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Taxes at Death

When a South Carolina resident dies, in addition to debts, expenses of administration, and enforceable claims, oftentimes taxes must be paid before distributions can be made to heirs or beneficiaries. There are many types of taxes that the estate may owe, but the primary tax obligations tend to be state and federal income taxes and federal estate taxes. South Carolina imposes income taxes on income earned during the course of estate administration, and there may be income and/or estate or death taxes imposed by other states or nations. Currently, South Carolina does not impose an estate tax, but other states do. In addition there is a federal estate tax imposed on estates in excess of a threshold, called an “exemption,” that changes from time to time. The size of the estate determines whether there is an estate tax obligation, and the amount of income usually determines what income taxes must be paid.

Not all estates must file a federal estate tax return (Form 706). However, for decedents dying in 2014, a Form 706 must be filed if the total estate value for federal tax purposes, called the "gross estate," which is the total value of the decedent’s assets located in South Carolina and elsewhere, exceeds $5,340,000. This is true even if ultimately no estate tax is due after factoring in allowable deductions and credits. The Form 706 is due nine months after date of death.

Even when a federal estate tax return will be required, no federal estate tax is currently imposed upon property passing to a surviving spouse or to a qualified charity. Additionally, after deductions and credits, estate tax is only imposed on the value of an estate that exceeds the exemption. In January 2013, Congress set the estate tax exemption at $5,000,000 for decedents dying in 2011 and indexed it to inflation. For decedents dying in 2013, the figure was $5,250,000, and the 2014 figure is $5,340,000. The exemption changes annually and is also subject to change by legislation.

One relatively recent concept with which those administering the estates of high net worth individuals should be aware is that of “portability.” Established by Congress in 2010 as part of a broader tax compromise, portability allows a surviving spouse to use a prior deceased spouse’s unused estate tax exemption. For example, in 2014, if a husband dies having an estate of $1,000,000, assuming there are no deductions or credits, since his estate tax exemption is $5,340,000, he would have $4,340,000 of unused exemption. Upon the wife’s death, she can use not only her own $5,340,000 estate tax exemption, but also her husband’s remaining $4,340,000 exemption. In effect, husband and wife are treated as one economic unit.

It is important to remember that portability is not automatic. After the first spouse dies, a Form 706 must be timely filed in which portability is elected in Part 6. If this does not happen, there will be no portability, and the second spouse will only be able to use his or her own exemption, resulting in potentially millions of dollars in additional tax liability.

Finally, income taxes also must be paid on income reportable by the estate. The personal representative of the estate must file the decedent's final income tax returns, which reflect income earned during the decedent’s last partial year alive, with federal and state authorities, and pay the taxes due. If the property in the estate continues to produce income after the decedent is dead, for example, from bank accounts or stocks, in excess of $600 per year, the personal representative of the estate may have to file fiduciary returns for the estate on that continuing income. All income, whether payable to an individual before death or his estate after death, is reportable on the appropriate federal or state income tax return if the return filing threshold is exceeded.

A personal representative who fails to file required returns or who fails to pay taxes when due may incur personal liability to taxing authorities for the unpaid tax, penalties, and interest.

It is thus quite important to seek competent advice from accounting and legal professionals regarding filing requirements and the timely payment of taxes.

This information was prepared to give you some general information on the law. It is not intended as legal advice about any particular problem. If you have questions about the law you should consult a lawyer. If you do not know a lawyer, you can call the South Carolina Bar Lawyer Referral Service weekdays between 9 a.m. and 5 p.m. The number is 799-7100 in Richland or Lexington Counties, and 1-800-868-2284 from other parts of the state.