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When someone dies, or when a trust begins earning income, a separate set of tax obligations begins. Executors and trustees can be held personally responsible for them, and the rules are different from those that apply to individuals. This guide covers the returns that may be required, the deadlines, and the mistakes we see most often.
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The tax returns an executor or trustee may need to file
- Form 56 (notice of fiduciary relationship), which tells the IRS who is acting for the estate or trust so notices go to the right person.
- The final personal return (Form 1040 and New York Form IT-201) for the year of death, covering income from January 1 through the date of death. A surviving spouse can usually still file jointly for that year.
- The estate or trust income tax return (Form 1041, and New York Form IT-205) for income earned after death. An estate or trust is a separate taxpayer with its own tax ID number. A federal return is generally required once gross income reaches $600 for the year.
- Federal and New York estate tax returns (Form 706 and Form ET-706), when the estate is large enough. The federal exemption is $15 million per person in 2026, while New York’s is $7.35 million, so some estates owe New York tax without owing any federal tax.
Trust and estate tax rates: compressed brackets
Trusts and estates reach the top federal income tax bracket at a much lower income than individuals do. In 2026, the 37% rate applies to trust and estate income above about $16,000, compared with more than $600,000 for a single individual. The 3.8% net investment income tax also starts at that same low level.
Income kept inside the trust is taxed at those rates, while income distributed to beneficiaries is generally taxed at their own rates. Deciding what to distribute, and when, is one of the main planning tools. Trustees can also elect to treat distributions made in the first 65 days of a new year as if they were made in the prior year, which gives time to make that decision with the numbers in hand.
The fiscal year choice
An estate can choose a fiscal year instead of a calendar year, which can defer when income is taxed to beneficiaries. A revocable trust can often be treated as part of the estate for this purpose. The choice must be made on the first return, so it is worth making deliberately.
Mistakes executors and trustees make most often
- Treating the estate’s income as the executor’s own. The estate needs its own tax ID and bank account.
- Missing the basis step-up. Inherited assets generally take a new basis equal to their value at the date of death. Without appraisals or statements showing those values, beneficiaries can overpay tax when they sell.
- Skipping the federal estate tax return when no tax is owed. If the first spouse dies, filing Form 706 lets the surviving spouse keep the unused federal exemption (called portability). New York does not allow portability, so planning for the second death matters.
- Distributing too early. Paying out assets before taxes and debts are settled can leave the executor personally liable.
- Overlooking income in respect of a decedent, such as retirement accounts, deferred compensation, and final wages. This income has its own tax treatment, and most non-spouse beneficiaries must empty an inherited retirement account within 10 years.
- Missing deadlines. Late filing penalties apply. Federal and New York estate tax returns are generally due nine months from the date of death. An extension of time to file is available, but it does not extend the time to pay.
A practical first step
Collect the death certificate, the will or trust documents, a list of assets with date-of-death values, and the last three years of tax returns. With those, we can tell you what must be filed and by when. If the person who died had recently moved out of New York, their domicile also affects whether New York estate tax applies (see our guide to New York residency audits).
We prepare estate and trust returns and work with the family’s attorney so filings and distributions are consistent.
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Common questions about estate and trust taxes
Does every estate need to file a tax return?
Not every estate owes estate tax, but most require at least a final Form 1040 for the person who died. Form 1041 is generally required if the estate has $600 or more of gross income in a year.
What is the New York estate tax cliff?
If a New York taxable estate is worth more than 105% of the exemption, the exemption is lost entirely and the whole estate is taxed, not just the amount above the exemption.
Is an executor personally liable for unpaid taxes?
An executor who distributes assets before paying taxes and debts the estate owes can be held personally liable for the shortfall.
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About the author: Eric Krupnik, CPA, prepares estate and trust returns and advises executors, trustees, and families in Brooklyn and Manhattan. Last reviewed: November 2026.
This article is general information, not tax advice for your specific situation.