PROBATE

IN STATE OF CALIFORNIA

probate-tax

The executor or administrator is liable to see all of the taxes due the federal government and the State of California are paid. While he is not normally personally liable, his liability does extend to the assets that are in probate.

Payment of Taxes

If the executor or administrator distributes assets and the Internal Revenue Service or California Franchise Tax Board assesses a deficiency, he is liable for the value of the assets distributed.

One immediate concern is who will handle all of the tax work involved? It can be the executor or administrator if the person is skilled enough to do so. Or, it may be the attorney. More likely it will be the tax preparer, enrolled agent or certified public accountant who handled the decedent’s tax matters prior to death. Whoever it is must be skilled enough to prepare and file all of the required tax returns.

Even when someone dies, an income tax return has to be filed for the year of death. Mary Doe dies on July 21st. An income tax return will be required from the first of the year until the date of death-January 1st-July 21st. The return is due by April 15th of the following year. Only the income received and any deductions paid through the date of death will be reported on the return. Income such as dividends and interest received after the date of death will not be reported on the return but will be picked up on the estate income tax return, or by the surviving joint tenant if the asset was in joint tenancy.

Any medical deductions on the decedent’s part paid within one year of the date of death may be deducted on the final return. All other deductions must have been paid before death to be allowable.

Estimated income taxes paid for the year of death should be reviewed. Depending upon the date of death, it may not be necessary to continue to make estimated payments after death.

The decedent’s income tax returns for the four years prior to death should be retained, and the return for the year prior to death should be carefully reviewed to be sure all items of income and deductions are picked up.

If the decedent died after January 1st but before April 15th or even later, a return may still be due for the prior year. With extensions, it is possible to file your income tax return as late as October 15th for the prior year. If the return has not yet been filed, an extension can be requested and will usually be granted.

Income that comes in after the date of death is not reported on the decedent’s personal income tax return. If the interest, dividends or other income are paid to the estate, they must be reported on the fiduciary or estate income tax return. A separate tax identification number is obtained for the estate and used in lieu of the decedent’s social security number.

A separate income tax return, called a fiduciary tax return, is filed annually for the estate. This form lists the taxable income such as dividends, interest, capital gains and net rents. The fiduciary return also takes off the allowable deductions such as mortgage interest, legal and executor’s fees, taxes, and a few other deductions.

The tax return does not have to filed on a calendar year basis, as of December 31st. It can be filed on a fiscal year basis at the end of any calendar month. Once a fiscal year is picked, the return must be filed within 3-1/2 months of the end of the tax year.

At the end of the tax year if the estate has not been closed and distributed, the tax is then paid on the net income. That income is later distributed to the beneficiaries of the estate without additional tax. If the estate has been distributed during the tax year, the tax is not paid on the net income, but instead each beneficiary must list his or her proportionate share of the taxable income on his or her personal tax return.

Fiduciary tax returns are required until the estate is closed and distributed. If the estate is open for more than two tax years, estimated fiduciary taxes must be paid each year.

Other taxes may also be due. Real estate taxes are due in California by December 10th and April 10th. Sales tax may be due if there is a business selling some product.

In 2018, if the decedent made a gift of over $15,000 to someone during the year of death, a gift tax return may be due. If there is real property in another state or country, it may be necessary to file a separate income tax return for the income in that state or country.

As previously mentioned, the executor is liable for taxes if assets are distributed and additional taxes are later discovered to be due. Because of this, the executor or administrator will frequently request to be allowed to hold back some estate funds for a period of time as a reserve if additional taxes are due. This reserve may be kept for two to three years and then distributed without additional court order to the estate beneficiaries.

The period of liability for taxes is normally three years for the federal government. This period is from the due date of the return or the filing date if it is later. The period of liability for the State of California is four years. The liability for a 2004 return filed on or before April 15, 2005, will expire on April 15, 2008 for the Internal Revenue Service, and on April 15, 2009 for the California Franchise Tax Board. There are longer periods of liability if the taxes are underpaid by 25% or more. The period of liability never runs out if a tax return is not filed or if there is fraud involved.