Concerns about taxes during the probate process often focus on estate taxes. People with multi-million dollar estates are potentially at risk of substantial estate tax obligations. Much of their property may end up used to pay taxes instead of enriching the lives of their heirs or beneficiaries.
People with large investment portfolios, successful companies and other valuable assets frequently plan carefully long before their health declines to minimize estate taxes or outright avoid them. There is another form of tax that may be due during estate administration if people leave instructions to sell some of their property.
Estates may owe income taxes
Family members of the person who passes may not necessarily want to retain all of their physical assets. Especially when considering personal property, such as home furnishings, clothing and similar resources, the plan may be to hold a sale to liquidate those assets and then distribute funds among chosen beneficiaries or heirs.
Families may not have much attachment to the property or desire to retain those assets. Holding an estate sale is an effective way to address those possessions. However, the revenue generated by an estate sale can potentially trigger additional tax obligations.
The sale of estate resources may necessitate an income tax return filed by the personal representative on behalf of the estate. If the revenue generated reaches $600 or more, then filing an income tax return is likely necessary.
The personal representative must retain some of the proceeds from the sale to cover the estate’s income tax obligations. Those taxes are in addition to any outstanding income tax obligations owed by the decedent directly at the time of their death.
Creating a robust estate plan can help a testator minimize the tax obligations that could otherwise diminish their legacy. Seeking legal guidance is a good way to get started.