Being an executor comes with numerous responsibilities, and it also comes with a couple of risks. If you make mistakes regarding the management of the testator assets and finances, you could face personal losses.
Failing to repay creditors is a mistake that could lead to personal financial consequences. Unpaid tax obligations can also potentially come back to haunt the executor of an estate. There are numerous possible taxes that may apply to estates for which you are an executor. If you fail to pay them with estate resources, you could be the one responsible for those unpaid tax debts.
What tax responsibilities will you likely need to address?
The final tax return for the deceased
It is customary in most circumstances to have the executor of the estate file someone’s final tax return. Even if someone did not have employment-based income at the time of their death, it is crucial that you file a final return to ensure that there are no outstanding tax obligations. Otherwise, you might discover those tax responsibilities after having already distributed property to the beneficiaries of the estate.
State and federal estate taxes
If the assets in the estate are worth multiple millions of dollars, then there may be estate tax implications. The federal government and the state of New York both assess estate taxes against large estates.
If the testator moved their assets into a trust or otherwise sought to limit their tax liabilities, this may not be a concern. However, the estate may have to pay 40% or even more in estate taxes without a proactive plan.
Income taxes for the estate itself
An executor doesn’t just hand specific assets over to particular family members. They often need to sell property and then pool the proceeds to distribute among numerous beneficiaries. This approach can be fairer than leaving specific physical assets to individual people.
However, it can also generate tax liabilities for the estate. If there is more than $600 in income generated by estate sales, an executor will have to file an income tax return for the estate for the year in which those sales took place.
Learning about the estate tax obligations that arise during probate will limit your risk of making a big mistake.