any other debts or accounts.
This is one reason why an estate plan is so important. You can name an administrator and prepare them to finalize your taxes and estate with all the access and information they need to do the job seamlessly.
Do Survivors Have to Pay Any Tax Personally?
It depends. If there is unpaid tax, the estate administrator will first:
- Pay the tax bill with the estate’s available cash,
- Then use any proceeds from liquidated assets,
- If the estate’s funds are drained, they must pay your taxes with their personal money.
The good news is that survivors usually don’t have to pay their taxes with their funds. The obvious caveat is that you need to leave enough money in cash or assets to cover your taxes.
If you’ve been working with a financial advisor, you should be able to predict how much you’ll owe in any given tax year and leave enough money in the bank to cover it and spare your survivors.
Preparing Your Estate Plan for Taxes
You likely know by now that an estate plan is critical. A detailed plan will save your family’s confusion and stress during an already difficult time. It also ensures that your wishes are carried out exactly as you want.
An estate plan is more than just a will. It usually includes these six documents.
- A will or trust
- A durable power of attorney allows the agent to act even if you become incapacitated or disabled.
- Beneficiary designations—you can have more than one as a backup.
- Letter of intent that gives beneficiaries and, if necessary, a judge an understanding of your intention if any part of your will is contested.
- A healthcare power of attorney
- Guardianship designations
Within these documents, especially your will and letter of intent, you can explain which accounts have funds available for taxes, outline how to settle debt you may owe, and any other financial obligations that must be satisfied.
Designating a power of attorney or estate administrator will also grant your survivors access to bank accounts, retirement funds, and other income streams they may need to settle your estate.
To ensure your bases are covered, you’ll want to work with a financial planner to develop a plan that meets your needs and wishes. Once it’s in place, you can feel confident that your family is provided for and can execute your will without any trouble after you’re gone.
If you need to create an estate plan or have other end-of-life financial questions, contact Metanoia Financial. We have experienced advisors who can help you plan for almost every eventuality.
The first call is free, so click here to schedule a consultation.
