Estate 401K and IRA with no beneficiaries

[gravestones]

I am the executor for my nephew who passed away in Massachusetts in August of 2021.  He left a 401k and an IRA with no beneficiaries.  The money is going to his estate but we need to use most of it to pay outstanding bills.  By intestate law, his mother will get the remainder.  Even though the money was used to pay bills, is the Estate responsible to pay the taxes owed on the withdrawal on the 1041?  The amount is about $32,000.  If so, what if there is no money left?

[Carl]

It's not common for a retirement account to not have any listed beneficiaries, as that's commonly identified at the time the 401(k) and/or IRA are first established. Then, it gets passed outside of any will or estate. So if you haven't already, I would suggest you check with the administrator of the account(s) and confirm there is "in fact" no designated beneficiaries.

Even though the money was used to pay bills, is the Estate responsible to pay the taxes owed on the withdrawal on the 1041?

Yes, especially since the money will be used to pay the bills of the estate.

The amount is about $32,000. If so, what if there is no money left?

Then you have nothing to be distributed to any heirs. If there's not enough left to pay taxes with, then those taxes just flat out don't get paid. I would assume you have already done the personal 1040 tax return of the deceased and marked the box to indicate the tax filer is deceased.

[gravestones]

Thank you for your response.  We have checked with both plan administrators and there were definitely NO beneficiaries.  Unfortunately, we are not surprised.  As for the deceased, I am in the process of doing his final 1040.  I think I may have read that estate taxes need to be paid first before creditors, however, the monies will be received in 2022 for 2022 taxes.  I hate to make certain creditors wait another year since I really don't want to be nagged by collectors.  The tax rate for the estate is quite high.

[Carl]

Yes, the taxes do get paid first. Once the money runs out, a "final" 1041 is filed and you're basically done. 

I hate to make certain creditors wait another year since I really don't want to be nagged by collectors.

Once the money runs out, when you receive a notice from a creditor, you simply send them back a statement with a copy of the death certificate. Remember, "you" are not responsible for the debts of the deceased. But you are responsible for the management of the estate. Once the final 1041 is filed, the estate is dissolved.

The only way another would be responsible for any debt of the deceased, is if they co-signed on the debt. But that's not always true either.

[gravestones]

Thanks a bunch for your valuable response.  Much appreciated.

[Carl]

I went through this when my father-in-law passed back in 2012. For "about" a year after his passing, I was getting bills (mailed to his address in his name and forwarded to me) in the mail from creditors and debt collectors. I simply attached a statement stating he passed and all of his estate had been exhausted to meet outstanding debts. Then included a copy of the death certificate. Mailed it back, and never heard from that creditor or credit collector again.

On a somewhat humorous side, he received a notice for jury duty in 2014. When he didn't show a sheriff's deputy showed up at my house looking for him. (My house was his last residence before he passed.) Told the deputy he no longer lived here, and he cut me off before I could finish my sentence by saying "because he passed in 2012", and was politely "demanding" to know where he was. Told the deputy I didn't know the specific address, but would be happy to take him there if he wanted to follow me in my truck.

We arrived at the gravestone and my final response to the deputy before leaving him standing there speechless and looking like an idiot was "I home you bought a shovel."

[Anonymous_]

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@gravestones wrote:

By intestate law, his mother will get the remainder.  

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@gravestones 

The remainder can be passed through to the nephew's mother via a K-1 (1041).

Estate income tax rates are highly compressed and she will most likely be in a lower tax bracket.

[gravestones]

Thank you.  That DOES seem to make more sense.

[Opus 17]

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@gravestones wrote:

Thank you for your response.  We have checked with both plan administrators and there were definitely NO beneficiaries.  Unfortunately, we are not surprised.  As for the deceased, I am in the process of doing his final 1040.  I think I may have read that estate taxes need to be paid first before creditors, however, the monies will be received in 2022 for 2022 taxes.  I hate to make certain creditors wait another year since I really don't want to be nagged by collectors.  The tax rate for the estate is quite high.

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I believe the estate can choose its own tax year.  If the estate will have no income until 2022, then you don't need to file a 1041 for 2021, and you can close the estate's tax year on a different tax year (like September to August) if that's more convenient for you. 

[Anonymous_]

That is correct; the estate can choose its tax year (calendar, fiscal, short) when filing its initial return (assuming a return is required to be filed).