Q: What is an estate, and what happens to it when someone dies?
A: During life, a person’s “estate” can broadly mean everything they own. After that person dies, their estate consists of the assets, debts and other financial matters that must be settled before the remaining property is transferred to the appropriate beneficiaries.
An estate is not something that applies only to wealthy families. Anyone who dies owning property, holding financial accounts or owing debts may leave behind financial matters that must be handled.
Someone must manage the estate. A personal representative – sometimes called an executor or administrator – is responsible for identifying the assets, paying valid debts and expenses, handling required tax filings and distributing what remains to the beneficiaries.
Probate may be required. Probate is the court process used to transfer certain assets after someone dies. For example, a bank account owned only by the deceased person may need to go through probate, while a life insurance policy with a named beneficiary generally passes directly to that beneficiary.
Federal and state requirements may apply. An estate may need to file federal Form 1041 if it earns income after the person’s death. States also have their own probate and tax rules. For example, a Massachusetts estate may need to file a Massachusetts fiduciary income-tax return.
The bottom line: Understanding how an estate works – and which assets pass through probate – can help ensure that a person’s wishes are followed, beneficiaries get what they are entitled to and unnecessary delays, legal fees and stress are reduced during an already difficult time.
Send questions about your taxes to Vincent Hicks, a CPA based in Cambridge who has more than 20 years of experience, at vincent@hickscpasolutions.com. You can call Hicks at (859) 553-0788.
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