What To Know About Estate Administration

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?

  1. To inform the Service of the death
  2. To apply for an EIN for the estate which banks and brokerages will require
  3. To notify the IRS of a fiduciary relationship
  4. 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?

  1. The taxpayer’s final return is the normal 1040 due date
  2. The Service will refund or credit the client’s account if they are due a refund even if a return is not filed
  3. Generally, items are reported on a cash basis of accounting to the date of death
  4. 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?

  1. They are often large enough to overcome the 7.5% “floor”
  2. They are often large enough to overcome the standard deduction
  3. The deduction is allocated to the 1040 or 1041 based on the day the expense was paid; i.e. cash basis accounting
  4. 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.

This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.

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