the Probate Judge—Possible Taxes Due Upon Decedent's Death
Rudd, appeared September 22, 2005, Albuquerque Journal, Business Outlook
Reprinted with permission
- Editor's note: This
column may not be quoted or reproduced in whole or part without express written
permission of the author.
Q: Can you talk about the taxes a personal representative must pay when probating
an estate? Also, do personal representatives have to pay taxes on fees they
earn for their work on behalf of an estate?
Your question is
very important because many of the cases filed in the Probate Court are pro
se cases. Pro se cases are opened without the help of an attorney. When someone
opens a pro se probate, he or she is still responsible for knowing what taxes
A personal representative is responsible for filing the final state and federal
income tax (Form 1040) returns for a decedent. If the decedent owned a business,
the personal representative must also file gross receipts taxes and required
payroll taxes for the business.
If an estate earns more than $600 prior to distribution, then an income tax
return for the estate, Form 1041, must be filed. If a Form 1041 is necessary,
then the personal representative must obtain a tax identification number for
the estate by using an Internal Revenue Service (IRS) Form SS-4.
Personal representatives may hire an accountant or tax expert to assist them
in assessing tax liabilities and filing required returns.
In 2005 if an estate is valued at more than $1.5 million, the personal representative
must file a federal estate tax return, IRS Form 706. For decedents dying in
2006 and 2007, this amount increases to $2 million per decedent. With proper
tax planning, married couples may pass up to $4 million without estate tax
liability in 2006 and 2007.
In New Mexico, if no federal estate tax is due, then no state estate tax is
New Mexico law allows personal representatives to receive "reasonable
compensation" for their services. Personal representatives are also entitled
by law to receive from the estate "necessary expenses and disbursements
including reasonable attorneys' fees."
Personal representative and attorney fees vary from estate to estate. Much
depends on the amount of time spent, the complexity of the tasks, the degree
of skill necessary, the size of the estate, and other criteria.
Fees earned by a personal representative or trustee are considered income
by the IRS and must be reported on state and federal income tax returns. New
Mexico gross receipts tax must also be paid on these fees!
To avoid this tax liability, many personal representatives, especially when
they will inherit from an estate, choose to decline a fee. If so, the personal
representative may file a written renunciation of the fee with the court.
Inheritances, on the other hand, are specifically excluded from the IRS's
definition of income and do not generally trigger income tax liability. With
limited exceptions, recipients do not report inheritances as income on federal
or state income tax returns.
The New Mexico Tax and Revenue Department oversees state income and estate
tax returns. The phone number for estate tax questions is 505-827-0763 (Santa
Fe), and their web site is www.state.nm.us/tax/.
The IRS publishes Publication 559, Survivors, Executors, and Administrators,
which provides useful information about tax requirements for personal representatives
handling decedents' estates. You can also call the IRS at 1-800-829-2040,
or visit their web site at www.irs.gov.
Local tax attorneys can let me know what other taxes I may have forgotten
2005, Albuquerque Journal, All Rights Reserved