Tax Planning After Death?!

Did you read the title of the article and think that I lost my mind? How could a deceased taxpayer plan anything?! Of course they can’t, but the executor of the estate can use various tax planning techniques to save money, and minimize or shift the amount of tax that a decedent’s estate will pay. Here are just a few tips…

Select a Fiscal Year End-one basic thing to keep in mind when considering the taxation of an estate is that the assets held by a decedent when she/he passed away will generally continue to generate income after death. Think of any dividend paying stock or mutual fund, and you’ll see that dividends will continue to be paid, regardless of whether they’re held by an individual or an estate. An estate is one of just a couple of “tax paying” entities that has the ability to choose a fiscal year end, that is, a year end other than December 31. By picking a different fiscal year end, the estate can effectively defer tax on income retained in the estate, or on income distributed to beneficiaries.

Elect to Include Income From the Decedent’s Trust on the Estate’s Income Tax Return-as I mentioned above, an estate is able to choose a fiscal year end, while a trust must use a calendar year end. By electing to include the income from a decedent’s qualified revocable trust on the estate income tax return, the executor can effectively shift the income (and tax) from one taxable year to another.

Consider Distributions to Beneficiaries to Minimize Tax-this “tool” is almost a no brainer, provided there are no issues with an estate’s ability to make distributions to beneficiaries (such as assets tied up due to legal problems, or family issues). The tax brackets for an estate are so small that an estate will be in the maximum (35%) bracket at $11,650 of taxable income. By contrast, a single taxpayer doesn’t hit the 35% bracket until getting to $388,350 of taxable income. So if it’s at all possible, the estate’s income should be distributed out to the beneficiaries.

File an Initial/Final Return-o.k., even though this one potentially means less fees in my pocket, one thing an executor should consider is filing just one tax return for an estate, in which both the “initial return” and “final return” boxes are checked. For smaller estates that are able to take care of business quickly, and make all the required distributions, this is the way to go, since it will save having to file a return for a second year.

These are just a few of many things that an executor can do, to save tax money on an estate. Please pass this article along to anybody you know who may be dealing with an estate, and post any comments you may have, based on your own experience.

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