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Deceased Taxpayers

There is an old saying that states “The only two things certain in life are death and taxes”.  Unfortunately, there is a lot of truth to that statement.

It is always recommended to give some thought to how a person’s estate will be taxed before they have passed away as certain steps and mechanisms may be taken to proactively manage the taxes and fees that may be applied to an estate.

Whether a loved one has passed away or if you are interested in being proactive in managing your affairs, it makes good sense to consult with Numbers Plus Professional Corporation in addition to your lawyer to navigate the often complex issues relating to the death of a taxpayer.

The following is a general overview of some of the taxation related items to be considered and acted upon when someone dies.

When someone passes away the Estate is required ensure all prior tax returns have been filed.  Next, at a minimum a final return must be prepared for the deceased taxpayer.  This tax return covers all items that would normally fall within their personal tax return except this tax return covers from January 1 to the date of death.  This personal tax return to the date of death is officially called the ‘Final Return’, although it usually is not the last tax return that is required to be filed.  This tax return is due on April 30th of the year following death unless the taxpayer passed away in November or December, then the Estate has a maximum of six months to file this personal tax return.

There are two Optional Personal Tax Returns that may be advisable:

  1. A ‘Return for Rights or Things’ personal tax return must be completed if there is income after death from items and/or investments held by the Estate.  This covers the period of the first day after the taxpayer died to the first anniversary (or sooner) of death.
  2.  Another personal tax return that occasionally must be filed is when the deceased had, or was a partner of, an unincorporated business and that business earns income after the taxpayers death.  This tax return is due on April 30th of the year following death unless the taxpayer passed away in November or December, then the Estate has a maximum of six months to file this personal tax return.  For each calendar year following the taxpayers death that the Estate retains ownership in the business personal tax returns are required for the income earned from the business.

Generally speaking, when a person dies and the estate holds a valid will for the Estate, the will creates what is called a testamentary trust.  This is an important tool with respect to taxation as this allows the Estate to file tax returns as a trust, but unlike a normal trusts a testamentary trust has progressive tax similar to an individual applied to it.

If tax returns are prepared using the trust, then the trusts tax year end will be the anniversary of the taxpayers death, and the tax return must be filed within 60 days of that date.  The advantage of using a trust is that the Estate can be taxed in the hands of the estate, the beneficiaries or a combination.  This means that the amount of tax paid on the inheritance can often be much lower than if the same estate does not use the trust mechanism.

Some of the advantages of Testamentary Trusts include:

  • Ability to reduce the total income tax payable on the future income earned on the inheritance for the first 36 months post death (prior to the 2016 tax year this was applicable for so long as it is held within the trust)
  • Help protect the inheritance from creditors of the beneficiaries, potentially even from family and/or property claims so long as it is held within the trust
  • Avoids guardianship/curatorships rules being applied to the inheritance of a minor or incapacitated beneficiary so long as it is held within the trust

To ensure the Estate is properly positioned to minimize the tax, and probate fees, that may apply it is always advisable to have Numbers Plus® working with your lawyer before you pass away.  Some items to be considered include setting up a Testamentary Trust for a Spouse and Testamentary Trust(s) for Children and occasionally setting up a trust while still alive.