During the first quarter of the year, the only tax items most taxpayers are concerned with are their own personal and business returns. However, settling an estate involves tax matters that need to be resolved before the estate is closed. The executor or administrator of the decedent’s estate generally is responsible for handling tax matters. (Learn more about executors’ and other personal representatives’ responsibilities.) Not only does the executor have a duty to handle the estate’s tax matters, but they may be personally liable for tax debts if not handled properly.
Executors must locate assets, determine date of death values and debts, and contact surviving beneficiaries. After the executor satisfies debts (including payment of any tax due), the beneficiaries will receive their share of the estate. The executor might receive a commission from the estate. If compensation was not outlined in a will, the Clerk of Superior Court can grant a commission up to 5% of the value of the estate receipts and disbursements, according to the North Carolina Administrative Office of the Courts’ Estate Procedures.
Items executors should review with a tax attorney include:
1. Decedent’s 1040 and estate income tax return. The final 1040 will reflect income earned from January 1st of the tax year through the decedent’s date of death. Income could still accrue after the decedent’s death from retirement savings, investments, annuities, or other accounts. Income earned post-mortem must be accounted for on an estate income tax return Form 1041.
2. Federal estate tax requirements. An executor might be required to complete a Form 706 if the estate is valued at more than $5.34 million for decedents who died in 2014; this value was increased to $5.43 million for 2015.
3. State estate tax requirements. North Carolina repealed the state estate tax in 2013, but did the decedent have assets in other states? Depending how the decedent structured out-of-state assets, the executor might need to complete the probate process in multiple states, as well as satisfy respective state tax laws. Consult with a tax attorney on multi-state tax laws.
Closing an Estate in North Carolina
An executor’s responsibilities involve a generous amount of time to complete tax documents. Closing an estate properly requires respect to critical deadlines. If you are concerned about serving as an executor in North Carolina, contact a tax or estate planning attorney.