Estate Tax ID / EIN Numbers | The Complete Guide

Many people typically associate a tax ID or EIN with an individual tax return, which is usually a Social Security Number (SSN). They use this number to file their annual income tax return before April 15.

To prepare for tax returns, business owners usually separate their business interests from their personal assets by obtaining an employer identification number, or EIN, to use strictly for the business. This number empowers them to hire employees, obtain bank loans, and take other actions they wouldn’t be able to do by using their SSNs. An EIN also aids business owners in filing separate tax returns so they can keep their assets separate from one another.

What many people don’t realize is the estate left behind by an individual is treated very similarly to a business. Here, we’ll take a deeper dive into how EINs and estate tax IDs work and why you’ll want to obtain one if you have the task of settling an estate.

What is an Estate of Deceased?

An estate is the economic valuation of a decedent’s assets, including cash, bank accounts, real estate, land, furniture, collectibles, artwork, and any other assets. In many cases, the decedent will have done estate planning, which is essentially a comprehensive roadmap detailing their final wishes. It includes a will, any trusts, or powers of attorney they’ve designated.

An executor, administrator, or other appointed individual will be in charge of distributing assets and settling the estate. This includes satisfying any debts and filing income taxes. However, before any distribution of assets to heirs and/or beneficiaries can be completed, federal and state estate taxes must be paid.

Does an Estate Need a Tax ID (EIN) Number?

If you are in charge of an estate, to file an income tax return for it, you will need to obtain a tax ID, otherwise known as the EIN. The reason a separate number is needed is to segregate the decedent’s final tax return from their estate income tax return.

If an estate generates more than $600 in gross income for the year, the estate will owe income tax. Examples of assets that become property of the estate upon a person’s death include:

● Savings accounts

● Certificate of deposits (CDs)

● Rental property

● Stocks and bonds

● Mutual funds

These are all types of income-generating assets, meaning an estate must have a separate tax ID to pay its share of taxes, distinct from those of the decedent. In other words, you must obtain an EIN if one has not already been secured.

How to Apply for an Estate Tax ID (EIN)

To obtain an estate tax ID, you can file an SS-4 form, “Application for Employer Identification Number,” online, by fax, via regular mail, or by the assistance of a professional. Information you need to provide includes:

Decedent’s Information

When filling out form SS-4, you must have the decedent’s first, middle (optional), and last name handy. Keep in mind that the last name of the deceased individual must be an exact match to the name the Internal Revenue Service and the Social Security Administration have on file.

Executor/Administrator/Representative Information

The EIN application must also include the first, middle (optional), and last name of the person in charge of handling the decedent’s estate, along with their full address (no post office boxes permitted, must be a legal street address), to include address, city, zip code, state, and country. As the representative of the estate, you must also include your Social Security Number.

All forms must also include the date the estate was created and funded. If you must change the estate’s address of record, this can be done by submitting Form 8822, “Change of Address (for Individual, Gift, Estate, or Generation-Skipping Transfer Tax Returns). Keep in mind that the processing for the change of address could take up to six weeks.

How to Open a Bank Account for an Estate

A common step an estate executor will take is to open up an estate bank account. This temporary account is held in the name of the decedent, empowering you, as the estate’s representative, to use the funds in the bank account to pay for the estate’s day-to-day expenses. You can also use this account to complete the final distribution of funds to any beneficiaries either named by the decedent or determined in probate court.

An account can be set up ahead of time by the estate planner to give the executor/representative an easier ability to facilitate estate business. While the individual doing their estate planning can certainly open up a joint account with the person they’re appointing as the administrator of their estate when they are still alive, there are many benefits to keeping a separate account.

A standalone account ensures funds are left as is and not used intentionally or accidentally for purposes not associated with the estate. It also eliminates the possibility of commingling money. An estate bank account should only contain money belonging to the estate.

As a designee to manage an estate’s affairs, if the decedent hasn’t already set up an estate bank account, you can take the following steps to open one.

● Open the account in the same state where the decedent lived. This eliminates any complexities associated with paying taxes on the estate in two states.

● As the estate’s executor or administrator, you’ll want to initiate the probate process before opening a bank account.

● Obtain the EIN for the estate.

● Bring to the bank any documents they require, including the EIN, a directive naming the executor, a copy of the will and/or trust, a copy of the death certificate, and any other requested documents.

● Fill out forms to open a bank account and be prepared to make an initial deposit.

It is important to keep in mind that you must wait until the completion of probate before distributing assets, making final distributions, and closing an estate bank account.

Difference Between a Trust vs Estate of Deceased

When doing estate planning, a person will need to decide how to handle their assets so their affairs are in order before their death. Two common approaches are to make a trust or an estate. While some might think these terms are interchangeable, they’re quite different.

Each is a legal structure utilized to transfer assets to any heirs and/or beneficiaries, but how the planner chooses to manage their assets is where they part ways. It’s important to understand how and why asset distribution in each is very different.

Estates

An estate is a temporary structure designed to facilitate a one-time transfer of a decedent’s assets when the estate is settled. A last will and testament outline any directives about what happens next according to the decedent’s final wishes.

If no will is available, this is known as “dying intestate,” and the state will determine how to distribute assets. An order of beneficiaries is often set by the state, which begins with the spouse and then by blood relationships in accordance with state law. Beneficiaries can receive their inheritances after the estate settles debts and any liabilities.

The estate only includes solely owned assets and doesn’t include any joint assets they share with another person. For example, if your grandparents owned a house and one outlived the other, the surviving grandparent would keep the house as it would be excluded as part of the estate. Once the executor of the estate distributes assets, the estate ceases to exist.

Trusts

A trust is a legal entity that works a little differently than an estate. These can be established by the person who owns the assets, and they can be revocable or irrevocable, depending upon how they want to set their trust(s) up. A revocable trust is how it sounds, it can be changed at any time. An irrevocable trust is a little different in the way that once it’s set up, it cannot be changed or amended and is held to its initial terms.

The assets in a trust can be distributed either while the person who created the trust is still living or after their death, depending upon the terms of the trust. Debts and liabilities aren’t factored in when the money is distributed like they are in an estate.

The person who wants to establish any trust(s) chooses the trustee, who is the person they select to manage the trust. They can choose to establish specific terms, which must be followed per their wishes. It may mean the money they leave behind can only be used for education, or the beneficiary must wait until their 25th birthday to receive any distribution, as just two examples. A trustee can be a family member, trusted friend, attorney, or other individual chosen by the person making their trust.

A trust never becomes a part of the decedent’s estate and, due to its structure, is exempt from being included in probate court. Regardless if an estate is planned or not, it will still become an entity after a person passes away. The difference is a planned estate empowers the individual to plan for how an executor can manage their assets, whereas an unplanned estate usually requires court intervention.