Death and Taxes--When the Certainties Collide.

• Author: Neilson, Hugh

As the cliche goes, the only certainties in life are death and taxes. When the former occurs, the Personal Representative(s) (formerly known as the Executor(s)) of the Estate must address the latter. Taxes become more complex in the year of death, and the period of Estate administration. This article provides a brief overview of some common issues.

Returns to be Filed

The Personal Representative must file the deceased's terminal (final) return. This return includes the deceased's regular income from all sources from January 1st to the date of death, like a typical tax return. It is due on the later of the usual filing deadline (April 30 for most individuals) or six months after the date of death (e.g. June 15, 2018 for an individual passing away on December 15, 2017).

The final return must include most income accrued to the date of death. For example, income on term deposits and similar investments are normally taxable when received. However, the income must be accrued to the date of death. For example, assume Charlie invested $10,000 in a one year Term Deposit bearing 1% interest on October 1, 2016, maturing September 30, 2017. He died on June 30, 2017. His final return should include interest of $75 ($10,000 x 1% x 273/365 days to June 30).

For an individual with many investments, determining the amounts to report can require considerable analysis.

Deemed Disposition--Most Assets

The general rule is that a deceased person is deemed to have disposed of all of their property at fair market value (FMV) on the date they die. The income tax consequences in regards to this rule depends on the type of property that is held by the deceased. Even though there was not an actual sale, there will be a capital gain (or loss) or full income inclusion, depending on the nature of each asset, resulting from this deemed disposition. The FMV becomes the cost to the Estate, or the beneficiary.

It would not be tax without exceptions to the general rule:

1. Assets transferred to a surviving spouse avoid the disposition at fair market value by transferring instead at original cost. No additional income is included in the deceased's final return. When the surviving spouse sells the property (or passes away themselves), they will compute any gains based on the deceased's cost. This transfer at cost occurs automatically, however the Personal Representative can elect a transfer at FMV, realizing any gains (or losses). This election is made on each property...