Inheritance Questions

[Cat in OH]

I’ve got two questions relating to a relative’s estate:

1) Is a Transfer On Death of an account a taxable event? (I know this is pretty basic, but I want to be sure…I’ve never handled anything like this before.)

2) This is a bit more involved. These are the facts as I have them:

-My husband’s aunt died Feb. 07. She was never married, never had any kids and all her money was in CD’s with transfer on death to her sister.

-There was no will, no executor, nothing was ever filed. (Caretaker may have filed a final 1040)

-A number of years ago, she had made a large loan (several 100K) to a nephew, Allen, for land investments. He had paid her interest every year on the money, probably per a hand-written agreement.

-As I said, there was no will and nothing else in writing as far as anyone knows. But she had told Allen and several others that if she died before the loan was repaid, it was to be divided between nephews and nieces, $25,000 each, when Allen is able to pay it off.

-At the end of 2007, Allen sent a check for pro rata interest and a 1099-INT to each nephew and niece.

-March 08, Allen refinanced the loan with a bank to get a lower rate. He has sent 2 checks to each nephew and niece, one for 3 mo. interest, the other for $25,000.

Are these payments a taxable event? As inheritance or as gifts from Allen (since there’s no known legal document relative to Auntie’s estate?)

Sorry this is so long, but I wanted to give enough info for answers.

Cathy

[zeke]

Cathy - Please take my comments in spirit intended. Your first question indicates your lack of experience in estate matters. Your second question indicates that the matter relates to (A) in-laws & ( money. Save communicating with your husband, I sincerely feel that you should remain deaf, dumb & ignorant in this matter. When this is all said & done, some people are going to be unhappy with some other people. Green makes you blind. Your husband (with your loving support) should make an appointment with a probate attorney, tell him ALL the facts & ask your questions of him/her. Husband should communicate with in-laws.

Inheritance taxable? Probably not, but additional info required. $25K payments taxable?

Again, probably not, again, more questions need to be asked. Interest IS taxable.

I couldn't even advise cashing the $25K check without additional information.

Please consider getting an extension for the involved returns until needed info is available.

Zeke

[Cat in OH]

Zeke,

Thank you for a response. You are correct about my inexperience in this area. I truly have never handled any estate matters. I did feel that the interest was taxable, no question there.

My husband has been the only one in touch with the relatives. Actually, no one is unhappy at this point, since "everyone" knew this was how Auntie wanted it done. My husband wants to handle it so that his cousin would get hit with gift tax. I guess the real problem is that there was nothing in writing regarding the loan principal (distributing vs being paid to the estate) and the fact that there was no will and nothing else in the estate but the receivable from Allen.

Unfortunately, my husband has already deposited the check into our account. I will talk to him about talking to a probate attorney...don't know what he'll say since he's sure I know everything about taxes, in spite of my telling him it's been 20 years since I covered inheritance, etc at college!. I should take my own advice to my clients to go to someone who knows more than me!

Cathy

[zeke]

Cathy - The tax answers will come more easily when the appropriate legal questions are answered. You should not be expected to solve the "redneck probate" problems. 4868!

Zeke

[Linda Mathey]

Cathy,

Depending on what state she lived in, the CD's along with the loan may have been enough to create a taxable estate for state purposes. Without a will, the loan would probably also have been deemed to belong to her sister. She could then have gifted it to the nieces and nephews and unless she has a lot of money using her annual gift exclusion and a portion of the unified credit there would have been no gift tax. Also remember that if there is gift tax it is paid by the donor not the recipient. Just additional comments.