February 17, 2025

What Taxes Must an Estate Cover During Probate Proceedings?

Estate tax laws can be complex, and the specific tax implications for your estate will depend on its unique circumstances. Consulting with an experienced estate planning attorney in McAllen, Texas is essential to ensure your estate plan minimizes potential tax burdens for your beneficiaries.

While creating a will or trust can help streamline the probate process, estates may still be liable for certain taxes. Below is a breakdown of the types of taxes an estate may be required to pay during probate.

Estate Taxes

An estate tax is a federal tax on the transfer of the estate’s value at the time of death. However, not all estates are subject to this tax. For 2023, the federal estate tax exemption is $12.92 million per individual, which means only estates exceeding this threshold are subject to federal estate tax. Estates valued below this amount are exempt, providing relief to most families. The executor must assess the total value of the estate, including all assets such as real property, investments, and personal property, to determine whether the estate tax applies.

In Texas, there is no state-level estate tax, making it an advantageous jurisdiction for estate planning. Executors handling larger estates that exceed the federal exemption must file IRS Form 706 to report and pay any federal estate taxes due. This form is essential for compliance and ensures that the estate’s assets can be distributed without additional penalties. Executors should work with qualified probate attorneys to ensure accurate reporting and efficient handling of estate taxes.

Income Taxes

The estate is considered a separate tax entity during the probate process. Any income generated by the estate’s assets, such as rental income from properties, interest from bank accounts, or dividends from investments, must be reported on a federal income tax return. Executors are responsible for filing IRS Form 1041, which covers the estate’s income, and ensuring any taxes owed are paid promptly. Failure to address these obligations can lead to fines or legal complications.

Additionally, the deceased’s final personal income tax return (Form 1040) must be filed for the year of death. This ensures that all income earned up until the date of death is accounted for and any owed taxes are settled. Executors must also ensure that any deductions or credits the deceased was entitled to are properly applied. Understanding the interplay between the estate’s income and the decedent’s final taxes is critical, requiring help from an estate planning attorney in McAllen.

Income tax issues can be particularly challenging when an estate has multiple sources of income. Executors should carefully document all income and consult with professionals to avoid mistakes.

Property Taxes

If the estate includes real property, ongoing property taxes must be paid to prevent penalties, interest, or liens. Real estate is often a significant asset within an estate, and its tax obligations must be managed carefully to avoid financial complications. The executor must determine whether the estate has sufficient liquid assets to cover these expenses during probate or if funds need to be raised through asset liquidation.

In Texas, property taxes are assessed annually, and any unpaid taxes may accrue interest and penalties. These taxes are based on the appraised value of the property, which the local tax authority determines. Executors should check for any outstanding property tax bills and ensure that payments are made on time. Failure to address property taxes can delay probate proceedings and jeopardize the estate’s assets.

When selling property from the estate, the executor must also account for any prorated taxes due at the time of sale. Planning for these obligations early in the process ensures a smoother transition.

Gift Taxes

If the deceased made significant gifts during their lifetime, the estate may be subject to gift taxes. The lifetime gift tax exemption is unified with the estate tax exemption, meaning that any taxable gifts made during life reduce the exemption available at death. For instance, if a decedent gifted $2 million during their lifetime, their federal estate tax exemption would be reduced by that amount.

Executors must review the decedent’s financial records to identify any substantial gifts reported on IRS Form 709. Failure to account for these gifts could lead to penalties or an increased tax burden on the estate. Additionally, the executor should consider whether the decedent’s gifting strategy was designed to maximize tax advantages, as these can significantly impact the estate’s overall obligations.

Sales Taxes

While not common, some estates may need to address sales taxes. For instance, if the executor sells personal property from the estate, sales tax may apply depending on the jurisdiction and nature of the sale. Consulting with a probate attorney can clarify whether this obligation arises.

Get Help Managing Estate Taxes

Addressing taxes during probate is a critical component of settling an estate. Whether it’s income taxes, property taxes, or potential estate taxes, ensuring compliance is essential to avoid complications. The Villeda Law Group offers unparalleled knowledge and resources to handle your estate’s tax obligations effectively. Let us help you safeguard your assets and achieve peace of mind. Contact us today to schedule a consultation.