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How to Deal with Probate and Behind on Taxes

What is Probate?  

Probate is usually initiated after a person’s death. It is concerned with locating the deceased’s will, informing the beneficiaries, paying any debts or unpaid bills, and finally distributing the estate among the beneficiaries, which in most cases are the deceased’s heirs or spouse.

Sometimes a will is not available, and a situation of intestacy arises. Here, in the United States of America, there are different ‘probate codes’ for other states. These codes are expected to be followed in case of distribution of assets in intestacy.

As already mentioned, a crucial step in probate proceedings is to pay any mortgage, unpaid bills, including utility bills, credit card bills, phone bills. Apart from these, any loans were taken, including student loans, have to be paid off by selling a small part of the property of the decedent estate to proceed to the next step.

An essential and frequent problem encountered here is that the decedent was behind their taxes. Following is the information and related proceedings if such a scenario arises.

Dealing with Probate and Behind on Taxes

When an individual passes away, regarding the federal and income tax, the date of death is considered the date of the deceased’s last tax year for filing an income tax return. Moreover, a separate entity for all taxes, including income and federal tax called ‘estate,’ is made.

What are the Proceedings?

A personal representative is an ‘executor,’ where no surviving spouse or other fiduciary empowered to do so, prepares and files the decedent’s final federal and state income tax returns.

In some cases, the deceased appointed the executor, as they name them in the will. Apart from these taxes, all other taxes, including state fiduciary income tax returns, estate tax, gift tax returns, are reviewed.

These returns are due by the regular individual filing date (usually April 15) of the year immediately following the decedent’s death unless an extension is obtained. The decedent’s final income tax returns may be filed jointly with the decedent’s surviving spouse.

The decedent’s income included in this return is the income earned for the portion of the year up to and including the day of death. The income included for a surviving spouse is that person’s income for the entire year.

The executor is expected to check for taxes owed for a year before the deceased’s death. There are two kinds of taxes owed by an estate: One on the transfer of assets from the decedent to their beneficiaries and heirs (the estate tax), and another on income generated by the support of the decedent’s estate (the income tax).

Dealing with Estate Taxes

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The estate tax is a tax on your right to transfer property at your death. This includes any taxes, including income and federal, and everything you own or have particular interests in at the date of death.

Who pays the estate tax of the deceased? 

The answer depends on whether your estate tax is taxable for either state or federal state purposes. If it is, someone will have to file, prepare, and sign the estate tax return. Someone will have to pay it for you,

The next question that arises is who will be that particular someone?  Will that be a close relative like decease’s spouse or son or daughter, or will it be some beneficiary or one of the creditors?? The answer is decided by primarily two factors: if there is a living trust of the deceased or not and if the deceased’s estate is being subjected to probate.

In the case where the deceased’s estate is being subjected to probate proceedings, the executor typically prepares, signs, and pays the estate tax of the deceased. Later, the estate tax return form is submitted to the Internal Revenue Service and state taxing authorities. 

Suppose the deceased’s estate does not require the estate tax. In that case, the court will appoint an administrator as a personal representative or executor in the absence of a will. The administrator will be responsible for dealing with and paying estate taxes from the estate. Usually, there is no estate tax if the deceased assets are too small or little in value to require probate.

Usually, a common assumption is that if the deceased had a living trust, their property would not be subjected to probate. Where that is ninety percent true, it is vital to know that a relatively small part of the estate will still be subjected to probate and will require estate tax. Who pays the estate tax in such a scenario??

In this case, the successor trustee (the person whom the deceased named in their will as the inheritor of their estate) of the deceased’s trust will most likely be responsible for filing the dead’s estate tax returns with the IRS, the state taxing authorities. He will most likely pay the estate tax from the trust’s assets and income.

Dealing with Income Taxes

Whether it is an individual living estate of a deceased, they generate their gross income similarly. In almost all of the U’S states, the deductions and credits are applicable on an individual living estate and a deceased estate, but there is one much significant difference!

A trust or decedent’s estate is allowed an income distribution deduction for distributions to beneficiaries. Income distributions are reported to beneficiaries and the IRS (Internal Revenue Service)

-In conclusion, to deal with taxes and probate dealings, one must know the nature of the case they are dealing with. They should have crystal clear knowledge of whether their case needs an estate tax to be paid or not and, if it is to be paid, who is the one expected to pay according to legal instructions.

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