Where is this income reported

[rfassett]

85 year old taxpayer dies in December 2013 leaving a traditional IRA with his daughter and son designated co-beneficiaries according to the will; but only daughter was on the IRA instrument for 50% of the IRA.  Before the funds can be disbursed son gets cancer in 2014 and dies three months later.  The bank has opted to not issue a 1099R (probably because they are dealing with the same questions I am).   Where do I report the IRA income?

 

Choices, as I see them:

 

1. Dad's 1041 because the monies would revert back to his estate lacking any designation on the IRA instrument.

 

2. Son's 1041 because the will trumps the IRA instrument.

 

3. Son's joint return with surviving spouse - don't really think this is an option unless the transfer date would be(could be) designated as Dad's date of death.

 

This has me stymied and I am not sure my feeble brain is up to this gymnastics right now.

 

Thanks!

[Margaret CPA in OH]

Wow!  This is interesting.  My guess would be 1 as I don't know (not an attorney) that 2, will trumps IRA instrument, is true.  If 2 is true, I would think 3 as my inclination would be Dad's date of death and actual distribution is just timing.

 

Let us know the outcome.

[GraceNY]

85 year old taxpayer dies in December 2013 leaving a traditional IRA with his daughter and son designated co-beneficiaries according to the will; but only daughter was on the IRA instrument for 50% of the IRA.  Before the funds can be disbursed son gets cancer in 2014 and dies three months later.  The bank has opted to not issue a 1099R (probably because they are dealing with the same questions I am).   Where do I report the IRA income?

 

 

If the daughter was on the IRA as a 50% beneficiary, the daughter applies to IRA custodian for her monies. [beneficiary designations trump will]

If there was no other designation on the IRA besides the daughter being a 50% beneficiary, the other 50% of the IRA goes to Dad's estate. [some custodians won't release any money until they have all the paperwork.]

Now the will kicks in.  If the will says "50% to Daughter and 50% to Son," then Daughter get's 50% and Son would have gotten 50%, but since he is deceased, I think it would go to the son's estate.  Then you would have to find out if the son had a will.  If not, your state estate laws come into play.  In NY, if you die without a will, first it would go to a spouse, if no spouse, it goes to child(ren), if no child(ren), then it goes to parent's, if no parents, it goes to siblings (including 1/2 siblings), if no siblings/1/2 siblings, it just keeps going until you find next of kin.

 

A couple of thoughts.  You may want to have the daughter look through all of the father's paperwork pertaining this IRA.  It could be that he submitted paperwork that shows a 50/50 beneficiary designation, but the insurance company made a clerical error in processing the request and only put one child on the form.  Alternatively, you can tell the IRA folks to pull all relevant paperwork relative to this IRA.  Perhaps the father filled out original paperwork designating Daughter and Son as 50/50 beneficiaries  but there was a clerical error at that time.  Or, if he changed the beneficiary later on, the IRA custodian should have some paperwork on file for that as well.  [Note RE: Beneficiary designations.  You have to verify what you have on file all the time.  I have seen so many instances of problems.  Banks merge and paperwork gets lost.  The account is old and the custodian no longer has any of the original paperwork. Etc, etc. etc.  It's a real pain in the butt].

 

I am not a lawyer, it's based on my experience.  Hope this helps.

 

Grace

[GraceNY]

85 year old taxpayer dies in December 2013 leaving a traditional IRA with his daughter and son designated co-beneficiaries according to the will; but only daughter was on the IRA instrument for 50% of the IRA.  Before the funds can be disbursed son gets cancer in 2014 and dies three months later.  The bank has opted to not issue a 1099R (probably because they are dealing with the same questions I am).   Where do I report the IRA income?

 

 

Follow-Up.  And, my original comments still stand.  However, didn't see that the father died in 2013 (vs. 2014).  Unless I am missing something, or the custodian is unwilling to pay the 50% to daughter as the designated beneficiary until all the paperwork is in for a 100% distribution, then whoever is designated in the will as the executor, would get the proper documents from the surrogates court in order to apply for the balance of the IRA.

 

I also see in your post "Where do I report the IRA income?"  To whom was the IRA paid?  (i.e.Daughter, Estate,..).  That's where the IRA proceeds would get reported.

 

If the monies were paid out, I don't know why the custodian didn't send a 1099R to whom ever received the money.  Seems strange.

[rfassett]

Truly appreciate your insight.  The daughter received her money.  That is not an issue.  There has been an attorney involved and an estate opened up for the deceased son for the sole purpose of receiving the monies.  But that did not seem to answer my question as to who picks it up as income for tax purposes.  I assume now, after reading your comments, that the monies must have been paid to the Dad's estate (in 2014) since he deceased in early December 2013 and nothing was done with the IRA's until 2014.  So I guess, from your comments, the taxable distribution of the son's portion goes to Dad's estate where it is taxed and the monies are then paid to the son's estate by action of the will.  And then the monies end up with the son's spouse as a distribution from son's estate.  So the bottom line answer to my question is that the son's portion of the IRA gets taxed in Dad's estate.  Am I understanding your comments correctly?

 

Again, thank you for taking the time to respond to this.  It helps to have experience sort some of these things out. 

[DANRVAN]

From what I can gather, the daughter and daughter-in-law each received 50% of the income.  Then the income would flow through dad's estate reduced by his estate's attorney fees and any other allowable deductions. The income would not be taxed at the estate level if distributions were made before the estate's year end.

 

Daughter would get a K-1 for her share.  Son's estate would get a K-1 for his share.

 

Then son's share would flow into his estate where it would again be reduced by attorney fees and any other allowable deductions.

 

In order to maximize deductions the estate can elect accrual accounting and a short year can be used first if it helps to match income and deductions in a later 12 month period.

 

Hope this helps.

[GraceNY]

Truly appreciate your insight.  The daughter received her money.  That is not an issue.  There has been an attorney involved and an estate opened up for the deceased son for the sole purpose of receiving the monies.  But that did not seem to answer my question as to who picks it up as income for tax purposes.  I assume now, after reading your comments, that the monies must have been paid to the Dad's estate (in 2014) since he deceased in early December 2013 and nothing was done with the IRA's until 2014. 

 

O.K. Let's forget about the Daughter receiving her half as the 50% beneficiary designated on the IRA.  That leaves us with the other 50%.

 

Now, one cannot "assume" anything.  You need to look at the IRA statement to determine on what date was the IRA proceeds paid.  And, to whom.  That said, let's say that your assumption is correct and it was paid to the Dad's estate.

 

In your first post, you said there was a will leaving the IRA proceeds 50/50 to Daughter and Son.  If none of this money was disbursed during the Estate's tax year, by the end of the Estate's tax year, or within 65 days of the end of the Estate's tax year, then it would be taxed to the Dad's Estate.

 

Has a tax year been chosen yet?  A tax year is chosen when the first 1041 is filed.  Ideally, you would want to chose a tax year in order to minimize the Estate taxes.  In other words, match the taxable income coming into the Estate to expenses and distributions going out.  And, without knowing more details, I can't comment on what the tax year could/should be.  With more details as to what taxable income came into the Estate and what expenses were paid out along with the dates for those respective items, one could offer some suggestions.  Perhaps you could start a NEW post when you have more of the facts.

 

Let me use a hypothetical to illustrate.  Let's say we are working with the following fiscal year:  12/01/2013 - 11/30/2014 and the IRA monies were paid to the Dad's Estate during that fiscal year.  If none of those monies were paid out on or before 11/30/2014.  Then it's taxable to the Estate.  If on the other hand, the "65 day election" were made then you would have had 65 days from the end of the Estates fiscal year, 11/30/2014 in this case, to make the distributions to the beneficiaries under the will and the beneficiaries would be taxed on the monies.  Now the issues with this example are (1) The 65 day window has already passed (expired 2/3/15) and (2) the 1041 is due 3/15/2015, unless extended.  This example also illustrates the importance of choosing Estates tax year carefully. 

 

 

Grace

[GraceNY]

So I guess, from your comments, the taxable distribution of the son's portion goes to Dad's estate where it is taxed and the monies are then paid to the son's estate by action of the will.  And then the monies end up with the son's spouse as a distribution from son's estate.  So the bottom line answer to my question is that the son's portion of the IRA gets taxed in Dad's estate.  Am I understanding your comments correctly?

 

 

Just adding to my prior post.

 

I think I'll use numbers to illustrate.  The IRA was worth $100,000.  In your first post you said Daughter was listed as 50% beneficiary and there was no designation as to the other 50%.  You said the Daughter already got her 50% ($50,000 in this example) from the IRA custodian.  That leaves us with the balance of $50,000.  According to you, there was a Will that left the IRA 50/50 daughter and Son.  That means Daughter is entitled to 50% of the proceeds that were paid to the estate.  That would be $25,000.  The other $25,000 would go to the Son's Estate.  If the Son had a will, that monies would get paid out accordingly.  If no Will, then it gets paid out according to the State's intestacy statutes.

[DANRVAN]

Grace, you made a good point in mentioning the 663( b )  election. The  65 day election can sitll be made if the return is filed or extended by the due date and any distributions that were made during that period would count.