Are Executors Liable for Income Taxes in the Estate?

Paying income taxes can drive you crazy. If you are an executor, it is even worse. You can get stuck paying someone else’s income taxes. Here are some executor tips so you won’t pay for costly mistakes.

As the legal representative for an estate, executors must handle the deceased’s income tax issues. That includes filing back tax returns and a terminal return for the year of death.

1. File all required tax returns for the deceased

These returns could be personal or for the deceased’s business. Sometimes the executor can file multiple tax returns to save the estate money. These returns usually are for certain types of income from a partnership or trust.

The estate can take advantage of multiple deductions and exemptions in certain situations. You will need professional tax advice to decide on and file these additional returns. There may be strict time limits for these filings.

2. Hire a professional, licensed tax advisor to protect you

You must supervise all the professionals you hire. Make sure your tax advisor filed the returns before the April 30th deadline. Don’t make that common mistake.

If your tax advisor is waiting for you to deliver documents, who pays the late fees? You are the one on the hook. You need to know the deadlines for filing.

Do not trust in a tax preparer to file income tax returns. You are responsible for any tax mistakes. So why take chances with any tax filer? They may have no experience with final or estate returns.

I have seen many tax filing mistakes made by tax preparers. They have little estate experience. You want a professional who works in the estate field. They will stay current with the tax laws and have insurance in case of an error.

3. Advise the beneficiaries

Let them know about any taxable assets they received.

Remember that the taxes on a RSP or RIF are still payable by the estate. Let’s say there is a $200,000 registered plan. All of it is included as income. Almost $100,000 is payable as tax in the terminal return.

Are there ways to defer this tax? Yes, if there is a qualifying beneficiary. Usually this is a spouse. But you must make sure the qualifying rollover works.

In some cases, the beneficiary can be jointly liable for income tax on a registered plan.

Do not forget to pay creditors’ claims before paying beneficiaries.

4. Avoid any late tax filings

Make sure that you know the due dates for all tax returns.

You must avoid any late filing penalties and interest charges on unpaid balances. These late charges may be your responsibility.

5. File any outstanding tax returns

Executors file a final, or terminal, tax return. This covers income from January 1st to the date of death. In this return all capital gains must be reported.

Executors also file an estate return for any income the estate received after the date of death.

Search for previous tax returns. You can use this to identify sources of income. You want to start collecting tax information slips as soon as possible.

Executors, as the estate’s legal representative, need the following documents:

• a copy of the deceased’s death certificate,

• social insurance number,

• a copy of the will or documents to confirm your status.

If you are an executor, you may feel like you need to go back to school.

Don’t worry! I am starting a new Executor Boot Camp. I designed it for executors who feel they don’t have any time. Contact me to get advance notice of the next boot camp. You have no obligation.

Learn more about executor duties in my free ebook – Ed’s Executor Essentials.