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SaratogaSam1
Level 2

Partial distribution of estate - are both estate and beneficiaries taxed?

I am executor of an estate.  I have distributed two of the five accounts in the estate to beneficiaries in the current tax year.  Income shown on the 1041 includes all the income the estate earned during the year. 

Do I  include only the income earned by the brokerage accounts distributed (dividends, interest) in the K1s?  The rest of the income would then be paid by the estate via the 1041 (also dividends and interest)? 

 

The same beneficiaries will be receiving the remaining accounts next year so eventually they will receive the income earned this year. (also dividends, interest)

4 Replies
tagteam
Level 15

Partial distribution of estate - are both estate and beneficiaries taxed?

Is there a testamentary document (i.e., a will)? If so, does it give you discretion regarding how the income and/or gains are to be distributed? 

 

Typically, all of the income generated by the estate is distributed to the beneficiaries annually. If you do not distribute all of the income to the beneficiaries via their K-1s, then the estate will be liable for paying taxes on the income that remains in the estate.

 

SaratogaSam1
Level 2

Partial distribution of estate - are both estate and beneficiaries taxed?

Yes, there is a will.  It does not mention how income is to be distributed.

My lawyer and the accountant I am working with have not told me I have to distribute income annually.

 

Actually, the accountant said I should include all the income on the beneficiaries' K1s whether they received that income during the tax year or not. So they pay the taxes even though they did not get the money yet.


I have been leaving the accounts intact - not touching them - until I distribute.  So the income is included in the account balance at the time the entire balance of the account is distributed.

 

So - from your answer, it looks like tax on any income made by accounts not distributed in the tax year should be paid by the estate.  As long as the income remains in the estate at the end of the tax year, the estate should pay tax on it.  I will have some income tax being paid by beneficiaries and some by the estate. 

 

Is there any official IRS document that discusses this?  I may have to explain to my lawyer and accountant.

tagteam
Level 15

Partial distribution of estate - are both estate and beneficiaries taxed?

You should consult with your accountant and handle the tax issues as instructed by your accountant.

 

Income, as your accountant indicated, is generally passed through to the beneficiaries on their K-1s (whether actually distributed or not).

 

You might want to look at Publication 559 (link below) and also the relevant statute and regulations (§§ 641-685). In any event, you should follow your accountant's advice.

 

https://www.irs.gov/publications/p559 

Critter-3
Level 15

Partial distribution of estate - are both estate and beneficiaries taxed?

The accountant and lawyer should be able to help you on this matter however the estate pays taxes at a much higher rate faster than individuals which is why if you have the option to pass the taxes onto the beneficiary then most will do so even if the income is not currently being distributed.  

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