What happens if you die without having filed your final estate tax return? The answer to this question depends on several factors including whether or not you lived in a state that has an inheritance tax, and also if you lived in a state that does not have an inheritance tax. If you lived in a state that has an inheritance tax, then the probate court will determine what “abundance” percentage applies to your estate and will distribute it based on what it says is your last known taxable estate value. In some states there is no requirement for a final estate tax return, and in these states the property can be distributed to beneficiaries immediately after death without having to file a final tax return. However, even in states with inheritance taxes, you may still choose to file your return if you believe that the amount you’re entitled to is not enough to cover your final expenses and living costs before death.
When you’re preparing for your final estate tax return, it’s always a good idea to prepare ahead of time so you’ll know exactly where your assets will go after you die. For example, while the federal estate tax doesn’t apply to most estates, there are circumstances where the value of the estate is actually higher than expected. One such circumstance happens when large estate donations are made before death. Any assets that are left out of this final estate donation will be subject to inheritance taxes.
Also included in the assets that are subject to inheritance taxes after death are certain unsecured debts, like credit card debts and student loans. These debts typically become a part of the probate estate, but depending on the state, they can also be distributed through probate. Debts that are due before death and which are not protected by a trust and/or an asset protection strategy can remain with the family or with the executor (usually the decedent’s personal representative). However, in some states probate cannot be avoided and assets must be distributed. If the taxes on the debts are not paid in a timely manner, the heirs will receive a certificate of deficiency showing the debt that must be paid.
As mentioned above, in some cases assets left by the deceased estate can be distributed without waiting for inheritance taxes to be paid. This occurs if the executor does not have an asset protection strategy in place. If no plan exists and no monies are protected, the court can order a distribution without a formal estate plan. This distribution is called a “contingency” and will come from the remaining estate assets.
It’s also very important to understand how the various forms of taxation generally work. The Internal Revenue Code provides for six basic tax forms: income tax, corporate tax, gift tax, estate tax, property tax, and self-employment tax. These six basic forms must be paid each year at different times based on the calendar year. In addition, there are numerous additional charges that may be assessed. Many people fail to fully understand the complexities of the tax forms and, as a result, become subject to penalty and fine for late filing or failure to pay the necessary taxes.
Anyone considering using a form 706 to prepare their estate income tax return should review the forms themselves closely. Form 706 is a standard W-2 form that allows the executor to report any income and assets owned by the deceased. This document is particularly useful because it eliminates the possibility of forgetting an important item. For example, if an item such as a computer system is left behind, the executor might not realize that it needs to be reported on the individual tax return. However, if the proper form is used, the computer system can be entered on the form and reported on the individual tax return.
