Financial Briefs
What To Know About Estate Administration
Published Wednesday, June 14, 2023 at: 9:15 AM EDT
When a spouse, parent, sibling, or other loved one dies, administering their estate becomes the responsibility of a family member or professional. If you are not a professional, expect to be thrusted into details of the Internal Revenue Code after the death of a loved one.
It’s not impossible for a layman to learn about the arcane rules of estate administration, but it is a daunting challenge for a lot of people. Below are three questions to test your knowledge of estate administration and learn more about the topic. You’re not expected to score well. The point is to encourage forethought and careful planning by challenging individuals to think about what will happen when they die or lose a loved one and administering the estate becomes a burden at a bad time.
1. What is form SS-4 used for during an estate administration?
- To inform the Service of the death
- To apply for an EIN for the estate which banks and brokerages will require
- To notify the IRS of a fiduciary relationship
- To help the executor avoid personal liability for the decedent’s tax liabilities
The correct answer is b. Use Form SS-4 to apply for an employer identification number (EIN). An EIN is a 9-digit number (for example, 12-3456789) assigned to estates (as well as employers, sole proprietors, corporations, partnerships, trusts, certain individuals, and other entities) for tax filing and reporting purposes.
When someone dies, their surviving spouse or representative files the deceased person's final tax return. On the final tax return, the surviving spouse or representative tells the IRS that the person has died. The IRS doesn't need any other notification of the death.
A professional fiduciary can be designated to assist with estate administration, sparing a spouse, sibling, parent or other loved one from the responsibility of administering an estate. Form 56 is used to designate a fiduciary. File Form 56 with the Internal Revenue Service Center where the person for whom you are acting is required to file tax returns. An executor’s liability has nothing to do with SS-4, by the way.
2. What is NOT true about the final 1040?
- The taxpayer’s final return is the normal 1040 due date
- The Service will refund or credit the client’s account if they are due a refund even if a return is not filed
- Generally, items are reported on a cash basis of accounting to the date of death
- A surviving spouse will have to indicate their spouse died during the year on the return
The correct answer is b. The Internal Revenue Service will NOT refund or credit taxpayer’s account if they are due a refund if a return is not filed. A surviving spouse, executor, estate administrator or other legal representative of a deceased person and their estate has many responsibilities in filing a deceased person’s final return, as explained here in detail by the IRS.
3. What is NOT true about the decedent’s final medical expenses?
- They are often large enough to overcome the 7.5% “floor”
- They are often large enough to overcome the standard deduction
- The deduction is allocated to the 1040 or 1041 based on the day the expense was paid; i.e. cash basis accounting
- Medical expenses paid within one year of death can be reported on a decedent’s 1040 according to the date the expense was incurred
The correct answer is c. It is not uncommon for the cost of health care in the year of death to soar. Nor is it not uncommon for medical expenses to exceed the 7.5% threshold on deductibility. If you itemize deductions, you can deduct qualifying medical and dental expenses that exceed 7.5% of your adjusted gross income and, thus, greater than the standard deduction. You can only include the medical expenses you paid during the tax-filing year. Here’s an IRS brief on the topic.
Nothing contained herein is to be considered a solicitation, research material, an investment recommendation, or advice of any kind, and it is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Tax advice always depends on your particular personal situation and preferences. You should consult the appropriate financial professional regarding your specific circumstances. The material represents an assessment of financial, economic and tax law at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.
This article was written by a professional financial journalist for NBS Financial Services, Inc. and is not intended as legal or investment advice.
©2023 Advisor Products Inc. All Rights Reserved.
More articles
- The Economic Boost From Artificial Intelligence
- Artificial Intelligence Leaders Warn Of Dire Consequences; What’s It Mean To You Financially?
- Inflation Is Lower, And There Is Reason For Optimism
- Three Implications Of Artificial Intelligence For Personal Financial Planning
- How To Be A Good Grandparent
- Managing Investment Risk Strategically Based On Facts And Experience
- What Investors Need To Know About The Debt Ceiling
- The Economic Outlook Through 1Q 2024
- A 2023 Tax Break For Small Business Owners
- Parents, Children, And Social Media Regulation
- Retirement Planning Basics, And Tips For 2023
- Fed Hikes Rates 0.25%, Balancing Risks of Inflation and Bank Runs
- Chances Of Contagion Subside
- Basics Of A Retirement Income Withdrawal Plan
- What You Need To Know Before Investing In A Self-Directed IRA Account