Key Tax Considerations When Settling a Loved One’s Estate

April 9, 2026

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A loved one’s estate may or may not be subject to federal estate tax. Unlike an inheritance tax—which is typically paid by the person receiving the assets—an estate tax is assessed on the estate itself after the individual passes away. In other words, estate taxes apply to the transfer of a deceased person’s property and must be paid by the estate before any remaining assets are distributed to beneficiaries.

Below are several tax-related considerations that may arise when settling an estate. Because the rules can be complex, it is often wise to review these matters with a qualified tax professional or attorney.

Does the executor need to file a final tax return?

In most cases, the executor is responsible for filing a final individual income tax return on behalf of the deceased. This return is generally prepared in the same manner as if the individual were still living, reporting income and deductions for the portion of the year up to the date of death.

When preparing this final return, it’s important to report all income earned before the individual’s passing and claim any applicable deductions or credits, such as qualifying medical expenses. The return should also indicate that the taxpayer is deceased.

Additionally, the executor may want to verify that tax returns from prior years have been filed. If the deceased previously worked with a tax preparer or advisor, that professional may be able to assist with this process. For executors unfamiliar with handling a final return, seeking guidance from a tax professional is often helpful.

When is an estate income tax return required?

An estate may also need to file its own income tax return if it generates income after the individual’s death. Under current IRS guidelines, if the estate earns more than $600 in gross income during a tax year, the executor must file Form 1041, the U.S. Income Tax Return for Estates and Trusts.

Before filing Form 1041, the executor must obtain a tax identification number for the estate, typically an Employer Identification Number (EIN). This number is used to report any income, deductions, gains, or losses associated with estate assets during the administration period.

For smaller estates—or those in which most assets transfer directly to beneficiaries outside of probate—this requirement may not apply. Even so, confirming the details with a tax advisor can help ensure compliance.

When is a federal estate tax return necessary?

Federal estate tax is based on the total fair market value of the deceased person’s assets at the time of death, rather than their original purchase price. Assets that may be included when determining the estate’s value can include:

●     Cash and bank accounts

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●     Investment holdings

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●     Real estate or rental properties

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●     Personal belongings such as vehicles or collectibles

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●     Retirement accounts

For 2026, federal estate tax generally applies only to estates exceeding $15 million for individuals, or $30 million for married couples. Although the executor is responsible for filing any required estate tax return, the tax itself is paid from the assets of the estate before distributions are made to heirs. In some situations, professional appraisals may be necessary to determine the fair market value of certain assets.

Do states impose estate or inheritance taxes?

While many states have eliminated their estate or inheritance taxes, some still maintain them. Currently, twelve states and the District of Columbia impose estate taxes, while five states have inheritance taxes. Maryland is unique in that it applies both.

If the estate falls under the jurisdiction of one of these states, it’s important to understand that each state has its own thresholds, rules, and filing requirements. Consulting with a knowledgeable tax professional can help ensure that all applicable obligations are handled properly.

Sources:

https://www.fidelity.com/learning-center/life-events/how-do-estate-taxes-work

Disclosure:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.‍ ‍