Tax Help for Estates, Trusts and Inheritance

When someone dies, the family faces grief and paperwork at the same time. The tax work is often more manageable than it looks, but it has deadlines, and mistakes about the value of inherited property can cost money years later. This page explains the main tax steps for estates, trusts and heirs in Naperville, Aurora and Chicagoland, and for families with ties to other states or India.

First steps after a death

The personal representative files the decedent's final Form 1040, due when it would have been had the person lived (generally April 15 of the next year), marked "DECEASED" with the name and date of death. A surviving spouse can file a joint return if no representative has been appointed, unless the spouse remarried that year. A return is also needed to claim a refund of withheld tax, with Form 1310 where required. Funeral expenses are not deductible on the final return; medical bills paid within one year after death can be, with an election.

Get an employer identification number for the estate, usually issued immediately online, and file Form 56 to tell the IRS who the fiduciary is.

The estate's income tax return

An estate must file Form 1041 if it has gross income of $600 or more or a beneficiary who is a nonresident alien. A calendar-year estate or trust return is due April 15, a five-and-a-half-month extension is available on Form 7004, and an estate may choose a fiscal year when the first return is filed. The estate deducts income it distributes, limited to its distributable net income, and each beneficiary receives a Schedule K-1 showing what to report. The personal representative can elect to treat distributions made within 65 days after year-end as made in that year. Fees paid to the representative are taxable income to the representative.

Trusts and estates reach the top 37 percent bracket at a very low level: for 2025, taxable income above $15,650. The 3.8 percent net investment income tax also starts there, so planning distributions matters. See our guide on fiduciary returns.

Basis step-up and the exceptions

Property inherited from a decedent generally takes a basis equal to its fair market value on the date of death, or on an alternate valuation date if the representative elects it on an estate tax return. Inherited capital assets are treated as long-term when sold.

Example. A parent bought shares for $20,000 that were worth $100,000 at death. An heir who sells them for $105,000 reports a $5,000 gain, not an $85,000 gain.

Keep date-of-death valuations for homes, businesses and accounts. Certain executors must report estate tax values to the IRS and heirs on Form 8971 so basis stays consistent. The step-up does not apply to income in respect of a decedent, such as unpaid wages or traditional IRA balances. The recipient may deduct estate tax paid on that income. See capital gains and losses.

Inherited retirement accounts

For owners who die after 2019, most beneficiaries other than a surviving spouse and certain other eligible beneficiaries must withdraw the entire inherited IRA by December 31 of the 10th year after death; for a 2025 death, that is December 31, 2035. Depending on whether the owner had begun required distributions, annual withdrawals may also be required within that period. A missed required distribution can bring a 25 percent excise tax, reduced to 10 percent if corrected within two years. Get advice before cashing out or retitling an account, because some choices cannot be reversed.

Federal estate and gift tax in 2026

Form 706 must be filed by the executor of a U.S. citizen or resident whose gross estate, plus adjusted taxable gifts and the specific exemption, exceeds the filing threshold: $15,000,000 for decedents who die in 2026 ($13,990,000 for 2025). The return is due nine months after death, and Form 4768 provides an automatic six-month extension. An estate below the threshold may still file to elect portability, which transfers the unused exclusion to the surviving spouse. A late portability election is allowed by the fifth anniversary of death under Rev. Proc. 2022-32, subject to conditions.

For 2025 and 2026 you can give $19,000 per recipient each year without a gift tax return. Larger gifts require Form 709, generally due April 15 of the following year, though they usually produce no tax because lifetime gifts use the same exclusion. See estate and gift tax basics.

Illinois estate tax

Illinois has a separate estate tax that is filed with the Office of the Attorney General on Form 700, with an extension form available. The Attorney General's site lists forms by year of death, and payments go to the Illinois State Treasurer. Do not assume that an estate below the federal threshold has no Illinois filing; check the instructions for the year of death.

Inheritances from India and other countries

An inheritance from a foreign relative is not taxed as income to a U.S. recipient. But if you receive more than $100,000 in a year from a nonresident alien individual or foreign estate, including related persons, you must report it on Form 3520, listing each gift over $5,000. The penalty for missing it is 5 percent of the amount for each month, up to 25 percent. Foreign accounts and later sales raise further FBAR, Form 8938 and gain questions. See gifts and inheritance from India.

How we can help

We prepare final returns, estate and trust returns, K-1s, basis schedules and gift tax returns, and coordinate with your attorney and advisors. See tax planning and individual tax preparation. This page is general information, not advice for your situation. Probate and trust administration questions belong with an attorney.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.