Best approach for separated and deceased spouse creating tax due

[Locke]

This is an interesting one:  Taxpayer separated from spouse in 2021; filed jointly in '21.  In 2022 they remain separated but not yet divorced, the spouse withdraws a large amount from her IRA and other sources with no tax withheld and gives it to taxpayer's estranged family just before passing away in 2022.  Taxpayer is named executor on the will but the money from withdrawals is out of his possession.  The amount due from filing jointly is very large.

What is the best approach?  MFS may be valid but as executor taxpayer would still be liable for the spouse's tax bill using financial assets that were held in both names, correct?

Would an innocent spouse appeal go through successfully on the grounds of separation of liability relief?

[ehill]

Initial thinking is MFS.  Depending on state may not be responsible for the debt and again depending on state may go to to spouse automatically and again not be liable.  Sounds like this might be a probate issue to deal with the tax debt and possibly have terminated under the provisions of the probate as insolvency.

[Skylane]

Lots of moving parts that have to be addressed…

TP is executor… is he also heir? May want to speak with an estate attorney? 

MFS is an option, the tax would ultimately be paid by the estate…. Innocent spouse rule may lower the tax but I’d want to be on very firm grounds first….

if TP is not an heir… let’s assume the heirs are the couples children and amicable … (and there is money in the estate)…i always like  whatever method yields the lowest tax  There would have to be some form of written agreement from the heirs….i wouldn’t attempt it without an estate attorney involved 

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[BobKamman]

Let's call your client John and the late wife Mary.

in 2022, Mary withdraws a large amount from her IRA and gives it to ... John's family?  And they are estranged from her, or John, or both of them? Not that it makes any difference.  

But now John is executor of the will, so presumably responsible for filing Mary's final tax return.  And taxes are owed.  And there are assets in Mary's estate that will pay Mary's taxes, unless there are priority claims ahead of them.  (Like statutory family allowances, final expenses, and administrative expenses.)  

Not filing MFJ is a no-brainer.  Mary's final return is MFS, and if John doesn't know whether he should pay taxes or pay claims with higher priority, he should ask his lawyer, not you.  

[taxes96786]

You need a copy of the will to see what it says. Is there a trust? If so, you also need a copy of the trust.

Estate attorney may not have knowledge of tax law, if not a tax attorney.

[BobKamman]

There is no need for a copy of the will or trust.  Poster is doing a tax return, not a probate.  And it's a return for the period before someone died.  

[dsocpa]

I disagree.  Always RTD (read the document).  Language in the trust or will rules unless contrary to tax law.

[BobKamman]

Read. The. Facts.

Then don't read my will when you're doing my 1040.  

[qbteachmt]

All else aside, this is the one that stands out to me:

"MFS may be valid but as executor taxpayer would still be liable for the spouse's tax bill using financial assets that were held in both names, correct?"

[ehill]

Not sure that is true?  Once the spouse passed away the joint automatically went to the survivor and is no longer a joint asset.  

If it was a probate, then a joint asset that passed by operation of law would not be a probate asset any longer and not subject to the debts of the estate of the spouse that passed away.

[dsocpa]

No worries there, no docs, no return.

[qbteachmt]

"Not sure that is true? Once the spouse passed away the joint automatically went to the survivor and is no longer a joint asset."

Uh, what? "Sorry, my husband might owe $50,000 on that credit card, but I am keeping all of our $100,000 that is in our joint checking."

That's taking a bit of a leap over beneficiaries, pay/transfer on death, ROS vs TIC, common law State or community property State, type of financial asset (retirement, ordinary checking, annuity).

The point is, to know what is available and applies, and my favorite word... some of this stuff is discoverable. You really need to separate that the Executor responsibilities are not the same as being the spouse.

It doesn't state the IRA was fully distributed, for instance.

[taxes96786]

Thank you, dsocpa....I totally agree with due diligence

[taxes96786]

Wouldn't the deceased portion of "jointly held" assets be reported on date of death and not what remains due to transferred after death. Will/Trust law requires Trustee/Personal Rep to pay creditors, then taxes and finally distributions to beneficiaries.

[BobKamman]

Income earned before date of death goes on the final 1040, which is why you don't need to read any wills or trusts, but you might need to see the death certificate to verify you have the right date.  It doesn't matter whether the assets passed in any of the three possible ways:  Probate, joint tenancy or beneficiary designation. 

No, that's now how it works.  Taxes get paid first, then administrative expenses and finally unsecured creditors.  Similar to bankruptcy.  There may be survivor allowances (similar to exempt property in bankruptcy) that come before creditors also.