split of income and tax withheld on decedents 1040 and estate 1041

[gn]

In lacerte how do we split income and taxes withheld between the decedent's final 1040 and the estate 1041 in the same year? An example is with a 1099 of interest income for 2020 the decedent dies March 31st and pick up 3 months of interest and tax withheld on the final 1040, then the estate 1041 picks up the 9 months after death reported on the same 1099 to the decedent which covers all of 2020, so the bank does not split a 1099 between the decedent and the estate, the bank gives 1 form 1099 covering all of 2020 to the decedent. 

How is this shown on the Schedule B is it the total interest on the 1099 on the decedent's final 1040 with a negative taking out the 9 months which goes to the estate 1041? If so is there a description to use on both returns. Also the bigger question, is there a requirement to prepare a second form 1099 for the 9 months of income and taxes withheld to the estate from the decedent? How does the IRS and state know the split comes from the total on the same 1099 from the bank? 

[BobKamman · Accepted solution]

I don’t know, because I don’t take clients who are so grief-stricken that they can’t get to the bank and close the accounts for nine months. At least that would stop the tax withholding. But death does cause all sorts of problems like this – sometimes the family can’t agree on who’s in charge, for a year. I would do a nominee distribution from the 1040 Schedule B to the estate, but claim all of the withholding on the 1040. There’s no little man with a green eye shade, checking every line to make sure the return is correct. But if there were, that might be exactly what he would suggest.

I came across an interesting situation today, speaking of dead people with interest income. $120,000 face value, $200,000 redemption value of savings bonds. Taxpayer had been talked into a living trust, so no probate is necessary, right? But the bonds were just in her name, and Treasury says if the amount exceeds $100,000 they need a court appointment. Has anyone else come across that?

And of course, many preparers are unaware that the accumulated interest can be reported on the decedent’s final 1040, which is often the best place to report it.

[gn]

You might deal with normal localities but a place like NYC which can take up to a year to get the court to appoint an executor/administrator in normal times then add being closed for months during covid lockdown and it goes over a year with ease where the family can’t do anything like in this case.  So your saying prep 1099’s from the decedent to the estate for the income, but isn’t that already late filing for calendar 2020? If I did the nominee distribution is the 1099 required or would a statement explaining the split income filed with the tax return suffice? I’m kind of tempted to put the whole 2020 income on the final 1040 and use the estate 1041 for 2021 income assuming there really is no little guy with a green eye shade looking that you may have missed

I had a similar issue with savings bonds they were cashed by the estate and passed the interest income out in the DNI to the beneficiaries so the tax was much lower when divided up by a few beneficiaries on their personal returns then including a much larger income amount on the decedents final return. 

[BobKamman]

I'm not saying file 1099's.  I would just subtract out the estate's share as a "nominee distribution" on Schedule B.  Trust me, the little man with the green eyeshade won't fuss about it.  

[qbteachmt]

"Taxpayer had been talked into a living trust, so no probate is necessary, right? But the bonds were just in her name, and Treasury says if the amount exceeds $100,000 they need a court appointment. Has anyone else come across that?"

Often. I see old people get talked into establishing a living trust by a lawyer that advertised or attended some group home meeting or social event, and the trust is an empty shell. No titled or deeded property is put into the trust. I try to explain this and the issues of Transfer On Death and Beneficiary provisions, as opposed to "Let's put it all in a trust, then never follow up."

"just in her name" would be nice...

I recently worked with a couple, both on their third marriage (he's 91, she's mid-80s), and they both have bonds jointly named with the old dead spouse(s) and not the current spouse.

[BobKamman]

@qbteachmt   

What I see are the insurance licensees who rent a room in the retirement-community library and hold a seminar on estate planning, calling themselves a “leading expert.” They frighten people into setting up living trusts, but then make sure they are funded, because they offer to help with that and then tell customers that their investments are poor and that better choices are available. Then they sell them an annuity with a lower-rated company.

But I can sympathize with @gn , and the delays of New York probate. Most states have the Uniform Probate Code, which makes life easy when it comes to death. But New York and California are stuck with archaic laws that give probate a bad name. And where are much of the major national media located? New York and California – so local reporter calls local lawyer, and writes a story about how living trusts are the greatest thing since sliced bread, and spreads it across the country.

There are some estate planners in New York, though, who seem to be fixated with putting real estate into life estates with remainder interests. They don’t do the tax returns, though, when the property is sold.

[gn]

Seems these days life estates/asset protection trusts have become more popular and your right they sometimes get surprised come tax time.