As the saying goes 'There are only two things you can be sure of in life - death and taxes'. What many people don't realise is tax rises to the top because even when you're dead, there are still taxes.
Taxes after death can present a complex landscape for the dead person's family and executors but there are several things you can do whilst you're still alive to help elevate yourself to Dream Dead Person status.
Your executor will be responsible for the following tax obligations:
- Filing a final tax return.
- Filing any outstanding tax returns.
- Filing a tax return for the estate if it generates income before being distributed (ie rental income, interest etc).
- Understanding Captial Gains Tax obligations.
You can read more about your tax obligations as an executor HERE.
As a death lawyer, I'm not an accountant or financial expert (I have people for that). I'm in no position to offer you taxation or financial advice (you should find your own people for that).
I am, however, in a position to provide you with a raft of reasons why your family (and your death lawyer) want you to stop talking about doing your taxes, put your big person pants on, and get them sorted before the end of the financial year.
Your tax obligations don’t die with you
When a person dies, outstanding debts are paid before distributing any remaining assets to their beneficiaries. The first debt to get paid is, yep you guessed it, outstanding tax.
Your executor will be responsible for gathering all the information and documents required to file a final tax return for any income you earned between the start of the financial year to the date probate or letters of administration are granted.
Whether you’re a year or ten years behind on your tax returns, all outstanding tax debt must be paid from your estate - it doesn’t just disappear when you die.
🔎 Tax Fact: Unpaid taxes can significantly reduce the value of your estate and may delay the transfer or sale of property, investments, and savings to your beneficiaries, which may put them at risk of financial hardship.
Doing a dead person's tax is significantly more challenging than a living person's
If you've ever had to hunt through receipts, invoices, and bank reconciliations, you'll know that doing a tax return can be challenging.
For executors filing tax returns on behalf of a deceased person, it can be a complicated, stressful, and time-consuming activity. It can also result in additional legal, accounting and administration fees or a requirement for them to act as your representative if you are audited.
🔎 Tax Fact: There's one thing that sucks more than doing your own tax return and that is doing a dead person's tax return. Dream Dead People don't leave it up to others to clean up years of overdue taxes.
Ignoring your tax puts your executor at risk
We all think we'll die with enough time and warning to get our affairs in order. Perhaps unsurprisingly, the top of many people's 'affairs' list isn't curating a beautiful scrapbook of memories or recording personal videos for friends and family - it's doing five years of tax returns.
Leaving your executor to manage your tax puts them at risk of legal disputes and challenges from beneficiaries, creditors, or tax authorities.
🔎 Tax Fact: The executor of your estate is legally obligated to settle your tax liabilities. If your taxes are not up to date or correctly lodged, the executor might face personal liability for failing to properly manage the estate's tax obligations.
Your tax returns are a helpful tool when administering your estate
An up-to-date tax return is an incredibly valuable tool that helps your family and your estate lawyer navigate the ins and outs of your life. It sheds light on investments, income, superannuation and other mechanisms of your life and helps to paint a picture of the sale or transfer of assets.
Understand special tax considerations
Tax time is a great opportunity to make time to discuss other estate tax matters with your accountant, including;
- Tax treatment of your superannuation
- Tax implications of foreign assets
- Tax obligations related to trusts and companies
Ensuring you're operating a business under the correct structure
Many sole traders believe (incorrectly) that if they were to die, family members or staff would be able to step in and continue running their business.
If you run a business under an ABN and have staff, rent a building, hold stock, lease equipment, or have other contractual obligations - then your death and the immediate closure of your business will undoubtedly have significant flow on effects for people connected to your business as well as your beneficiaries and the person managing your estate.
Talk to your accountant about ways you can protect your business by using the right business structure.