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FAQ

How do you file taxes for a deceased person?
This is for US residents:Most taxable income will be reported on a W-2 or 1099 at the end of the year. If the form says the decedent's name, it is taxable on form 1040. If it is addressed to the Estate of that person and has the estate's EIN, it will be reported on form 1041, and if it is addressed to a beneficiary, it goes on the beneficiary's tax return.HERE'S THE DETAILS:Income PAID BEFORE the date of death is considered income to the deceased person. That goes on a standard 1040. The widow(er) can still file a joint return in the year of death and they sign the return for the deceased person - see instructions for this step. If the person who died was qualified as a dependent at the time of death, they would still be filed as a dependent. Nothing is pro-rated. The status as of the date of death is considered their status at the end of the year. The due date is the same as all other 1040's, including extensions.If the widow(er) gets remarried, they can file jointly with the new spouse. In such cases, the decedent's return can be filed as married filing separately. If the person who died has dependent children, their spouse can file a joint return in the year following the year of death. So they get an extra year with the same deductions. Income PAID AFTER the date of death is considered income to the Estate of the decedent. That income is reported on a 1041, the income tax return for estates and trusts. Read up on the instructions for 1041's on IRS.gov to determine the filing due date. It varies. It is usually best for the tax on that income to pass through to the heirs through K-1's generated by the return. The Estate can pay the tax directly, but there are very few deductions and the tax rate is high. However, the complexity of the Estate may make those decisions hard to make. And if the Estate is in dispute or will hold onto assets for a while, it can get complicated. You should definitely consult a tax professional or CPA if there are any disputes between heirs or if the value of the Estate is high.Income PAID TO ANOTHER PERSON on behalf of the decedent, such as a beneficiary of an insurance policy or retirement account, will be reported on that person's own tax return.Finally, there is the issue of the actual Estate. There is a tax form for Estates that reports an Estate's assets (not income) called form 706. This is the return called the Estate Tax return by the IRS. But this is NOT a form that is typically required. Because only those Estates with very large asset values are required to file it (in the millions).Assets include cash and property held. Income is what is earned on those assets (interest, capital gains, rental income, income from business entities) or earned by the taxpayer (wages, self-employment income). So don't get confused when you go to the IRS website or talk to a professional about the tax forms.
What are the rules around a 401k passed to a survivor through a will?
If the deceased has named their estate as the beneficiary of their 401(k) and has corresponding instructions in their last will and testament as to whom should receive the 401(k) plan proceeds, the executor should notify the 401(k) plan administrator that a trustee to trustee transfer will be made to the the trustee that the beneficiary named in the last will testament selects. The executor should avoid receiving the funds in the estate account since it will not be eligible for a IRA rollover unless the named heir is the deceased's spouse. The plan funds must be transferred from the 401k plan administrator via a “trustee to trustee transfer” to defer taxation on the funds. If the estate 401k plan beneficiary is not concerned about income tax consequences on the funds, then the funds can be disbursed to the estate and then to the beneficiary or directly to the beneficiary from the 401(k) plan.When a qualified plan participant dies without naming a beneficiary, or they have named their estate as beneficiary, the executor of their estate must use caution to prevent full taxation while maneuvering these funds through the estate settlement process. This document will provide guidance to the executor for reducing income tax consequences to the estate and heirs. Definitions are provided for italicized terms.A Worst Case ScenarioIf the executor requests that qualified funds be disbursed to the deceased’s estate, the estate is 100% taxed on the taxable portion of the distribution. (Neither After-tax contributions nor Roth IRA funds are taxable upon distribution.)Taxable qualified retirement distributions made after death are considered “Income in Respect of Decedent “ hereinafter called (IRD) and is taxable to the recipient as such. Code Sec. 408(d) and Code Sec. 72 (Rev. Rul. 92-47, 1992-1 CB 198). If the estate receives IRD, in this case in the form of IRA proceeds, and distributes the IRA proceeds to the heirs, it can claim a tax deduction for the amount of the distribution. (See instructions for Schedule B Form 1041). Reporting income to the heirs is performed by issuing a K-1.As a quick side bar, the estate can also take an income tax deduction for administrations expenses, if the executor files a statement waiving the right to deduct administration expenses on the Estate Tax Return, Form 706. An executor will file this statement on the estate income tax return, Form 1041. An executor is required to file Form 706 when the estate is valued in excess of $5.4 million.You should also know, that an income tax deduction cannot be taken for funeral, medical and dental expenses.Since estate income tax brackets escalate faster than personal tax brackets, IRC distributions to heirs normally results in lower taxation of the funds. Also, if an estate has multiple heirs, resulting in the IRC being distributed to a number of recipients, the taxable income is spread out among those heirs.Example:Okay, so now if the deceased plan participant had one million dollars in his qualified retirement plan, we have one million dollars of taxable income that is either taxable to the estate or taxable to the heirs receiving the funds. So, somebody is thinking, “Why don’t the heirs just roll over these funds into a Beneficiary IRA? The answer is painful.The only heir that is eligible for an IRA Rollover is the deceased’s spouse. A non-spouse is prohibited from rolling over qualified retirement funds (PLR 2005-13032). This means that if a non-spouse receives a check from the estate, or, for that matter, receives a check directly from the plan administrator or plan custodian, they will be taxed on the distribution in the year paid without remedy. To put it plainly, you cannot set up a beneficiary IRA with a check from the estate, nor can you set up a beneficiary IRA with a personal check. A beneficiary IRA must be expedited as a Trustee-to-Trustee transfer from one qualified plan custodian directly to another plan custodian. Code Section 408(d)(3)(C). If a beneficiary IRA is set up any other way besides a Trustee-to-Trustee transfer or re-titling it at the original custodian, it is a rollover which is prohibited by tax law unless you are the spouse of the deceased.Just one more point on this matter. If you manage to set up a beneficiary IRA with a personal check because a financial institution, such as an insurance company takes your check along with an application for an annuity designated as a beneficiary IRA, tax law is clear that the beneficiary IRA will not be recognized as such by the Internal Revenue Service. If this happens, here are my concerns:1. You, your agent or financial advisor believe that the funds have been successfully placed in a Beneficiary IRA just because the annuity application and the issued annuity clearly states it is a beneficiary IRA.2. Consequently, you believe that you have avoided the taxation on these funds until later distribution, when, in fact, they are fully taxable in the year these funds were disbursed to you.3. You also mistakenly believe that you can receive distributions from the beneficiary IRA over the course of five years, your life expectancy, or the deceased’s life expectancy. In fact, since these funds are not recognizedas a beneficiary IRA by the IRS, you have indeed purchased a non-qualified annuity, that is subject to 10% non-deductible tax penalties on all interest that is paid to you under the age of 59 ½.4. Also, when the IRS sends you a letter requesting a past due tax payment on the initial distribution from the estate or the IRA custodian, you will likely be subject to substantial surrender charges for premature surrender of the annuity.The consequences are:1. You will pay the back taxes that were due for the year of disbursement on the qualified plan distribution.2. You will pay penalties and interest for underpayment of income taxes.3. If you must withdraw funds from the non-qualified annuity that you thought was a beneficiary IRA, and if you are under the age of 59 ½, you will be accessed a 10% penalty; plus, payment annuity surrender charges that could be high enough to cause you a nervous breakdown.Can this Tax Tragedy be Avoided with Tax Strategy?The short answer is, “Maybe.” To successfully postpone taxation on qualified funds that have no beneficiary, the executor should make a request to the deceased’s qualified plan custodian to continue to hold the funds until further notice. Be aware that a company qualified plan custodian will have guidelines that may restrict them from honoring a request.The plan custodian may also have restrictions as to the disbursement of qualified funds when there is no named beneficiary or when the estate is beneficiary. If a beneficiary has not been named, you will want to ask if they have a default beneficiary. If so, you may have options that allow you to stretch the taxation of the IRA over many years using qualified disclaimers, etc.Once the executor has decided it is time to make distributions of the qualified retirement funds, he/she should consult with the deceased’s qualified administrator / custodian to ask their procedure for the disbursement of the funds. In all likelihood, the executor will need to consult with the heirs who are to receive the qualified funds as to whom they prefer to have as their Beneficiary IRA custodian. It, of course, may be a bank, a brokerage firm, an insurance company or another financial institution. In any event, these firms will have Beneficiary IRA trustee-to trustee transfer forms that should be completed. The estate’s personal representative should then send the trustee-to-trustee forms to the deceased qualified plan administrator with written instructions as to the percentage or amounts that should be disbursed to the beneficiary IRA’s custodian. By using this method of disbursement, the executor has assured that the funds remain in a qualified plan and the non-spouse beneficiary will not be taxed on the funds until they are disbursed to him/her from their beneficiary IRA.As stated earlier, the deceased’s plan custodian will have plan provisions that dictate their disbursement criteria. So they may require that a deceased plan participant’s estate receive funds when no beneficiary is named or when the estate is the beneficiary. If so, the estate, if allowed, should have the qualified retirement funds of the deceased, trustee to trustee transferred to an IRA that is titled after this example or something similar to it, “Alice Doe f/b/o Estate of Joe Smith,” or “Alice Doe, Executor of the estate of Joe Smith, as beneficiary of Joe Smith.” To postpone taxation, the funds should stay in this account until the estate’s personal representative is ready to process a trustee-to-trustee transfer to an heir’s beneficiary IRA custodian.When there is no beneficiary and the executor has successfully helped an heir or heirs of the estate set up a beneficiary IRA by having the deceased qualified plan administrator execute a trustee-to-trustee transfer to the beneficiary IRA custodian, the beneficiary then must use the 5-Year Rule for taking distributions from the beneficiary IRA . The beneficiary is not a “Designated Beneficiary” if he or she was not named as a beneficiary by the deceased; consequently, the beneficiary is not entitled to take distributions over the course of his /her life expectancy or the deceased’s IRA holder’s life expectancy.The 5-Year Rule applies when the IRA holder dies before age 70 1/2 and the IRA holder has no designated beneficiaries at the time of death. The minimum required distribution for a beneficiary IRA under the 5-Year Rule is: “All benefits must be distributed no later than December 31, of the year that contains the fifth anniversary of the participant’s death. Reg. § 1.401(a)(9)-3, A-2.Consequently, by using trustee-to trustee transfers of qualified retirement accounts from the deceased qualified plan’s custodian to the estate beneficiary IRA custodian or to preferred beneficiary IRA custodians, the holder of the beneficiary IRA has five tax years to liquidate the IRA rather than experiencing full taxation on the funds in the year received.Titling the Beneficiary IRAA title example of an individual beneficiary IRA is, “Joe Smith, deceased, f/b/o Jane Doe.”A title example of an IRA that is payable to the deceased qualified plan participant’s estate is, “Alice Doe, f/b/o Estate of Joe Smith,” or “, Alice Doe, Executor of the estate of Joe Smith as beneficiary of Joe Smith.”A title example for a Trust that is beneficiary is, “Joe Smith, f/b/o Joe Smith Testamentary Trust,” or Alice Doe of the Joe Smith Revocable Trust, as beneficiary of Joe Smith.”Disclaimer:This report does not cover all the possible contingencies regarding beneficiary IRAs and the tax implications, on the estate, its heirs, and beneficiaries. My hope is that it informs you well enough for you to know that all concerned needs to consult qualified estate and income tax professionals who have expertise specific to this matter.
How does a land trust work?
A land trust is a private legal contract in which the owner of real estate transfers the title of the property to a trustee. The property owner retains all rights to the property — to build, rent, sell or transfer to heirs — but has the luxury of remaining anonymous. An example would be the Disneyworld property in Florida. The Florida swampland that would become the multibillion-dollar empire of Walt Disney World was purchased by nameless, faceless trusts [source: Disney Park History)Land trusts of this type are called "Illinois Land Trusts," because the first such contracts were drawn up by railroad tycoons, businessmen and politicians in 19th-century Chicago. Some of the early beneficiaries were people wanting to buy up Chicago real estate without jeopardizing their political posts as city aldermen, since they were not allowed to vote on city building projects if they owned any nearby lands [source: Exeter].These anonymous land trusts met opposition, but were eventually upheld by the Illinois State Supreme Court. In addition to Illinois, only eight other U.S. states — Florida, Hawaii, Indiana, North Dakota, Virginia, Arizona, California and Ohio — have legalized this kind of anonymous real estate land trust, whether through legislative statutes or court decisions [source: Murray].One land trust example is known as a real-estate land trust. Corporations and other institutional buyers sometimes use these trusts to purchase large tracts of land to discreetly avoid publicity.A different kind of land trust is called a conservation trust or conservation easement. In some cases, a non-profit organization may purchase or take the donation of a piece of land.Land TrustStylishly Elegant, Sophisticated Simplicity