Estate IRA

[Kea]

I'm filing (or trying to) a 706 for client's late father. I'm using the alternate valuation date due to the stock market decline. There was an IRA that was invested in a CD. Since the change between DOD and alt val is just interest, the 2 values would be the same. HOWEVER, the bank paid out an RMD in between those dates (even though there were no required distributions in 2009 -- oh well). Does that alternate valuation get reduced by the distribution? I would think not, except that the distribution is taxed on the 1041 (thanks OldJack!)

Is this just another area of double taxation?

Thanks.

[OldJack]

>>Is this just another area of double taxation?<<

The required minimum distribution is ignored (or you could say added back) for valuation purposes since it was distributed after the date of death. Its not double tax as the proceeds have never been taxed, but will be now. Make sure there is not a beneficiary other than the estate when it comes to reporting the interest income. Most IRA plans have a beneficiary other than the estate thereby keeping the income off of a 1041 fudiciary return.

[Kea]

My client is the beneficiary. And yes I did realize (very late last night / early this morning) that it had not been previously taxed.

I'm a bit brain-fried on this, so I just want to make sure I understand:

Value on 706 for DOD and Alt val are the same (ignoring the RMD) and other changes were just interest.

RMD is reported on beneficiary's 1040 since it was distributed after DOD.

If that's the case, I go back to my previous question -- how do I "nominee this out" on the decedent's final 1040? I know how to do that for the interest & dividends, but I don't see a way to do that for a 1099R. If I just report it on the beneficiary's 1040 it will confuse the IRS matching computers, right?

Thanks so much.

[grandmabee]

My client is the beneficiary. And yes I did realize (very late last night / early this morning) that it had not been previously taxed.

I'm a bit brain-fried on this, so I just want to make sure I understand:

Value on 706 for DOD and Alt val are the same (ignoring the RMD) and other changes were just interest.

RMD is reported on beneficiary's 1040 since it was distributed after DOD.

If that's the case, I go back to my previous question -- how do I "nominee this out" on the decedent's final 1040? I know how to do that for the interest & dividends, but I don't see a way to do that for a 1099R. If I just report it on the beneficiary's 1040 it will confuse the IRS matching computers, right?

Thanks so much.

who was the RMD paid to? If after death should go to beneficary.

[Kea]

The RMD was transferred into a still-open joint checking account (decedent & beneficiary) at that same bank. The 1099R is in the decedent's name & SSN. Yes, the bank was already aware of the death prior to distribution. Checking account was still open to catch any direct deposits / withdrawals until those could be stopped.

Since IRS computers will look for the 1099R on decedent's 1040, could I back it out on line 21 & pick it up on line 21 of beneficiary's 1040?

Thanks

[OldJack]

I think maybe you are mixing apples and oranges in your thinking. The estate will not deal with any 1099-R reporting in this case as the bank as trustee of the IRA will do that as the individual beneficiary receives the distributions. You are only reporting estate income on a 1041, if any, and declaring the estate value on the 706 estate return. Basically think of a 1041 only passing estate taxable amounts to the beneficiary and the 706 only declaring amounts. Distributions from the estate are not normally accounted for by any tax documents issued to the beneficiaries (ie: 1099-R). Compare how distributions from a Sub-S are not taxable/accounted for as the profit is what is reported. Much the same with an estate, the income is passed on a k1, or taxed on the 1041, and distributions are not reported to the beneficiary.

However, since the bank issued a 1099-R to the deceased the estate will have to report the same as income on the 1041 and pass to the beneficiary for taxes or the estate pay the tax. The fact that it was deposited in a joint bank account is irrelevant.

[Kea]

I am still confused.

For the 706, I am only reporting value of IRA CD on DOD + accrued interest. For alt val, I will use the same value as DOD. (No adjustments will be made for the RMD or additional interest. 1099R not involved.)

However, the 1099R was issued in decedent's name and SSN. Therefore (I think) it should go on decedent's final 1040 -- that's where IRS matching computers will look for it. Since it was paid after DOD, it is not taxable on decedent's 1040. It should be taxed to client who is the is the beneficiary. If this were a 1099 INT or DIV it would get nomineed out of the decedent's 1040 and a new 1099 INT or DIV would be issued to my client. Not the case with the 1099R? (At least I can't figure out how to show it on the forms.)

Does the bank need to re-issue the 1099R in the beneficiary's name & SSN? That would make my life easier, but I'm not sure this bank is capable of making this change. (Client had minor nightmare moving IRA to inherited IRA at another financial institution.) I know that the RMD will eventually get reported on beneficiary's 1040. I'm just trying to make sure I know the procedure for getting it there.

Thanks for your patience.

[OldJack]

However, the 1099R was issued in decedent's name and SSN. Therefore (I think) it should go on decedent's final 1040 -- that's where IRS matching computers will look for it. Since it was paid after DOD, it is not taxable on decedent's 1040. It should be taxed to client who is the is the beneficiary. If this were a 1099 INT or DIV it would get nomineed out of the decedent's 1040 and a new 1099 INT or DIV would be issued to my client. Not the case with the 1099R? (At least I can't figure out how to show it on the forms.)

No, it is not directly reported or taxed on a 1040 of anyone and nothing you mention gets nomineed out as you call it. Think of a 1041 form as the same as a 1040 for the decedent's income after the date of death to the end of the year.

A required minimum distribution on form 1099-R to the decedent's name is income in respect of a decedent (IRD, after-death income).

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From the 2010 RIA Federal Tax Handbook, paragraph 3967, page 643:

>> Income in respect of a decedent

Income in respect of a decedent (IRD) covers income (including capital gain) which a decedent had a right to receive but that: (1) wasn't actually or constructively received by a cash basis decedent, or (2) wasn't accrued by an accrual basis decedent. IRD includes insurance renewal commissions, a monthly pension paid to deceased employee's widow, taxable distributions from a qualified employee plan or IRA, a death benefit under a deferred annuity contract, partnership income of a deceased partner (reg 1.742-1) and S corporation income of a deceased shareholder. (code Sec. 1374( b )(4).

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From the 2009 Small Business Quickfinder Handbook, page H-5:

>> Income in Respect of a Decedent (IRD)

Income in respect of a decedent is gross income the decedent had a right to receive that is not includible in his or her final return. For a cash basis decedent, IRD is income earned but not received prior to death. If IRD is paid to the estate, it is reported on Form 1041. If IRD is paid directly to a beneficiary, it is reported on the beneficiary's tax return.

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[Kea]

Maybe the fog is beginning to lift?? Thanks for beating me upside the head with a 2x4.

If the fog is clearing:

It goes straight to the 1041.

Which is what you said before. I kept letting myself get confused because of the specific beneficiary designation.

Thanks