Whether a loved one has passed away or if you are interested in being proactive in managing your affairs, it is advisable to consult with Numbers Plus® in addition to your lawyer to navigate 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 ensures all prior tax returns have been filed. This will allow for a final return to be prepared for the deceased taxpayer. The final return of the deceased taxpayer will include all components that fall within their personal tax return, however, this tax return covers the period from January 1st, to the date of death. This is known as the Final Return although in most cases, it is not the last return that needs to be filed. The final tax return is due on April 30th of the year following death unless the taxpayer passed away in November or December. In this case, 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:
- 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 from the date of death to the first anniversary (or sooner) of death.
- Another personal tax return that must be filed is if the deceased had, or was a partner of, an unincorporated business that generated income after the taxpayer’s death. This tax return is due on April 30th of the year following death unless the taxpayer passed away in November or December. If this is the case, then the Estate has a maximum of six months to file the personal tax return. Personal tax returns are required to be filed each year following the taxpayer’s death in which the Estate retains ownership in the business and that business generates income. Generally speaking, when a person dies and the Estate holds a valid will, 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. However, unlike a normal trust a Testamentary Trust has progressive tax applied to it, similar to an individual.
- If tax returns are prepared using the trust, then the trusts tax year end will be the anniversary of the taxpayer’s death and must be filed within 90 days of that date. A major advantage of using a trust is that the Estate can be taxed in by the Estate, the beneficiaries or a combination. If this is the case, the amount of tax paid on the inheritance can often be much lower than if the 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 and/or curatorship’s rules being applied to the inheritance of a minor or incapacitated beneficiary. This only applies as 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 hire Numbers Plus® as soon as practical.