An important function of the executor is to file tax returns for the decedent and the estate. Therefore, it is also important that the executor understands how the date of death determines which tax return to file. Income received before the date of death and after the date of death require different treatment. As a result, the executor must track the estate income accurately as depicted in the article Track the Estate Income. 

Federal Guidelines for Tax Returns

NOTE: This portion of the article has been updated to reflect the Estate Tax and Gift Tax exemption amounts for 2020. 

To understand the tax returns and when they are due, the executor must grasp the guidelines for each return.
The following is a review of the tax returns for an estate.

1) The Final Taxes – Form 1040. The final return will cover the income received by the decedent up until the date of death. This return is due on or before April 15th of the following year.

2) The Estate Income Tax return or Fiduciary Income Tax return – Form 1041. The filing of fiduciary income tax return occurs only if the estate assets generate more than $600.00 in annual income after the date of death. If filing a fiduciary income tax return is necessary, the executor will have two options to establish the deadline:

a. The executor may elect to file in the calendar year. In this case the return will be due on or before April 15th of the following year.

b. The executor may elect to file in the fiscal year. In this case the return will be due on the 15th day of the 4th month after the close of the fiscal year.

By using the fiscal year option, you may avoid filing multiple calendar year returns because the fiscal year starts at the date of death and gives you a 12 month period to settle the estate and to file only one return. For instance, in the estate I administered, my Uncle died on September 1st, 2012. So, with guidance of the CPA I retained, we determined it would be best to establish a fiscal year beginning on September 1st, 2012 – August 31st, 2013. This way the return would be due on December 15th, 2013. This would allow me plenty of time to settle the estate and to file only one return. In the end, the CPA filed one return before the December due date. Because the estate account earned residual income after the first return, the CPA filed a short year return to report the final activity.

3) Estate Tax – Form 706. The Estate Tax return is for large estates. The executor must file Form 706 if the combined gross assets and prior taxable gifts exceed $12,920,000.00. The estate tax return is due 9 months after the date of death.

4) Gift Taxes – Form 709. The filing of the gift tax return occurs only if the decedent gave a gift of over $17,000.00 in value prior to the date of death. The gift tax return is due on or before April 15th after the year the gift was made. Please note that the gift tax was unified with the estate tax which means a tax payer can give up to $12,920,000.00 in lifetime gifts before there is a tax. So, there is a credit that will eliminate the tax but the executor will still have to file Form 709. Also, if it was determined that the decedent had to file a gift tax return in prior years but did not file, the executor will have to file a gift tax return for each of those years using the value threshold established for each particular year.

Massachusetts Guidelines for Tax Returns

The Massachusetts estate tax returns mirrors the federal estate returns except for some minor differences. The following is the review of Massachusetts estate tax returns: 

1) The Final Taxes – Form 1. The final return for Massachusetts will cover the income received by the decedent up until date of death. The final return is due on or before April 15th of the following year.

2) The Estate Income Tax – Form 2. The filing of the estate income tax return occurs only if the assets of the estate generate more than $100.00 in annual income. The due date determination is the same as the federal fiduciary income tax return.

3) Estate Tax – Form M-706. The executor must file Form M-706 if the combined gross assets, adjusted taxable gifts, and the total specific exemption for gifts exceed $1,000,000.00. The estate tax return is due 9 months after the date of death.

4) Massachusetts doesn’t have a gift tax. 

Conclusion

Keep in mind that there are automatic extensions to some of these due dates. So, the executor must estimate the tax and write a check on the due date if making the deadline is not possible. Also, the value thresholds established for the estate tax return and the gift tax return may change from year to year. Therefore, the executor will need to check the value threshold for that year to determine if filing an estate tax return or a gift tax return is necessary. 

Finally, estate taxes are complex. The date of death provides some guidance and establishes deadlines for the necessary tax returns. However, some returns are still complex. For that reason, it is best to hire a tax professional competent in estate tax law, or, to retain an attorney that provides estate tax services.

A quick note: Any state that has an income tax may also have estate taxes. Consult a tax professional to see if your state requires an estate tax return and to learn the requirements that would trigger an estate tax return filing. Like Massachusetts, any state that has an income tax, the tax laws usually mirror the federal tax laws.

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References:

• Department of Revenue Estate Tax Guide.
• Massachusetts Estate Tax Instructions Form M-706.
• Massachusetts Fiduciary Income Tax Form 2.
• IRS Publication 559 Survivors, Executors, and Administrators.
• Deceased Taxpayers – Filing the Estate Income Tax Return, Form 1041.
• Estate and Gift Taxes.