1099-C received after estate dispersed

[hadleykris]

I have been the trustee for my grandmothers estate since her passing in 2020.  I filed both her personal (final) and estate taxes for 2020.  I paid off what debt I could find and then the balance of the trust was dispersed to the beneficiaries in December 2021.  I had planned to file the final tax return for the trust closing it for 2021.  Today (1/24/22) I received a 1099-c for a credit card that I didn't know she had.  It was charged off 12/01/21.  Do I need to include the 1099-c on the estate return?  There is no more money to pay anything at this point.

[M-MTax]

You need to include the cancellation of debt. It is income to the estate.

[hadleykris]

I understand- but the Estate is disbursed- there is no money to pay the taxes at this point.  Is the estate considered insolvent?

[AmyC]

Yes. The cancelled debt is income to the estate. There is an exclusion that may cover the income so that there is no tax. See  Instructions for Form 706.

[ThomasM125]

Although the estate may be technically insolvent with respect to having no assets or liabilities, that is not a defense to treat the cancellation of debt income as forgiven, since there were distributions to beneficiaries that could have been used to pay the taxes due. The best thing to do is complete a trust tax return for 2021 and report the cancellation of debt income, and have the beneficiaries chip in to pay the taxes due.

@hadleykris

[Edited 1/24/22 at 4:54 PST]

[M-MTax]

Is the estate considered insolvent?

The estate is NOT considered insolvent. There were funds that were distributed which can be clawed back to pay the debt that was cancelled. 

You can easily file a 1041 and issue K-1s to the beneficiaries who got distributions before. They can report the income on their 1040s and pay any tax due.

[hadleykris]

Does the cycle ever end?  What if I get another 1099-c next year or the year after that?  is there a statute of limitations or anything similar?  There was not a large estate, the disbursements were quite small.  If we get another 1099-c in say 5 years, are the beneficiaries still liable?  Seems there should be some sort of cut-off.  I paid all the debt that I knew about, this came out of left field and I have no idea what else may be out there.

[AmyC]

Here is some help: 

Debts and Deceased Relatives | FTC Consumer Information

Debt of Deceased Relatives - Estates, Executors ...

You will need to check with your state for specifics.

[M-MTax]

Does the cycle ever end?

YES it will BUT ONLY IF you followed the procedures for winding up an estate in the decedent's jurisdiction. 

The problem is many executors and administrators do NOT.

[hadleykris]

UPDATE:

I figured out how this process works!  My main issue was how to pay the taxes since the trust had been disbursed.  Well, since I marked the box that this was the final return for the estate, the tax software automatically filled out schedule K's for the beneficiaries based on their % of the estate.  All I had to do was mail them out and the trust itself was not required to pay the taxes due.  The beneficiaries added their portion of the "income" to their own tax returns.  Easy Peezy

I do actually question whether the charge off was legitimate.  After 2 years, I never received an invoice, a letter, a statement or a phone call regarding this account.  I just get a 1099-C out of the blue.  I thought it was odd, but there was no more money in the trust to pay an attorney to investigate and I wasn't a beneficiary, so no skin off my nose