What Are the Tax Responsibilities of an Estate Administrator?

Losing a close friend or loved one is always a heartbreaking event, but when that loss is coupled with the responsibilities of managing their estate, the ensuing stress and grief can feel overwhelming.

If you have been named as the administrator for a loved one’s estate, the following information should alleviate some of that stress, and it can help you achieve a smooth financial transition for the deceased person’s beneficiaries.

Key Terms for Estate Administration

While most estate administrators approach their job with dedication and diligence, there’s always a learning curve when managing someone’s estate, especially if they had lots of property and assets. Here is a list of key terms and roles that you should get familiar with.

• Decedent: A legal term that refers to the deceased person whose estate is being settled.
• Fiduciary: An individual, bank, or trust company that acts on behalf of another party. Trustees and executors (see below) are both considered fiduciaries.
• Trustee: A trust company, bank, or individual who is responsible for holding property and income that will eventually be delivered to a beneficiary according to the terms of a will or trust.
• Grantor: Sometimes referred to as a settlor or trustor, grantors transfer property to trustees to manage according to the terms of a trust agreement. (Not to be confused with a grantor trust, which is a tax term for certain types of trusts.)
• Beneficiary: The individual who will receive property or income from a will or trust, either now or at a set date in the future.
• Executor: Also commonly known as a personal representative, an executor is the individual, trust company, or bank that represents and settles the deceased person’s estate.

General Responsibilities of an Estate Administrator

After someone dies, the court should open probate proceedings within 30 to 90 days of their passing and appoint an executor for the estate. The executor is usually next of kin, an attorney, or the executor named in the will.

If the court appoints you as the estate administrator, then it will issue letters testamentary, which authorize you to execute the decedent’s wishes and fulfill various estate administration responsibilities.

RELATED: When Should I Contact a Tax Representative?

Your main job as an estate administrator is to collect assets, settle financial matters, and distribute finances and property to the surviving friends and family whom the deceased person named as their beneficiaries. This means you must provide the probate court with a full and accurate list of the decedent’s debts and assets.

The court will probably require that you hire a third party to appraise some of these assets. In addition, you’ll also be responsible for verifying debts and keeping track of creditor claims.

Filing and Paying Taxes Owed

In addition to the responsibilities listed above, the estate administrator is responsible for filing the decedent’s tax returns and paying the city, state, and federal tax balance in full. As the estate administrator, you are solely responsible for these activities, and the IRS can impose penalties and taxes on you for filing late or failing to pay.

Listed below are the three primary tax responsibilities of an estate administrator:

1. 1040 Form: The decedent’s final 1040 will include all their income from January 1 until the date of their death. This form is due on or around April 15 of the year following the person’s death. If there is a surviving spouse, he or she can still file jointly and include the decedent’s income and deductions.
2. Estate’s Income Tax Returns: Following the decedent’s passing, the estate is immediately eligible to assume ownership of any or all of their assets. The estate will be taxed on any income according to the IRS trust guidelines.
3. Estate Tax Return: You will need a Form 706 to file a federal estate tax return, which is due nine months after the decedent’s death. However, you can apply for an extension if there are extenuating circumstances. If the deceased person didn’t make any sizable gifts (which the IRS defines as a gift of more than $14,000 to a single recipient) before they passed away, there’s no need to file an estate tax return.However, the one exception is if the estate is worth more than $5.43 million. In this case, you can transfer unused exclusions to the surviving spouse, but only if you file an estate tax return. Also, note that life insurance proceeds are free of income tax but are subject to estate taxes, regardless of the beneficiary.

In general, it’s important to approach the tax aspects of estate administration with a healthy dose of caution. Making a mistake could cost you and the decedent’s beneficiaries a significant amount of money. The best move is to at least talk with an attorney who can learn about the details of the estate and advise you about your options and any notable concerns.

What About Medical Expenses?

Many individuals accrue enormous medical expenses as they grow older, especially if they struggle with ill health prior to their death. Oftentimes, these individuals no longer have relevant health insurance coverage that can pay for these medical bills. If these debts remained unpaid at the time of your loved one’s passing, you are responsible for determining how these debts will be treated for tax purposes.

You can deduct the decedent’s paid and unpaid medical bills on their final 1040 if they exceed 10% of the decedent’s adjusted gross income (AGI). This means that if the person died early in the year, before they earned much income, these deductions may render all of their income nontaxable.

You can also deduct these expenses on the deceased person’s estate tax return, which is usually the more beneficial option because the estate tax rate is 40% — much higher than the typical income tax rate. This means that reducing the decedent’s taxable income for their estate taxes is generally more important than reducing it for their personal income taxes. In addition, you can deduct any medical bills on estate tax returns, not just those that exceed 10% of the decedent’s adjusted gross income.

S.H. Block Tax Services Can Guide You Through the Estate Administration Process

Depending on the estate, serving as an estate administrator and executing a will or trust can be simple and straightforward or highly complex and confusing. It’s often difficult for people without formal legal training to make tough estate administration decisions, especially when they’re not sure about the consequences of their choices.

If you’ve been appointed as the administrator for a loved one’s estate and you need help, please call (410) 872-8376 or complete this brief form to schedule your free consultation with us today. During our discussion, we can inform you about your rights and responsibilities as an estate administrator and help you establish a plan of action. And if you decide the task is too much to handle, we can also act as your agent through a power of attorney and help execute the estate.

The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.