The legal and financial aftermath of losing a loved one often arrives before you have had time to process your loss. Tax obligations, in particular, emerge with unforgiving deadlines and complex requirements – creating a challenging time for those grieving.
What the deceased owned, gave away during their lifetime or planned for their beneficiaries can all trigger different tax obligations. Understanding these requirements is crucial in preserving as much of their legacy as possible for the people and causes they cared about the most.
Income taxes
Your loved one’s final income tax return represents one of the first tax obligations you will face as you settle their affairs. This return covers income they earned from January 1 until their date of death. Their estate also becomes a separate taxpaying entity that must file its own income tax returns for revenue generated by estate assets during the settlement period.
Gift taxes
Gift taxes represent the federal government’s claim on transfers of money or property you give to others. The person who makes the gift, not the recipient, must pay any gift tax due. In 2024, a person can give up to $18,000 per year without needing to report it to the Internal Revenue Service. Many families use this yearly opportunity to share wealth with children and grandchildren. If the estate owner exceeded this threshold but failed to file gift tax returns, this creates a paper trail that now affects how you settle their estate with the government.
Generation-skipping transfer taxes
These taxes apply when assets move directly to beneficiaries who are two or more generations below the deceased. If your family member left significant assets directly to their grandchildren or great-grandchildren, these transfers may trigger GST taxes at a flat rate of 40%. Fortunately, each person can protect up to $13.61 million from this hefty tax through their GST exemption.
The Delaware difference
Delaware residents enjoy a significant financial advantage when settling an estate as the state does not impose state-level estate taxes. Federal estate tax obligations may still apply, but the absence of additional state taxes means more of your loved one’s hard-earned assets will go to their intended recipients.