I have written in previous blogs about the tax filing deadlines to be observed by executors of estates. From time to time there will be delays that could lead to missed deadlines resulting in tax penalties and arrears interest. All is not lost, however, where the deceased leaves a testamentary trust which would otherwise qualify as a spouse trust.
The time for filing the final tax return of the deceased is extended to 18 months after death where the deceased leaves a testamentary trust which would qualify as a spouse trust except that it provides for the payment of testamentary debts. You see, for a trust to be a spouse trust no one other than the spouse can receive or otherwise obtain the use of any trust income or capital during the spouse’s lifetime. Assets left to a spouse trust may be received by the trust at their tax cost from the estate thus deferring the capital gain and resulting tax to the deceased where there has been an increase in value during the deceased’s lifetime. The rollover rules will not apply where a spouse trust becomes “tainted”.
The extension of time is allowed so that the executor(s) may have a reasonable time in which to determine the amount of non-qualifying debts (which may frequently depend upon the final determination of death taxes). Once determined the executor(s) may take appropriate steps to list and elect upon trust property as a means of untainting the spouse trust.
Take the time to carefully review the deceased’s will for the treatment of testamentary debts and maybe buy some time to file that final return.
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