When you agree to serve as a Trustee, Executor, or Administrator (“personal representative”) you responsible for ensuring that the decedent’s taxes will be paid properly. We do not file tax returns or provide advice about tax elections. However, we try to make each personal representative aware that he or she will tax obligations. We also encourage every personal representative to hire a competent tax professional to assist with tax reporting.

A personal representative is personally liable for a decedent’s unpaid income and gift taxes if he or she knew the debt existed and distributed the estate without first paying the taxes. Knowledge of the tax debt includes notice of facts as would “put a reasonably prudent person on inquiry as to the existence of the unpaid claim of the United States.” If you do not have sufficient information about the decedent’s prior taxes, this is something you should discuss with your accountant.

If the decedent’s income was above the filing requirement, the Personal Representative must file the decedent’s federal and state income tax return for the year of death and for any preceding years for which a return was not filed. The estate may also be required to file income tax returns. When an income tax return is required, it is important for the personal representative to determine the most tax efficient way to make distributions. This can be important because the estate may have a much higher tax bracket than the individual beneficiary.

In some cases, a personal representative will also file a federal estate tax return. This is only required for estates valued at the exemption amount of the year of death. However, there are also instances where it may be a good idea to file estate tax return even when it is not required. Since 2010, the surviving spouse of a decedent has had the option of “porting” the deceased spouse’s unused estate and gift tax exemption amount and adding it to the surviving spouse’s own exemption. This requires an estate tax return. In some cases, the personal representative or trustee may also wish to file an estate tax return for the purpose of making a qualified terminable interest property (“QTIP”) election. North Carolina abolished its inheritance tax in 2013.

This summary is meant as an overview only. It is important to understand that there are tax aspects to estate administration. We always suggest that our clients hire a tax professional to help them make decisions about tax filings and to prepare tax returns.