Turner Padget Insights

Know These 3 Tax Situations When Handling Assets of an Estate

Posted On May 9, 2019

When someone dies in South Carolina, a personal representative is named either in a will or by the court to act on behalf of the estate and manage the assets. Also known as an executor, the personal representative has major responsibilities in the court-supervised process known as probate. The personal representative has the legal fiduciary duty to identify and value all assets of the deceased, use the assets to pay any debts of the deceased and distribute the remaining assets to beneficiaries according to the will or South Carolina law.

The personal representative also has the responsibility of using the assets to pay taxes for the deceased and for the estate. Failure to perform these duties appropriately can leave the personal representative personally liable for unpaid debts and taxes of the deceased as well as fines, penalties and interest.

There are three tax situations that a personal representative must consider:

Final Income Tax

The last income tax return is the individual’s final Form 1040. It will include taxes that are owed on income the individual earns until the date of his or her death. If there is a surviving spouse, the final 1040 can be filed as a joint tax return as if the decedent was still alive at year's end.

Estate Income Tax

The estate of the deceased person is a separate legal entity from the individual for tax purposes. An estate income tax return is necessary when the estate has assets that have generated income after a person’s death. Any income from a rental property or interest or dividends from savings accounts, stocks, bonds, mutual funds or other investments that accrue during probate become part of the estate.

If required, any estate income also will be reported on Form 1040. A Form 1040 reporting estate income is required when the estate generates more than $600 in annual gross income or if a beneficiary is a non-resident alien.

If an estate’s asset, such as a retirement account, has a designated beneficiary, then that asset passes directly to the beneficiary outside of probate. Any income generated by that asset goes to the beneficiary, who is responsible for taxes on that income.

Federal Estate Tax

In addition to the estate income tax on income generated by an estate’s assets, an estate may owe taxes on the transfer of assets from the deceased individual to the beneficiaries.

While South Carolina does not have an estate tax, federal estate taxes on the transfer of assets are reported on Form 706. Assuming the decedent did not make any sizable gifts before he or she died, no federal estate tax will be due unless the estate is worth more than $11.4 million for someone who dies in 2019. A 40% federal estate tax will be due on the value of any transferred assets exceeding $11.4 million.

The personal representative is responsible for getting all financial matters of the estate up to date, including filing returns and paying taxes owed. As the fiduciary, the personal representative holds a legal or ethical relationship to the estate and its beneficiaries. Being held to that high standard has pitfalls.

If you are the personal representative for an estate, make sure you talk with an attorney who has experience in estate and fiduciary tax issues. At Turner Padget, we can walk you through the entire estate and probate process and provide help from a CPA in our office to advise you on your obligations. Understanding an estate's tax requirements can help you avoid being on the hook later for payments due.