How to report funds obtained from a state's escheatment (unclaimed funds) account?

[Amos]

In 2024 I received a check from New York State for unclaimed funds from my mother's abandoned account which went into a newly created Estate Account.  Her original estate was closed many years ago.  I have given an equal share to my siblings.  The funds are a combination of accrued dividends since her death and the sale of a stock in 2024 when the money distributed to me, acting on behalf of my mother's estate.  What is the easiest way to report this income which is about $1000 to each sibling?  For simplicity can I just report my share on my personal tax return with my siblings doing the same?  I know the cost basis for the stock.  

[PatriciaV]

Yes, if the estate is closed and the unclaimed funds check is the only transaction in question, the heirs may report the allocated income on their individual tax returns. If the final estate return has been filed, there is no need to file another Form 1041.

Note that the income should be reported according to the source transactions that generated the income. Inheritances are generally non-taxable. But in this case, no taxes have been paid on the income by the estate. So, the tax liability flows to the heirs.

[Amos]

PartriciaV - Just a follow up on your helpful answer.   Since I had to create a new Estate account with its own tax ID number, into which the proceeds from NY's unclaimed funds account were deposited, how will the IRS and my own state tax department know that the tax due is being paid through my (and my siblings) personal account?  I did not see any place in Turbotax to make a note that the dividends and capital gains  are from a tax ID number different from my own, since there is no tax form being filed for the estate.  I am guessing that if the estate  gets a letter from the IRS I can just send them an explanation.   Can you advise?  Thanks very much. 

Amos

[PatriciaV · Accepted solution]

Since the unclaimed funds were deposited to a bank account under the estate's tax id number, you may need to file Form 1041 for the year (using TurboTax Business). The cutoff is $600 - any amount over that requires an estate tax return. 

A separate estate return would also avoid issues if the state sends Form 1099 for the payment. Each heir receives Schedule K-1 from the estate return that should match the funds that were paid to them.

If the funds were deposited into an account under your name and/or tax id number, then you could follow my previous instructions. Pardon any confusion.

Read more here: IRS File an estate tax income tax return

[Amos · Accepted solution]

PatriciaV - Ok thanks for explaining.  I was trying to avoid having to file  the 1041 and the K1 documents, plus any others that are needed.  It seems like a lot of work and added complexity, plus the cost of the upgraded software, unless I just do the forms manually.  That is why I thought I could just avoid the 1041 altogether and wait to provide an explanation to the IRS when needed

[PatriciaV]

Preparing an estate return does take time and adds expense. Although we don't recommend shortcuts, you have the option to report the income on individual returns. But if the IRS doesn't accept your explanation, you will eventually need to prepare the estate return.

[Amos]

PatriciaV - Hopefully one last question on this.  I have started completing the 1041 Estate tax return, doing it manually, just like the olden days.  Although I initially started to compute the capital gains form Schedule D and the related 8949, that seems to be incorrect  and adds complexity in my case.  I have distributed the total assets of the trust account to each beneficiary, and  I want all the capital gains and dividends and therefore any taxes due, to flow to the beneficiaries which seems easily accomplished on the K1 forms.    It seems I need to show the K1 forms as totaling to the full assets of the trust.  I am hoping this might be a more expeditious way to handle this even not exactly correct in terms of forms.  What do you think?

[PatriciaV · Accepted solution]

Your best option is to make your calculations and allocations in a spreadsheet before entering on the IRS forms. This allows you to use formulas and check that your intended entries will balance to Form 1041.

If you are reporting investment sales, you do need to complete Form 8949, which flows to Schedule D. However, if the investments were distributed to the beneficiaries and not the sales proceeds, you wouldn't include those forms.

Manually entry to IRS forms is tedious and can lead to serious errors. You may consider using a TurboTax Live expert to help with this. Or contact a local accounting professional.