Distributions from a decedent's estate

[Jack from Ohio]

Client's Mom passed in late 2013.  Estate was established.  Mom was in total nursing home care due to Alzheimer's and dementia.  The person who was handling her affairs until about 3 months ago simply did not.  4 years personal returns not filed, etc.  Now preparing the 1041.  Here are the facts.

The only income to the estate is $65K U.S. Savings Bond interest.  1099-INT was issued in the name of the estate.  After obligations and attorney's fees, approx. $60K remaining.

There is only one beneficiary, the son, who is our client.

Now to my question:

Is the estate required to pay the tax on the interest?  Can the estate distribute the remainder to the beneficiary and he claim the income on his return?

There is a big difference in tax rate.  If the estate pays, the rate is 40%.  On our client's return, the rate would be 25-28%.  The information I am finding on the IRS site is ambiguous at best on this question.

Any help from those of you with more estate return experience would be appreciated.

[Gail in Virginia]

I think that you could conceivably make an election to report savings bond interest on the mother's final return as opposed to the income being in the estate return, assuming she was a cash basis taxpayer and had not been reporting the interest all along.  From Publication 559:

  If the bonds transferred because of death were owned by a cash method taxpayer who chose not to report the interest each year and had purchased the bonds entirely with personal funds, interest earned before death must be reported in one of the following ways.

1. The person (executor, administrator, etc.) who is required to file the decedent's final income tax return can elect to include all of the interest earned on the bonds before the decedent's death on the return. The transferee (estate or beneficiary) then includes only the interest earned after the date of death on its return.

2. If the election in (1), above, was not made, the interest earned to the date of death is income in respect of the decedent and is not included on the decedent's final return. In this case, all of the interest earned before and after the decedent's death is income to the transferee (estate or beneficiary). A transferee who uses the cash method of accounting and who has chosen not to report the interest annually may defer reporting any of it as income until the bonds are either cashed or reach the date of maturity, whichever is earlier. In the year the interest is reported, the transferee may claim a deduction for any federal estate tax paid that arose because of the part of interest (if any) included in the decedent's estate.

I hope that helps.

[Richcpaman]

Jack:

Did your client, (the son) take the cash from the estate account during that first year after death?

Rich

 

[rfassett]

Gail probably has the best answer, but the timing of the events could impact the treatment.  Rich is alluding to that.  Is it possible to elect a fiscal year for the estate which could make some of this work?

[Abby Normal]

http://taxmap.ntis.gov/taxmap/pubs/p559-004.htm

[Jack from Ohio]

Client's Mom passed in Feb. 2013.  The funds are still in a bank account in the estate's name.  He is trying to clean up the mess the other person has allowed to happen.  We prepared 2010 - 2013 personal returns for her in the last 2 months. 

[Abby Normal]

Then the estate has to pay the tax unless the will required income distributions. I don't know if that's standard verbiage in a will or not, but it ought to be, because then actual distributions do not matter.

[rfassett]

When were the bonds cashed?  If late enough in 2014, but yet early enough, you could elect a fiscal year for the estate, distribute the income now (if the will and estate permit) and have the income in the second fiscal year of the return offset by the distribution now of the income to the beneficiary.  Wait, I just re-read your posts and it seems the facts have changed.  Your first post stated that Mom passed away in late 2013 and a subsequent post stated she passed in February 2013.  So my suggestion will not work in your case. Or maybe it could if the 2013 1041 has not yet been filed.  Maybe the bond redemption happened in the third fiscal year of the estate.  Timing is everything in these situations and the devil is in the details.