Last Will and Testament

One often-overlooked consideration that taxpayers should have on their tax planning agenda pertains to the inevitable – death. Our time and resources are more often consumed with planning and strategizing our day-to-day lives to stay ahead in the ever-changing U.S. economy, but many fail to ask one vital tax planning question:  what can I do today to ensure strategic care for my estate after I die? This blog aims to highlight a few tax considerations that you can take into account today to help ensure that your wishes speak for you after death.

You should first understand what responsibilities the IRS has mandated that a taxpayer fulfill, even after death. Per the Internal Revenue Service, “the final individual income tax return of a decedent is prepared and filed in the same manner as when they were alive. All income up to the date of death must be reported and all credits and deductions to which the decedent is entitled may be claimed.”

Thus, even after death, there is still a mandate to file one last 1040 tax return. This individual tax return is typically filed by the surviving spouse, or a court-appointed representative.

If a federal tax refund is due with your final 1040 tax return, and you wish to have someone other than your spouse file and claim the refund, you would need to have a personal representative appointed to do so. The personal representative would need to file Form 1310, along with a copy of the death certificate, with your final 1040 tax return. He or she may also be required to file any returns not filed for preceding years. Surviving spouses filing a final joint return, or any court-appointed representatives, do not need to file Form 1310.

Subsequent to filing a final individual tax return, the executor of a deceased person’s estate uses Form 706 to calculate the estate tax imposed by Chapter 11 of the Internal Revenue Code (IRC).

There are two kinds of taxes that an estate can be liable to pay. One occurs upon the transfer of assets from the deceased to his or her beneficiaries and heirs (the estate tax), and another on income generated by assets of the deceased’s estate (the income tax). When someone dies, his or her assets become property of their estate. Any income those assets generate is also part of the estate and may trigger the requirement to file an estate income tax return.

Federal Estate Tax Considerations:

  1. Examine estate planning documents and strategies
    It is critical to plan for an orderly transfer of assets or for unforeseen circumstances such as incapacitation. Also, consider including proper beneficiary designations on retirement accounts and insurance contracts, wills, powers of attorney, and revocable trusts.
  2. Consider whether to transfer wealth during your lifetime vs. at death
    Gifting during your lifetime not only helps your family and heirs now, but it also shelters appreciation of assets post-gift from potential estate taxes. Transferring your assets at death allows you to maintain full control of property while living and benefit from step-up in cost basis at death.
  3. Consult with a CPA or attorney regarding more complex wealth transfer strategies
    Individuals with significant wealth may benefit from a range of more complex strategies to efficiently transfer wealth. Examples include grantor trusts, family limited partnerships and other trust entities. Given the recent scrutiny among lawmakers, which has triggered restrictions on how these strategies are implemented, it may be prudent to examine these options while they are still viable alternatives.

State Estate Tax Considerations:
While we do tend to focus on the federal estate tax, taxpayers should know that many states have estate or inheritance taxes. There are a number of states that are ‘decoupled’ from the federal estate tax system. This means the state applies different tax rates or exemption amounts than the federal government. A taxpayer may have a net worth comfortably below the federal exemption amount for federal estate taxes, but may be well above the exemption amount for his or her particular state. It is important to consult with a CPA or an attorney on specific state law and potential options to mitigate estate inheritance taxes.

President Trump’s tax reform plan calls for eliminating the current estate tax. While this news may sound like a gift to the wealthiest taxpayers in America (since they are the population who would pay an estate tax), what the plan does not mention is that President Trump and Congressional Republicans have also proposed to eliminate the ‘stepped-up basis’ on capital gains, which could mean a new death tax on the middle class. Under current tax law, unrealized capital gains are not taxed since assets in an estate are valued at their fair market value at the date of death. In other words, the estate and the heirs receive a ”stepped-up basis” upon death of their parents.

This blog series is meant to provide an overview of the common implications you might face when you encounter various life events, but there are likely additional considerations dependent on your specific scenario. At FF&F our experienced staff will act as your advisors throughout each step of any event that might affect your tax planning. For more information on this topic, or to discuss tax planning strategies, please contact us at or (212) 245-5900.

Deven M. Conner, CPA, EA is a Tax Professional with FF&F. He is an IRS Enrolled Agent and has over 10 years of combined tax and public accounting experience comprised of family office groups, private equity firms, and forensic accounting. Deven has a strong background in individual, fiduciary, and partnership taxation. His diversified experience in the private and public sectors, which include a Big Four firm and top mid-size public accounting firm, serves as a solid foundation for his unique and comprehensive understanding of taxation.