In managing an estate, an executor bears the critical responsibility of overseeing the estate’s tax obligations. This role often extends beyond administrative duties and requires a thorough understanding of the applicable tax laws, tax strategy, and financial oversight. From filing annual income tax returns to navigating the intricacies of estate tax obligations, executors must ensure compliance with federal and state tax laws while safeguarding the estate’s assets.

Equally important, and often underestimated, is the executor’s role in maintaining consistent communication and coordination among the estate’s tax, legal, financial, and valuation advisors. This collaborative effort is essential to make sure that all aspects of the estate are accurately assessed, legally sound, and financially optimized. By fostering clear and regular dialogue among these professionals, the executor helps prevent costly missteps, aligns the estate’s administration with the decedent’s intentions, and facilitates a smoother, more transparent process for beneficiaries.
This article offers some practical tips to guide executors through the essential tax matters they may encounter, including both income tax and estate tax considerations. Keep in mind that these points do not represent an exhaustive list of every tax issue that may arise. 

Key fiduciary income tax considerations:

Understand Income Tax Filing Requirements (Forms 1040 and 1041)

File the final individual income tax return (Form 1040) for the decedent to report income through the date of death. Determine if a fiduciary income tax return (Form 1041) is also required to report income earned after the date of death by the estate or a trust; or if the surviving spouse or beneficiaries may be reporting the income. Check whether state income tax filings are also required based on residency or source of income. 

Understand Trust Tax Obligations Post-Death

If the decedent created a revocable or grantor trust during their lifetime, these may also require new or different tax filings after death. Income earned by the trust post-death is usually reported on a trust Form 1041, unless an election is made to treat some types of trusts as part of the estate for income tax purposes.

Be Aware of Tax Filing Deadlines and Choose a Year-End 

Estate income tax returns may choose a calendar year or a fiscal year (ending within 12 months after the date of death). Choosing a fiscal year can provide additional time to make distributions and defer tax payments. A calendar year tax return will be due on April 15 following the year of death, and a fiscal year return is due three-and-a-half months after the year-end. 

Apply the Stepped-up Basis to Inherited Assets

Most assets owned at the date of death can get a new income tax basis equal to the fair market value on the date of death. This “step up” may reduce capital gains when assets are sold. Executors should confirm with their investment advisors if brokerage accounts reflect these adjustments. Qualified appraisals may also be needed for non-marketable assets, such as real estate, business interests, collectibles, etc.

Evaluate Tax Elections

Several tax elections may offer advantages, or be required, depending on the specific assets and entity types involved:

• If the decedent owned S Corporation interests, certain elections may need to be filed to maintain the tax status
• Consider filing an election to treat a Qualified Revocable Trust as part of the estate to consolidate tax filings and be able to utilize several income tax advantages of filing as an estate

It is equally important to consider the fiduciary’s role in the realm of estate tax. While income tax obligations primarily relate to the ongoing financial activities of the estate or trust, estate tax responsibilities focus on the valuation and transfer of assets upon death. The following explores the executor’s duties in managing estate tax matters, such as asset valuation and filing the federal estate tax return, while highlighting some important post-mortem tax planning opportunities.

Key estate tax considerations:

Asset Valuation Requirements

When filing Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return, the return must include various supporting documents to substantiate the value of the assets reported on the return. All assets owned by the decedent at death, including real estate, stocks, bonds, personal property, business interests, and any other property owned, must be valued at their FMV as of the decedent’s date of death. Obtaining and attaching a qualified appraisal to the return can help ensure accurate valuations and help avoid disputes with the IRS.  

Election to Port Deceased Spousal Unused Exclusion (DSUE) aka “Portability Election”

For 2025, the federal estate tax exemption amount is $13.99 million per person. This means that an individual can transfer up to $13.99 million at death without incurring federal estate taxes. A portability election allows the surviving spouse to use any unused portion of the deceased spouse's estate tax exemption. To make the DSUE election, the executor must file Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return, within nine months of the decedent's death. Portability can significantly reduce the estate tax burden for the surviving spouse, making it a valuable tool for estate planning.  

Alternate Valuation Election

If the value of an estate's assets has declined significantly within six months of the decedent's death, an Alternate Valuation Election should be considered. This election allows the estate to be valued at a date six months after the decedent's death, rather than the date of death. This election can only be made if it results in a lower estate tax liability. It must be made on Form 706 and is irrevocable once chosen. However, executors must carefully consider the impact of the alternate valuation election on both the estate tax liability and the beneficiaries' future capital gains tax.

While the election may reduce estate taxes, it could result in a lower basis for the beneficiaries, potentially increasing their capital gains tax when they sell the inherited property.

Navigating tax duties as an estate executor

Serving as an executor of an estate comes with a wide range of responsibilities, and among the most complex are those related to taxes. While daunting at first, the process becomes more manageable with a clear understanding of both income and estate tax responsibilities. By staying organized, coordinating with professional advisors, and adhering to key deadlines, executors can fulfill their duties with confidence, and help ensure the estate is administered efficiently and in compliance with the law.