Executors: Follow These 5 Income Tax Rules

Do executors have to pay someone else’s income taxes? Wouldn’t it be nice if they got a free pass? You know like a get-out-of-jail Monopoly card. But this card also gets you out of tax trouble. Well, the reality is estate executors have to pay all of a person’s taxes.

If you are an executor, you are the legal representative for an estate. You must also pay all taxes, or you can be personally on the hook. That does not mean you have to use your own money to pass the taxes. You only need to sue the estate’s funds to pay bills.

Here are 5 tax rules for executors to remember:

1. File all required tax returns for the deceased

The returns could be personal or for the deceased’s business. In some cases, you can file multiple tax returns to save the estate’s money. You should invest in advice from a licensed tax advisor.

Not all tax advisors have estate experience. Find referrals from other professionals to get the right fit. Confirm how you are to assist the advisor to gather any missing documents. Ensure you know who is doing what to complete any return.

2. Hire a tax advisor to protect you

You must, however, supervise all professionals you hire.

Don’t make a mistake and hire a tax preparer to do estate returns. Tax filing mistakes can cause nightmares for you. No one may catch the errors until you go to distribute the estate. Re-filing amended tax returns can trigger a tax audit.

Confirm with your tax advisor, who will request any tax clearance certificates.

3. Advise beneficiaries

Let them know about any taxable assets they receive.

Remember, assets that pass outside of the will/probate can be taxable.

Here is an example that may surprise you.

A $300,000 registered tax retirement plan can generate a whopping tax bill for the estate. There can be close to 50% of the plan value. There may be a tax free transfer to qualifying spouses to defer these taxes.

Be wary of registered plans paid to someone not named in the will. You need to tell your tax advisor and set aside money to pay the tax bill. The bill is the estate’s responsibility, except in rare cases. The executor is responsible to pay all estate creditors before distributing the estate.

4. File any outstanding tax returns

This includes tax returns due for years before the date of death. Often if a person has been ill or incapacitated their tax filings are in arrears. You may not know this unless you can find notices of assessment. In some cases, you may need to request copies of the tax returns already filed.

An estate tax return reports any income received after the date of death. As long as the estate earns income, the executor must file tax returns.

5. Avoid filing any final tax returns late

Ask advisors to confirm any deadlines to file tax returns.

You should avoid any late filing penalties and interest charges. These charges can be your personal obligation if you neglect them.

As a legal representative, you need to provide tax officials with

• a copy of the deceased’s death certificate,

• social insurance number, and

• a copy of the will or court documents confirming your status as legal representative.

Being an executor is a challenging responsibility. Make sure you hire experts to assist you.