Forbes’ Practical Guide For Families

You expect the death of a spouse, parent or other close relative to be emotionally wrenching. What catches many survivors by surprise are the daunting and draining administrative, tax and practical tasks that follow–from tax returns and probate to sifting through a lifetime of papers and possessions. When my dad died suddenly last October, I was intellectually prepared for these tasks, since I’m a tax and estates attorney as well as a journalist. Yet my own family’s experience reminded me that the complicated rules don’t always line up or work smoothly. After I wrote about how my widowed mother went for five months without benefits because of problems dealing with a staff-short Social Security Administration, I received emails and texts from families wrestling with similar or worse problems, as well as all sorts of practical questions about estates.

Those messages led me to create this guide as a starting point for families, executors, surviving spouses, and beneficiaries. It’s a how-to for spotting tricky issues and points you to resources (including a checklist, tables, and a map) on the topics that most often lead to tax and other unpleasant surprises after death. It also offers readers suggestions on ways to reduce the tax and administrative burden on their own heirs.

Most families don’t need to worry about the federal estate tax. The current federal exemption from the tax ($15 million per person, or $30 million per married couple) is high enough that little more than one in a thousand estates is hit with the federal levy

State taxes are different. Twelve states and the District of Columbia impose estate taxes, and all but one have far lower exemptions–three are $2 million or less. Five states impose inheritance taxes that can hit nearly every penny depending on who an heir is. A couple might live together for years and buy a home together, but the surviving partner could still face a stiff inheritance tax because they never got married.

Other states don’t impose a death tax, but have expensive probate systems or mandated attorney fees. We’ve got state-by-state details, as well as ideas for minimizing the state burden.

One common misconception is that tax problems disappear when someone dies. They do not. Old tax bills and liens don’t just disappear. And a final Form 1040 is generally required for the year of death if the decedent would have been required to file one had they lived. That return reports income received or constructively received before death and medical and other deductions attributable to the decedent before death.

The final 1040 may not be the only tax return that needs to be filed. An estate can become a separate taxpayer, and if it has enough post-death income (including interest and dividends), it may need to file Form 1041. You’ll have to sort out what needs to be reported, when it needs to be reported, and who is responsible for reporting it. Mistakes can follow the executor, the surviving spouse, or the beneficiaries long after the funeral. Here’s more help on the tax front.

Inherited retirement accounts can seem simple. Many taxpayers name their beneficiaries when they open an IRA or a workplace account like a 401(k) and then largely forget about it. At death, the account transfers to the beneficiary, who may also be tempted to forget about it.

Doing so is dangerous. The SECURE Act and SECURE 2.0—signed into law on December 20, 2019, and December 29, 2022, respectively—changed and complicated the options for managing inherited retirement accounts. For many non-spouse beneficiaries, the old “stretch IRA” option which allowed you to spread out distributions over your own lifetime, is no longer available. Instead, if the account owner died in 2020 or later, these beneficiaries must now empty an inherited account within 10 years.

The 10-year rule is so confusing that beneficiaries have been making a lot of mistakes. A common one: Assuming no annual distributions are required during the 10 years. We explain this and other common mistakes and how to avoid them here.

Decades’ worth of furniture, jewelry, art, collectibles, family records, and photographs, including those stored in boxes in the basement (and in my dad’s case, in cubbies all over the house), also need to be addressed. Some items may have financial value, while others may simply carry sentimental value. Some may be donated. Some may be sold. And some may need to be thrown away, which can be more emotionally difficult than families expect.

For tax purposes, inherited property generally receives a step-up in basis equal to its fair market value at death. That means heirs who sell inherited property shortly after death may have little or no capital gain if the sale price is close to the date-of-death value. But collectibles have their own rules, including a higher maximum federal long-term capital gains rate. Donations can also be tricky, both when it comes to finding a charity that wants your family’s stuff and when it comes to the tax deductions.

We’ve got tips on all this, as well as practical advice on estate sales and 10 steps to deal with your own stuff now, so your kids don’t have to do it later.

Along with all the possessions, many folks (including my dad) leave behind decades of tax and financial records, often squirreled away in the oddest spots. You might be tempted to toss the lot. But be careful: Financial records are different from ordinary clutter. Old tax returns, Forms W-2, brokerage statements, and account statements may still matter.

For ordinary income tax records, the general rule is to keep returns and supporting documents until the period of limitations has run. If a return was filed correctly and on time, the IRS generally has three years from the filing date to assess additional tax. But there are exceptions, including omitted income, foreign asset reporting issues, fraud, and failure to file. In those cases, records should be kept much longer.

Along with all the old records, lots of new ones are generated in the process of administering an estate. You’ll have to hold on to some of those too. We’ve got the details on what to toss or save here, as well as advice for scanning paper records and shredding them.

Go Slow the First Few Weeks

After a death, families often want to move quickly. That’s natural. But for tax purposes, the best first step is to slow down and make sure that you understand the rules before you do anything—before distributing assets, selling property, closing accounts, or taking retirement distributions.

Take a look at existing documents and records, including the will, trust (if there’s one), beneficiary designations, account statements, and prior tax returns. Consider reaching out to a tax professional for help before deadlines pass or assets are distributed.

Many estates are straightforward. But even simple estates can have one or two issues that create tax consequences. While the tax system doesn’t stop for grief, a careful process can make the months after a death less chaotic, less expensive, and less likely to produce painful surprises.