Probate needed just for final tax return?

[SecretlyFI]

My mother in law passed away earlier this year. I was checking with her accountant on the process for filing a final tax return, who would sign it and whether a refund is issued in her name and therefore, whether we needed to keep her checking account open until next year.

He responded that my husband would sign her final tax return, as he is her executor, and form 1310 would be filed (Statement of Person Claiming Refund Due a Deceased Taxpayer) and we should attach the Letters Testamentary received from the probate court.

There's only one problem with this approach--we were not planning on going through the probate process since all her assets were monetary, with my husband as POD or TOD. I looked at the form and it appears as if we can check "option C" in part 1 (person other than surviving spouse or court-appointed representative) and then answer the questions in part 2 as follows:

1. Did she have a will? Yes
2a. Has the court appointed a personal representative? No
2b. If you answered no to 2a, will one be appointed? No (and we can attach a statement explaining that the answer is No because there are no assets to go through probate)
3. As the person claiming the refund for the decedent’s estate, will you pay out the refund according to the laws of the state where the decedent was a legal resident? Yes

Anyone have any experience with this and know whether this would be the appropriate way to handle it and provide a way for him to sign the return and have the refund issued to him? We don't see any reason to incur the cost of probate when there's no assets that require it.

I wrote back to the accountant asking about the approach above and thought I'd also ask here in the meantime. Thanks in advance.

 

[OldShooter]

Unless the refund is a large sum, I'd just go with your idea. See what happens. If it doesn't work, there might be a delay while you get it sorted but at that point the IRS will be telling you what you need, not someone charging you by the hour. If the refund amount is such that you don't mind risking a delay then you are good to go IMO.

Edit:

... (and we can attach a statement explaining that the answer is No because there are no assets to go through probate)

I would suggest not volunteering any extra information. If it is needed they will tell you. Probably it is not needed, so then there is the small risk that it will create some kind of question or concern that would not otherwise have arisen.

 

[Onward]

Agree. To my knowledge, the executor can sign. I've certainly never heard on anyone going through probate just to be able to sign a tax return.

 

[SecretlyFI]

Thanks, good advice

 

[Montecfo]

The executor can sign. You mark it final return. They expect the executor to be signing.

Leave bank account open. Can you not just specify the refund be deposited direct to her account?

 

[SecretlyFI]

According to the accountant, the IRS won't issue a refund to the deceased, so it won't get direct deposited to her checking, like it had in the past. They will issue the refund to the authorized representative who files the return. So this seems to make sense, husband files & signs return and refund is issued in his name.

Now I'm doing some reading on income earned this year and the cutoff between date of death and when the assets are transferred to my husband. We need to be able to capture that and include it on our return, as "income in respect of decedent". This will be a year of careful record keeping.

 

[CaliKid]

Worst comes to worst you can return the check with a small estate affidavit. That form asks for the check to be re-issued to the proper heirs. It's pretty common so I imagine it would work with the IRS. Some governmental entities have their own form so I imagine the IRS does too. Good luck.

 

[Texas Proud]

Have no idea, but I would not think the check would be in the name of the executor by himself... IOW, there should be an indication of and estate...


John Doe exc of Estate of Mama Doe




Edit to add...


Also, when did she pass? You are supposed to split the income between when she was living on the 1040 and after passing on the 1041. I am doing this now and am getting a tax surprise as the year end MF distributions are going on the 1041 and taxed at a high rate.

 

[SecondCor521]

You are supposed to split the income between when she was living on the 1040 and after passing on the 1041. I am doing this now and am getting a tax surprise as the year end MF distributions are going on the 1041 and taxed at a high rate.

Yeah, this is a well kept secret of trusts. They may be good for sheltering assets from estate taxes, but they are rotten wrt income taxes.

It's too late for you, but two things that may help others in similar situations:

1. I believe the only income that goes on the 1041 is estate income. If there are income-producing assets in the estate (like the mutual funds in your case) that can be distributed to heirs/beneficiaries/devisees and that income is generated after distribution, I'm fairly certain that the income would then be taxed on the recipient's 1040. So the 1041 taxes are only on income between death and asset distribution. Granted in some states and situations it can be challenging to distribute assets quickly.

2. There is a thing with trusts called DNI - distributed net income. If permitted by federal law, state law, and the trust instrument, the trust can distribute income to the beneficiaries even if the assets are retained in the trust. (I'm talking about trusts here and am optimistic that this paragraph also applies to estates, since they both use 1041's. It's not guaranteed to apply, though, because there are differences between the two.) Such DNI is passed on in it's character, so MF cap gains distribution that were in the trust and distributed become MF cap gains on the individual's tax return. This can even be done in the first sixty days of the subsequent calendar year via a 663(b) election, which is just a checkbox on the bottom of the 1041.

I use the second feature to balance the tax load between a trust and its beneficiary each year. I do the tax returns assuming no DNI, and then shmoo the DNI until I get the minimum total tax liability, then distribute that amount in February, then file the tax returns.

 

[Montecfo]

Have no idea, but I would not think the check would be in the name of the executor by himself... IOW, there should be an indication of and estate...


John Doe exc of Estate of Mama Doe




Edit to add...


Also, when did she pass? You are supposed to split the income between when she was living on the 1040 and after passing on the 1041. I am doing this now and am getting a tax surprise as the year end MF distributions are going on the 1041 and taxed at a high rate.

OP should not have this issue since assets were TOD or POD.

 

[SecretlyFI]

OP should not have this issue since assets were TOD or POD.

Yes, I received a reply back from the accountant this evening. He said since the assets were all TOD or POD, they effectively transfer upon her death to my husband. So I need to make sure the financial institutions record it this way. She died 2 weeks ago. We’re still waiting for the death certificates, as the state is backed up AND working reduced hours due to Covid.

So it sounds like I will need to make sure the institutions back date the transfer to 4/27 once we provide them with the death certificate. In that way, we should not have to file an income tax return for the estate. Her final return would cover income through 4/27. Ours would pick up income from 4/28 on.

Does that sound right?

 

[SecondCor521]

Yes, I received a reply back from the accountant this evening. He said since the assets were all TOD or POD, they effectively transfer upon her death to my husband. So I need to make sure the financial institutions record it this way. She died 2 weeks ago. We’re still waiting for the death certificates, as the state is backed up AND working reduced hours due to Covid.

So it sounds like I will need to make sure the institutions back date the transfer to 4/27 once we provide them with the death certificate. In that way, we should not have to file an income tax return for the estate. Her final return would cover income through 4/27. Ours would pick up income from 4/28 on.

Does that sound right?

I don't think you can backdate the transactions...at least not as far as I know.

What you can do is just get stuff transferred from her name to his name as soon as you get the death certificates. Death certificates are normally very fast, and the TOD/POD transfers should likewise be fast. We got my Mom's death certificate in less than a week; granted that was in normal times.

You can shorten the time by contacting the institutions involved and find out what the procedures and paperwork are to execute the TOD/POD process. I think most of the time it's a simple form with an original copy of the death certificate. Get that all straightened out now, wait for the death certificates, and you'll probably be done in a few weeks.

I think (a) if her estate earns less than $600, you don't even need to bother with a 1041 estate tax return, and (b) you can probably just file her income tax return to include all of her income from 1/1/2020 through the date of transfer (not date of death), then file your income tax return to include income from the date of transfer through 12/31/2020.

Part (b) may not be technically correct, but I'm pretty sure the IRS would be OK with it, it's a lot less hassle, and I bet it's what most people do anyway. It may even be technically correct. Someone who knows more may pipe up.

Sorry for your loss, BTW.

 

[Texas Proud]

Second, you are right on the income being transferred to the beneficiaries if you have a distribution...


However, it took over 3 months to get the letters testamentary for me and many more to get accounts in my name as executor... I had zero access to funds last year and could not transfer.


I knew the taxes were going to be higher, just not as high as I see... over $10,000 tax on $38,000 of income.... and a lot of that being capital gains.


I could save over $8,000 if I kept it all on her 1040.

 

[meierlde]

Yes, I received a reply back from the accountant this evening. He said since the assets were all TOD or POD, they effectively transfer upon her death to my husband. So I need to make sure the financial institutions record it this way. She died 2 weeks ago. We’re still waiting for the death certificates, as the state is backed up AND working reduced hours due to Covid.

So it sounds like I will need to make sure the institutions back date the transfer to 4/27 once we provide them with the death certificate. In that way, we should not have to file an income tax return for the estate. Her final return would cover income through 4/27. Ours would pick up income from 4/28 on.

Does that sound right?

Of course the exemption for an estate is $600 to avoid a lot of hassle for the irs and the taxpayers, since 1041s are used. In the past what I did for my parents estates is for the annual 1099 take the number of days the person was alive divided by 365 (or 366 this year) and use that percentage on the 1099 amounts, with the remainder going on the accounts Never heard a peep from the irs over this an it has been 15 years. If the income is over 600 you can distribute it if allowed and then the reciepent gets a k1 with the amount to add to their tax return.

 

[Texas Proud]

Of course the exemption for an estate is $600 to avoid a lot of hassle for the irs and the taxpayers, since 1041s are used. In the past what I did for my parents estates is for the annual 1099 take the number of days the person was alive divided by 365 (or 366 this year) and use that percentage on the 1099 amounts, with the remainder going on the accounts Never heard a peep from the irs over this an it has been 15 years. If the income is over 600 you can distribute it if allowed and then the reciepent gets a k1 with the amount to add to their tax return.

Hmmmm, now that would make things a bit different as most of the distributions were late in the year... I can see doing that for income you do not know when earned like from a K-1 but if you know for sure when it was distributed....


Did a quick calc... would save about $2,000....

 

[Montecfo]

Yes, I received a reply back from the accountant this evening. He said since the assets were all TOD or POD, they effectively transfer upon her death to my husband. So I need to make sure the financial institutions record it this way. She died 2 weeks ago. We’re still waiting for the death certificates, as the state is backed up AND working reduced hours due to Covid.

So it sounds like I will need to make sure the institutions back date the transfer to 4/27 once we provide them with the death certificate. In that way, we should not have to file an income tax return for the estate. Her final return would cover income through 4/27. Ours would pick up income from 4/28 on.

Does that sound right?

It does. And there would be no 1041 since the estate has no assets. Just a final return through DOD.

And as an aside, if the banks delay the transfers in some way, none of this changes. The deceased can have no income attributable to a period after DOD, and nothing is being transferred to an estate.

They deal with this stuff all the time, so should not be an issue.

If the 1099s end up incorrect, overstating her income, it is pretty easy to correct. Just reflect the gross income per the 1099 on her return, then make a negative entry to reflect the income after her DOD.

On your return, you would report the gross 1099 figure and then add the additional income (inverse of negative income above) on a separate line as a positive figure to get to the correct income to report. That will zero out the difference between the two returns.

 

[ERD50]

Second, you are right on the income being transferred to the beneficiaries if you have a distribution...


However, it took over 3 months to get the letters testamentary for me and many more to get accounts in my name as executor... I had zero access to funds last year and could not transfer.


I knew the taxes were going to be higher, just not as high as I see... over $10,000 tax on $38,000 of income.... and a lot of that being capital gains.


I could save over $8,000 if I kept it all on her 1040.

This doesn't sound right to me. As you said earlier, one tax form up to date of death, one after.

In the final tax year of a trust/estate, all taxable income is assigned to the beneficiaries. I don't think it matters if it was actually distributed or not, the IRS (as far as I know) doesn't get any report on the account value, just the 1099s and K-1s. This makes sense, otherwise these estate/trust would need to hold funds to pay taxes in April the next year, and then what if those funds earned income, you'd have another tax year to report, and so on. Final makes it final.

Are you saying you could not get access to close it out until this year? If there wasn't more than $600 income generated this year before you got it closed out, I think you could ignore it, and make the 2019 form the final.

(edit - cross posted with the last few, so some of this may have been answered)

-ERD50

 

[Texas Proud]

ERD50,


I could not get access to any of her accounts until this year.



The income after death was $38000 which is the majority of her income for a normal year when she was living as it is year end distributions from mutual funds.


The estate is not closed. It might not be closed this year either as I am trying to run down stock she would have received from a mutual insurance that converted to stock. Seems that her getting a policy prior to Social Security being in place puts a stumbling block in place as there is no SS number attached to the account. Right now New York is 'researching'.


However, I will get it down to where it will NOT make more than $600 or there will be a distribution which solves the problem.