Tax Resolution & Controversy

When a person dies, they are still required to file a final income tax return. In addition to their individual tax return, several additional tax returns may need to be filed depending on the assets owned by the decedent, and the estate planning they did during their lifetime. Here are the common tax returns that must be filed after someone’s death:

1. Final Individual Income Tax Return (Form 1040). This is the final federal income tax return for the deceased individual. The personal representative of the deceased must report all income, deductions, and credits on the tax return for the year of death up until the date of death. There are often additional disclosure required when filing the final income tax return. State individual income tax returns must also be prepared and filed. The personal representative is responsible for paying any balance due. If a refund is due on the income tax return, a claim for refund is made by submitting Form 1310, Statement of a Person Claiming Refund Due a Deceased Taxpayer.

If the deceased was married, the surviving spouse can still file a joint income tax return for the year of death and may qualify for special tax rates for the subsequent two years if they are a qualifying surviving spouse.

In addition to the current tax year, the personal representative must confirm that the deceased filed all prior year tax returns and paid any tax balance due.

2. Estate Income Tax Return (Form 1041). Once a person dies, his/her assets may become part of their estate. The estate is a taxable entity separate from the decedent and comes into being with the death of the individual. Those assets may continue to generate income after the person’s death (e.g., interest, dividends, rental income, etc.). The estate, not the deceased individual, must file an estate income tax return to report any income earned subsequent to the date of death. The estate’s income, like an individual’s income, must be reported annually.

3. Estate Tax Return (Form 706). The estate tax is a tax based on the value of the deceased’s estate (i.e., the fair market value of their assets). If the value of the deceased person’s taxable estate exceeds $13.99 million for those dying in 2025, a federal estate tax return, Form 706, must be filed within 9 months of the date of death. Payment of the estate tax is due with the filinf of the return.

4. Trust Income Tax Return (Form 1041). The deceased person might have created a trust as part of his/her estate plan during their lifetime. their is often the case that the deceased’s assets are contributed to a trust upon death, though the deceased might have contributed assets to the trust during lifetime. If the trust’s asset generate income, the trust may be required to file an income tax return (Form 1041) to report income and pay any tax due.

5. Gift Tax Return (Form 709). A gift tax return is required when a gift is made to one or more individuals (other than a spouse) that exceed the annual gift tax exclusion. The annual exclusion for 2025 is $19,000 per recipient. The gift tax applies to the transfers, or gifting, of any type of property, not just cash. If the deceased person made any taxable gifts during their lifetime that were not previously reported on filed gift tax returns, a gift tax return may need to be filed.

It’s important to note that the specific tax returns required can vary based on the deceased person’s financial situation, the size of their estate, and the state in which they resided. It’s advisable to consult with a tax professional or an estate attorney to ensure all necessary tax returns are filed correctly and on time.

Fiduciary income tax refers to the federal income tax that is paid on the taxable income of an estate or a trust. An individual’s estate or a trust are distinct taxable entities. This tax is separate from the income taxes paid by the individual beneficiaries of an estate or a trust.

Some key points about fiduciary income tax:

1. Estates and Trusts as Separate Taxpayers. For federal income tax purposes, estates and trusts are treated as separate taxable entities from the beneficiaries. The estate or trust must each file their own income tax returns (Form 1041) and pay taxes on their taxable income.

2. Taxable Income. The taxable income of an estate or trust is generally calculated in a similar manner to individual income tax. It includes income earned from various sources (e.g., interest, dividends, capital gains or rental income) minus allowable deductions.

3. Tax Rates. Estates and trusts are taxed at special tax rates, which are generally higher than individual tax rates for the same level of taxable income. This is done to discourage the use of trusts solely for income tax avoidance purposes.

4. Distribution Deduction. Estates and trusts are not taxed on income that is distribute to beneficiaries during the tax year. The distributed income is then taxable to the beneficiaries at their individual tax returns – which is lower than the estate or trust income tax rate.

5. Estimated Tax Payments. Estates and trusts may be required to make estimated tax payments during the year if their expected tax liability exceeds certain thresholds.

The fiduciary income tax is designed to ensure that income earned by estates and trusts is subject to taxation, either at the entity level (for undistributed income) or at the beneficiary level (for distributed income). Proper tax planning and compliance are important for efficient administration of estates and trusts.

A grantor trust is a type of trust in which a person creates and funds a trust. This person is called the grantor (or settlor) and he/she retains certain powers or ownership over the assets contributed to the trust. The grantor makes a gratuitous transfer of assets to the trust, meaning the grantor received nothing in return for the transfer. The grantor is treated as the owner of the trust assets for income tax purposes. The grantor retains rights to the trust assets even though legal title to the assets has been transferred to the trust. The grantor is responsible for paying taxes on income generated by trust assets.

Why make a gratuitous transfer to a trusts?

1. Estate Planning. Some grantors may want to reduce the size of their estate and potentially reduce estate taxes.

2. Asset Protection. Grantor trusts provide a degree of asset protection which shields assets from creditors.

3. Provide Support to the Beneficiary. The trust can be created to provide financial support for family members or other beneficiaries.

4. Charitable Giving. For those charitably inclined, grantor trusts can be established to support charitable causes and in turn, receive a tax deduction.

Here are some key features of a grantor trust:

1. Revocable or Irrevocable. A grantor trust can be either revocable, meaning the grantor can modify or terminate the trust, or it can be irrevocable and the trust agreement cannot be amended.

2. Income Tax Treatment. Because the grantor is considered the owner of the trust assets, all income generated by the trust flows through to the grantor and is reported on the grantor’s personal income tax return (Form 1040). The trust itself does not pay income taxes.

3. Control over Assets. The grantor typically retains certain powers over the trust assets, such as the ability to revoke the trust, substitute assets, or direct trust investments.

4. Estate Tax Treatment. For estate tax purposes, the assets in a revocable grantor trust are included in the grantor’s taxable estate upon their death.

Grantor trusts are commonly used for estate planning purposes, such as reducing the grantor’s taxable estate, providing asset management, or controlling the distribution of assets to beneficiaries. They can also be used for other purposes, such as gifting assets to beneficiaries without triggering immediate gift taxes.

The grantor trust rules are complex, and the specific tax treatment and benefits can vary depending on the type of trust and the powers retained by the grantor. It’s important to consult with an experienced estate planning attorney and tax professional when considering the use of a grantor trust.