Frequently, the administrator of an estate will have completed the tasks of probate administration but may need to keep the probate open for additional time to file the final income tax returns for the estate. (And note that tax season is a little longer this year, as the IRS recently extended the deadline for filing 2020 federal income tax returns to May 17, 2021.) Waiting to close an estate until the taxes are complete can be a source of frustration for many estate administrators who just want the probate to be done. Why keep a probate open just to file income taxes?
Even if an estate does not need to file federal or Washington estate tax returns, the estate administrator is still responsible for filing any required income tax returns for the estate, as well as for the decedent. This can take time, much of it spent waiting. The administrator may need to wait to receive required tax forms, which may be delayed, particularly if the decedent held an interest in a partnership or LLC where a Schedule K-1 needs to be issued by a third party for the estate’s share of income.
Can the estate close as soon as the administrator receives all the tax forms and files the return? Maybe, but is prudent for an administrator to keep the estate open until the IRS processes the return and issues any refund. Why? First, because there is always that possibility that the administrator will receive a dreaded letter from the IRS seeking additional information or advising the administrator of a perceived error, which may require a response from an individual with the authority to speak on behalf of the estate as the court-appointed administrator. In addition, if a refund is received, it will be issued to the estate and needs to be deposited into the estate bank account. It is a far greater hassle for the administrator to re-open the probate in order to correct any errors or to deposit an unexpected refund check into the estate bank account than it is to keep the estate open while awaiting confirmation that all tax-related work is complete.
Keeping an estate open until tax filings are complete does not mean that the administrator must delay the distribution of estate assets while awaiting completion of the final tax filings. The administrator may consider a partial distribution in which a portion – or even the majority – of the estate assets are distributed to the beneficiaries. The administrator may be able to make a substantial distribution while holding a reasonable amount in reserve to cover the expected taxes due, the costs of tax preparation, and the legal and accounting fees estimated to be necessary to close the estate.
It should be noted that Washington law does provide a method for an administrator to file a Declaration of Completion to close an estate while retaining authority to handle tax matters at RCW 11.68.114. Upon filing a Declaration of Completion pursuant to this section, RCW 11.68.114(1) provides:
The personal representative retains the powers to: Deal with the taxing authority of any federal, state, or local government; hold a reserve in an amount not to exceed three thousand dollars, for the determination and payment of any additional taxes, interest, and penalties, and of all reasonable expenses related directly or indirectly to such determination or payment; pay from the reserve the reasonable expenses, including compensation for services rendered or goods provided by the personal representative or by the personal representative’s employees, independent contractors, and other agents, in addition to any taxes, interest, or penalties assessed by a taxing authority; receive and hold any credit, including interest, from any taxing authority; and distribute the residue of the reserve to the intended beneficiaries of the reserve…
However, note that the reserve allowed under RCW 11.68.114(1) is just $3,000. That is not a lot of cushion to account for unforeseen expenses or liabilities related to taxes. For this reason, it is more common for administrators to keep the probate open until the tax filings are complete before filing the Declaration of Completion closing the probate with the court.
It is important for administrators to keep in mind that waiting for tax filings to be complete before closing a probate is much like waiting for paint to dry – tedious and unexciting but nevertheless necessary. In probate, as in baseball, it ain’t over till it’s over.
This post is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with an attorney.