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How are Federal & State taxes owed by the deceased, by the estate, dealt with during probate?

With respect to federal & state taxes, a death terminates the decedent's final tax year as far as filing an income tax return is concerned, and it creates a new entity for tax purposes called an "estate." The estate has to complete and file one or more of the following for Federal taxes: Final Form 1040 Federal Income Tax return; Form 1041 Federal Fiduciary Income estate Tax returns; Form 709 Federal Gift Tax return(s); Form 706 Federal Estate Tax return.

As for the state - state income tax return and any state income tax returns during the probate period, plus possible estate tax, inheritance tax and gift tax returns may need to be filed by the executor. However, requirements vary state to state; and inheritance, gift and estate taxes have been eliminated by some states, as far as many of the smaller sized estates are concerned. Your probate attorney will be able to determine how your state's rulings specifically impact you and your family. Your executor or personal representative should also carefully look for any other real estate, personal property, business, or other state tax liabilities or concerns that may affect you and your family during probate.

No one will take part in any transactions involving such inherited property prior to the Will being admitted to probate and/or an appropriate party lawfully appointed to represent the estate. If the deceased owned real estate in his or her own name, no well-informed outside party or parties would assume title to the property, and no bank would sign-off on a new mortgage, unless the estate went through the process of probate in order for "clear title" to be approved for the new buyer.