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How to Deal with Probate and Behind on Taxes

What is Probate?  

Probate is a process, normally initiated after a person’s death and is concerned with locating the will of the deceased, 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 different states, and 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 taken including student loans have to be paid off by selling a small part of the property of the decedent estate in order to proceed to the next step.

An important and frequent problem encountered here is that the decedent was behind on his or her 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 tax and the income tax, the date of death is considered as the date at which 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 known as an ‘executor’, where there is 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 executor is appointed by the deceased himself as he or she names them in the will. Apart from these taxes, all other taxes which include state fiduciary income tax returns, estate tax, gift tax returns are reviewed.

These returns are due by the usual individual filing date (normally 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 as a joint return 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 prior to 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 assets 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 certain interests in at the date of death.

Who pays the estate tax of the deceased? 

The answer depends on whether if your estate tax is taxable for either state or federal state purposes. In the case where 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 will it be one of the creditors?? The answer is decided by primarily two factors, one if there is a living trust of the deceased or not and second if the deceased’s estate is being subjected to probate or not.

In the case where the deceased’s estate is being subjected to probate proceedings, typically it is the executor who 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. 

If the deceased’s estate does not require the estate tax, then the court will appoint an administrator in place of a personal representative or executor in the absence of a will, and 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, his or her property will not be subjected to probate. Where that is ninety percent true, it is vital to know that, still a relatively small part of the estate will 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 his or her will as the inheritor of their estate) of the deceased’s trust will most likely be responsible for filing the deceased’s estate tax returns with the IRS and 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 a living individual estate or a deceased, they both generate their gross income in a similar manner. In almost all of the U’S states, the deductions, and credits applicable on a living individual estate and also applicable on a deceased estate but there is one much major 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, it is crucial that one knows 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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