The moment when a loved one passes away feels, inevitably, insurmountable. Aside from the overwhelming feelings of trying to sort out funeral arrangements, the legal aspect of managing someone’s finances after they pass away can seem perplexing to a grieving family. Which brings up the question: What types of taxes are due when a person passes away?

Estate Tax (Federal and State)

An estate tax, also known as a “death tax’, is a tax on the net value of an estate of a deceased person. This usually occurs before the assets of an estate are distributed to the heirs. The federal estate tax assesses the gross estate less any allowable estate tax deductions. Some deductions include the following:

• Funeral expenses
• Administration expenses
• Claims against the estate
• Unpaid mortgages or indebtedness

Considering that last year, the federal estate tax exemption was $12.06 million, only a small percentage of estates are expected to pay the federal estate tax. The federal estate tax is graduated, starting at 18% on the first $10,000 of a taxable estate and capping with a 40% rate on the taxable estate in excess of $1 million.

However, Illinois residents or a deceased person who owns real estate in Illinois may also owe an Illinois estate tax. In December 2011, the Illinois legislature issued an exemption increase to $3.5 million in 2012 and to $4 million in 2013. This means the exemption remains at $4 million in 2021 and 2022 at a tax rate of 16%.

Final Personal Income Tax (Federal and State)

The federal and state final individual income tax return of a deceased person is handled the same way it would have when they were alive. This also pertains to any tax due on the deceased person’s individual income tax return. The personal representative, such as the assigned executor, is responsible for filing any final individual income tax returns and paying taxes accordingly.

Estate Income Tax (Federal and State)

Apart from filing a deceased person’s final income tax return at the federal and state level, there will be a period of time while an estate or trust is being settled. During this period of time, the estate (including trust assets) will earn interest before the assets can be distributed out of the estate or trust to the beneficiaries.

Income earned by an estate must be reported to the IRS under the form U.S. Income Tax Return for Estates and Trusts. Furthermore, an estate (including trust assets) may also need to file a state income tax return for estates and trusts. In Illinois, the income tax rate for individuals and trusts is imposed at 4.95% of net income.

Because the estate of a deceased person is treated as a separate taxpayer, the assigned executor is also responsible for filing an estate income tax return and paying any estate income taxes.

Trust Income Tax

Trust income tax is a tax on the net value of the assets the trust owns and what those assets earn or produce.

Illinois requires an income tax return to be filed for trusts which, depending on the terms of the trust, may be treated as separate taxable entities. Subsequently, this means that the responsible party for payment of tax could alternate between the grantor, the trust, or the beneficiaries.

There are two primary classifications of trusts: grantor trusts and non-grantor trusts.

Grantor Trusts

A grantor trust is a trust where the grantor (or the grantor’s spouse) retains some degree of control over the assets and, therefore, is treated as though they own the assets for income tax purposes. These assets may include all items of income, deduction, and credit. Because the grantor trust’s income items are reported on the grantor’s personal income tax return, it is the grantor who is responsible for paying any taxes due.

Non-grantor Trusts

Non-grantor trusts also has two primary classifications: Simple trusts and complex trusts.

A simple trust is a trust that requires all trust income to be distributed at least annually, has no charitable beneficiaries, and makes no distributions of trust principal.

Since simple trusts are required to distribute all of their income, they usually do not have any income tax liability. Nevertheless, a simple trust is allowed a small personal exemption of $300.

A complex trust is a trust that is neither a simple trust nor a grantor trust. They are entitled to deduct any amount of income required to be distributed and any amounts properly paid or credited or required to be distributed. The deduction may not exceed the distributable net income of the trust. Therefore, the taxable income of a non-grantor trust equals its gross income less any allowable deductions. Complex trusts are entitled to a personal exemption of $100. Therefore, the trustee must file an income tax return for the trust, and then they must pay any taxes it owes.

Capital Gains Tax

If certain types of assets owned by a deceased person are sold after their death, then the sale will be subject to a capital gains tax.

The capital gains tax is a tax that is applied to any asset that increases in value. The amount of the tax depends on a deceased person’s income, their tax filing status, and the length of time that they owned the asset.

There are two primary classifications of capital gains taxes: short-term and long-term.

A short-term capital gains tax is a tax on profits from the sale of an asset held for one year or less. The short-term capital gains tax rate equals the deceased person’s ordinary income tax rate depending on their tax bracket.

Long-term capital gains tax is a tax on profits from the sale of an asset held for more than a year. The long-term capital gains tax rate is 0%, 15% or, 20% depending on the deceased person’s taxable income and filing status.

During such a difficult time, let the experienced attorneys at Johnston Tomei Lenczycki & Goldberg LLC help you with any of your estate planning needs. Call us today at (847) 549-0600 or email us at info@lawjtlg.com to schedule a free consultation.