Hire an accountant
Bringing an accountant into the mix when working as an executor or executrix can simplify your job, help ensure the estate monies are handled properly, and minimize liability — not to mention reduce the risk for hostility between the deceased’s loved ones and heirs.
What an accountant can do
An accountant can manage the deceased’s accounts while the estate is being closed, pay bills, oversee selling of any goods, deposit any refunds or over payments, etc. Having a professional in this role can help prevent any concerns among heirs that one is spending money improperly or not managing checking and savings accounts in the right way.
The accountant also can handle final income tax returns for the deceased, as well as the estate tax return. Even for someone comfortable doing their own taxes, these filings can be puzzling. Depending on the state where taxes will be filed, taxation of an estate can vary. In some states, you must pay taxes at the state level in addition to the federal level. But exemptions can exist under certain circumstances, which is where a knowledgeable accountant might help you save money.
An accountant also can help heirs with their individual tax filings, which could include inheritance taxes at the state and federal level. In short, it can be confusing and risky to try to handle these matters on your own. If done incorrectly, costly government fines could be assessed, money wasted, and family discord fueled. It’s important to remember that taxes might need to be filed for two years, not one. If the person dies early in a year, the chances are high that he or she will not have filed their taxes for the previous year yet. In that scenario, the filing process is significantly more complicated and an accountant becomes even more important in the process.
Factors to consider when hiring an accountant
When considering who to hire, make sure to check to see if they are a certified public accountant. Ask if they frequently handle estate matters. See what type of tax software they use and check if other accountants in the area can easily transfer data from that software into the program they use. That way, if the accountant you hire turns out to not be what you need, another accountant can easily pick up where they left off, saving you from paying twice for the same work.
You also might want to consider the general nature of the accountant. Is he or she open to answering questions and do they do so in a way that is clear and understandable? Since you could be acting as a middle man between accountant and family, you will want to make sure the accountant can explain things to you in a way that is easy to pass on to the deceased’s heirs, should they have questions. Ideally, the accountant should be open to talking to heirs directly, if needed.
It is also smart to ask for and call references for any accountant or accounting firm that you consider. These contacts can share their thoughts on the fairness of the accountant’s billing practices and whether the accountant brings value by being proactive in his or her work versus mechanically treating each client in the same manner.
Finally, you will want to check on rates and fees for handling taxes and any accounts. Don’t hesitate to check with other accountants to compare rates. You obviously want a skilled accountant, but as executor you also have a fiduciary responsibility to make sure the deceased’s money is spent wisely. By asking references about the value the accountant brings to the process and how fair they are in their billing, you’ll get beyond simply choosing an accountant with the lowest hourly rate, and make a much more informed decision.
Will You Owe Inheritance Taxes?
As executor, you will be working closely with the beneficiaries who the deceased has named in his or her will. You also might be a beneficiary yourself. It is therefore important to understand that the assets of the deceased will be subject to what many refer to as death taxes. Since it can be confusing as to who, when, how, and even if you will pay these death taxes, it is important to understand the difference between terms such as inheritance tax and estate tax and the rules for each.
What is inheritance tax?
An inheritance tax is a tax charged in certain states on money or property received from the estate of a deceased person. The beneficiary of the money or property must pay any due inheritance taxes individually. As of the 2014 tax year, eight states impose this tax. The eight states are Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee. The inheritance tax rate in these states ranges from one percent to 20 percent of the value of the money and property you inherit.
How Much Inheritance Tax Do You Owe?
So how do you know what you owe? Once an executor has divided up and distributed the deceased’s assets, any due inheritance taxes will be determined. You will pay tax based specifically on the amount you received and if this amount is under a certain threshold, you might not owe any taxes at all. For example, a state might charge a 10 percent tax on all inheritances greater than $2 million. If you inherited less than this amount, no inheritance taxes are due. So say you inherit $6 million from a friend, you will be required to pay taxes on everything other than the first $2 million. So your inheritance tax bill will be $400,000 – 10 percent of the taxable amount of $4 million – and you will be required to report this information on an inheritance tax form.
Inheritance Tax Exceptions
Keep in mind, there are exemptions that can spare you this cost under certain circumstances. For example, depending on your relationship with the deceased, you might receive an exemption or not have to pay as much in inheritance taxes. In most states, spouses are considered exempt. And children and other dependents might qualify for an exemption or partial exemption, too.
How are Estate Taxes Different?
An estate tax also applies to the deceased’s money and property, but it is not charged to beneficiaries. It is instead taken out of the deceased’s assets prior to any monies or property being distributed to beneficiaries. Estate taxes can be charged on both a state and federal level and are typically due within nine months of the deceased’s date of death. Keep in mind, like inheritance taxes, an estate tax on the federal level will not be levied unless the value of the estate exceeds a certain amount. Currently, this amount is set at $5.43 million. So if the deceased’s entire list of assets – home, vehicles, properties, jewelry, etc. – is valued under $5.43 million, no federal estate taxes will be due. State estate taxes, however, might still be charged.
Given the possible exemptions and varying rules, it is wise to consult with a tax adviser, tax attorney, or accountant for advice and to ensure you pay the proper amount of taxes.