The personal representative of an estate has a lot of work ahead of them. Probate proceedings and estate administration can consume months of their time. They may need to attend court hearings, communicate with various interested parties and physically distribute property to beneficiaries or errors.
Some of the obligations that come with estate administration can lead to liability for the representative if they mismanage resources. The failure to fulfill financial obligations can lead to legal claims against the personal representative in the future. Taxes are one of the estate responsibilities that can lead to liability for a personal representative. There are certain tax obligations that the personal representative may need to fulfill during estate administration.
What tax-related matters often arise often arise during probate proceedings?
Filing a final income tax return
The Internal Revenue Service (IRS) and state tax authorities need to learn about the death of the decedent. In some cases, there may be final tax debts due. Even those who did not have a job at the time of their passing could have income tax obligations due to investments and other sources of revenue. Personal representatives typically have to file a final income tax return on behalf of the decedent and use the estate’s resources to pay any amount that they owe.
Covering the estate’s income taxes
Many people have assets that their family members may not want to own. It is common practice for testators to leave instructions to liquidate certain assets. If the sale of estate resources generates $600 or more in income, then the estate itself may be responsible for income taxes. The personal representatives may have to file an income tax return on behalf of the estate and retain funds from any asset liquidation they conduct to cover those tax obligations.
Handling federal estate taxes
Most estates in Pennsylvania are not subject to estate taxes. The state does not assess an estate tax currently, and the federal threshold for estate taxes is relatively high. For those who pass in 2025, the exemption threshold for federal estate taxes is $13.99 million. The value of the assets held by the estate must exceed that threshold for estate taxes to be a concern. If the estate includes real property, business holdings or particularly valuable financial resources, then there may be reason to worry about the state taxes. Personal representatives may need to retain somewhere between 18 and 40% of the estate’s resources to cover that federal tax obligation.
Mistakes and oversights during estate administration can lead to financial and legal challenges for the personal representative. Retaining the support of an attorney can make it easier for personal representatives to fulfill their obligations and limit their personal exposure.