Last Updated: March 25, 2025
Benjamin Franklin once quipped that “…in this world, nothing can be said to be certain, except death and taxes.” He was being witty, but his wisecrack contains some real wisdom. Paying taxes is an often unexpected part of managing a loved one’s estate.
Most estate administrators will not have to worry about calculating estate taxes since the first $13,990,000 of an estate is exempt from federal estate taxes in 2025, and Mississippi does not have an estate, inheritance, or gift tax. However, taxes may still need to be paid on behalf of the deceased and the estate, making it important to understand potential liabilities.
Filing a Final Income Tax Return
When someone passes away, their final individual income tax return must be filed for the year of their death. This return covers all income earned up until their passing and is prepared the same way as when they were alive. The estate administrator must report wages, retirement distributions, investment income, and any applicable deductions or credits. If a refund is owed, the IRS may require additional paperwork to claim it. Ensuring income taxes are handled properly prevents unnecessary complications for the estate and its beneficiaries.
Estate Taxes: Understanding Tax Liabilities After Death
When someone passes away, their estate becomes a separate legal entity responsible for handling assets, debts, and taxes. While Mississippi does not impose estate or inheritance taxes, federal estate taxes apply to estates exceeding the exemption threshold, which adjusts annually. Additionally, estate-owned assets that generate income after death may be subject to estate income taxes.
The estate administrator must determine whether an estate tax return is required and ensure all tax obligations are met before distributing assets. Failing to do so can result in penalties or financial complications for beneficiaries, making proper tax management a key part of estate administration.
Where Does the Money to Pay Taxes Come From?
The estate administrator must use estate assets to pay any outstanding taxes before distributing inheritances. Funds may come from cash accounts, proceeds from sold assets, or other liquid resources within the estate. If the estate lacks sufficient funds to cover taxes and debts—known as an insolvent estate—federal income taxes owed by the decedent and estate income taxes take priority over other debts. In these cases, creditors may have to write off unpaid balances. Proper estate planning, such as setting aside liquid assets or creating trusts, can help prevent financial strain and ensure taxes are paid without unnecessary delays.
Trusts and Gifting: Strategies to Reduce Tax Burdens
Thoughtful estate planning can help reduce tax obligations for your heirs and ensure more of your wealth stays within your family. Two key strategies—gifting and trusts—can be used to minimize estate and income taxes.
Gifting Strategies
Transferring assets during your lifetime can reduce the taxable value of your estate:
- Annual gift exclusion: The IRS allows individuals to give a certain amount per year, per recipient, without triggering gift taxes.
- Lifetime gift exemption: Larger gifts may count against your lifetime exemption but can still lower the taxable estate.
- Medical and educational payments: Directly paying tuition or medical bills for someone else is an IRS-approved way to transfer wealth tax-free.
Trusts for Tax Efficiency
Trusts offer more control over how assets are distributed while providing tax benefits:
- Revocable living trusts avoid probate but do not reduce estate taxes.
- Irrevocable trusts remove assets from your taxable estate, reducing potential tax liability for heirs.
- Charitable remainder trusts allow you to donate assets while providing income for beneficiaries and reducing tax exposure.
- Grantor-retained annuity trusts (GRATs) let you transfer appreciating assets while minimizing gift taxes.
Choosing the right trust or gifting strategy can protect your estate from excessive taxation. We will help you explore these options to create a tax-efficient plan tailored to your needs.
Is the Estate Administrator Responsible for Unpaid Taxes?
Yes, an estate administrator can be held personally liable for unpaid taxes if estate funds are mismanaged. The IRS requires that all outstanding taxes—both the deceased person’s final income taxes and any estate income taxes—be paid before distributing assets to beneficiaries. If estate funds are used for other expenses before taxes are settled, the government may hold the administrator financially responsible.
Administrators should prioritize tax payments, keep detailed records, and seek professional guidance when necessary to avoid liability. Ensuring all tax obligations are met protects both the estate and the administrator from potential legal and financial consequences.
Preserving Your Wealth and Protecting Your Loved Ones
Taxes don’t disappear after death, but thoughtful planning can reduce the burden on your estate and protect your heirs. Filing required tax returns, managing estate income, and using trusts or gifting strategies can help minimize financial liabilities. Estate administration comes with responsibilities, and failing to handle taxes properly can lead to unnecessary costs or legal issues. If you need guidance on tax-efficient estate planning, Palmer & Slay, PLLC is here to help. Contact us today to secure your legacy and protect your loved ones.