I’m trying to confirm who takes what income on 2019 taxes (individuals or estate), what is Income in Respect of a Decedent, etc…

[TaxNoviceLearner]

Timeline:

• Grandma passed 1/9/19
• Mom passed 1/19/19

Facts:

• I’m executor of estate.
• Mom’s will split her estate evenly to 3 kids. Relatively small estate, so no state or federal inheritance tax due.
• Mom/Kid #3 had joint checking, which became Kid #3’s at Mom’s passing.

Income streams in question:

• #1 – Mom’s pension payment (earned December) was paid on 1/31/19 to Kid #3’s checking account (formerly Mom/Kid #3 joint). But would have been 1/3 to each kid if part of estate.  My guess: IRD, Kid #3 takes as regular 2019 income (and we settle up 1/3s later).
• #2 – Dividend paid 2/1, Mom alive on 1/10 record date, paid to checking account solely in Mom’s name. My guess: IRD, Mom’s estate takes as estate income on 1041.
• #3 – Dividend paid 2/1, Mom alive on 1/10 record date, paid to Kid #3’s checking account (formerly Mom/Kid #3 joint). But would have been 1/3 to each kid if part of estate.  My guess: IRD, Kid #3 takes as regular 2019 income (and we settle up 1/3s later).
• #4 – Annuity from Grandma (partially taxable, Mom sole beneficiary), paid to Mom’s estate checking account in March 2019. My guess: Estate takes as estate income on 1041.
• #5 – RMD from 403(b) paid to Kid #3’s checking account (formerly Mom/Kid #3 joint). I understand that the decedent’s calculated RMD must be taken by one or more of the beneficiaries.  My guess: Kid #3 can take as ordinary 2019 income.

Thanks for your help.

TNL

[smarttees]

Annuities and retirement plans name beneficiaries and that bypasses the estate.

[dmertz · Accepted solution]

Regarding #1, why was this paid to Kid #3?  If the pension plan terminated upon Mom's death and this was simply Mom's final pension payment, it seems that this this was payable to Mom's estate (for deposit into the estate account of Mom's estate), not to Kid #3, and, assuming that Mom used the cash accounting method, which it true for most people, it's IRA and includible on Form 1041 filed by the executor of Mom's estate.

Regarding #2, Mom's checking account should have been frozen upon her death and unable to receive the deposit.  It should have been paid to Mom's estate.  Presumably, though, this checking account was moved to Mom's estate account so this dividend payment apparently ended up in the right place as IRD to the estate. 

Regarding #3, is this a money market checking account and the dividend was earned on the balance in this checking account?  If not and this was a dividend paid on some asset owned entirely by Mom, it seems that this also is IRD to Mom's estate, not income payable to Kid #3.

Regarding #4, if there was no designated successor beneficiary of the annuity, this seems correct.

Regarding #5, who or what was the beneficiary listed on the 403(b)?  If not Kid #3 it should not have been paid to Kid #3.  If Kid #3 was a beneficiary of the 403(b), a payment of Mom's entire 2019 RMD to Kid #3 came from Kid #3's share of the 403(b) as beneficiary, satisfied Mom's 2019 RMD and is Kid #3's income.  It is also IRD to Kid #3, but that is relatively meaningless unless Mom's gross estate is large enough to owe estate tax (Form 706).

[TaxNoviceLearner]

Thanks, @smarttees,

My grandma didn't have a secondary beneficiary to her annuity, so I believe that to the estate was the annuity company's only option for recipient for the payment.

Correct, my mom's 403(b) had named beneficiaries (my sisters and me), but a couple of my mom's Minimum Required Distributions for 2019 from her 403(b) hit her checking account (that became Kid #3's upon my mom's death because it was joint mom/Kid #3) before we were able to contact the 403(b) company; they were unable to reverse my mom's RMD payments.  I understand that the IRS requires one or more beneficiaries to take the decedent's RMDs for the calendar year of death, so those payments "Income Stream #5" going into Kid#3's account (that used to be my mom's/Kid#3's joint account) isn't an issue.

Thanks again for your help.

TNL

[TaxNoviceLearner]

@dmertz, thanks for your very helpful response.

#1/pension payment - unfortunately that final Mom's pension payment was paid to Kid #3's checking account because that account was joint mom/Kid #3 checking account prior to my mom's passing.  (That checking account was where my mom's government pension payment was deposited each month.)  Yes, she used the cash method in prior years, so I will need to continue the cash method for her estate/1041.  IRD to estate, got it, thanks.

#2 - it was actually a bit more involved, as the checking account that received it was my grandma's/mom's joint account/JTWROS, which became solely my mom's when my grandma passed.  With only 10 days between my grandma and mom passing, we had a lot of craziness going on and didn't freeze it fast enough.  IRD to estate, got it, thanks.

#3 - it was a stock dividend (like #3 above), January 10th record date, February 1st payable date.  IRD to estate, got it, thanks.

#4 - correct, no designated secondary/contingent beneficiary.  IRD to estate, got it, thanks.

#5 - Perfect, very helpful!  All three kids were beneficiaries of the 403(b).  Unfortunately, my mom's estate was a tiny fraction of what would be needed for 706, so agree that it's moot.

Thanks again, @dmertz for your kind help!

NTL

[TaxNoviceLearner]

@dmertz (or other TurboTax friends)

Quick follow-up question re: #5:

The RMD deposit was received in Mom/Kid #3's joint checking account after Mom's death, so in essence Kid #3's checking account received it.  I tried to have Fidelity reverse it just after Mom passed, but it had been successfully received (because the account became Kid #3's solely and was still open), so they couldn't reverse it.

I called Fidelity and asked them to associate that #5/RMD deposit with Kid #3's SSN, but they said that they have to keep it associated with Mom's SSN because that checking account had successfully received it.  So they will likely not issue a corrected 1099-R in January to associate that RMD deposit with Kid #3's SSN.

Because the 403(b) had beneficiaries and the payment was received (cash basis) after Mom passed, it shouldn't be associated with the estate.  (Side note, Kid #3 has a lower tax rate than Mom's estate, so that's a fringe benefit of Kid #3 taking it as ordinary income in 2019.)

Does anybody have any guidance on how I can get this corrected and make sure that the RMD deposit from Mom's 403(b) after she passed goes to Kid #3 (as one or more beneficiaries have to take the RMD for the decedent in the year of death) instead of into Mom's estate?

Many thanks for your help.

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(original)

#5 – RMD from 403(b) paid to Kid #3’s checking account (formerly Mom/Kid #3 joint).  I understand that the decedent’s calculated RMD must be taken by one or more of the beneficiaries.  My guess: Kid #3 can take as ordinary 2019 income. 

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(your response)

Regarding #5, who or what was the beneficiary listed on the 403(b)?  If not Kid #3 it should not have been paid to Kid #3.  If Kid #3 was a beneficiary of the 403(b), a payment of Mom's entire 2019 RMD to Kid #3 came from Kid #3's share of the 403(b) as beneficiary, satisfied Mom's 2019 RMD and is Kid #3's income.  It is also IRD to Kid #3, but that is relatively meaningless unless Mom's gross estate is large enough to owe estate tax (Form 706).

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Thanks in advance.

[dmertz]

Although the IRS only describes its use for Forms 1099-INT, 1099-DIV and 1099-MISC, a distribution to the wrong recipient and reported on Form 1099-R in the name of the wrong recipient would probably need to be handled as a Nominee Distribution if the payer will not make the correction.  Search IRS Pub 559 for "Nominee Distribution."

https://www.irs.gov/pub/irs-pdf/p559.pdf

[TaxNoviceLearner]

Many thanks, @dmertz.  Sounds like a reasonable solution.  Really appreciate it!

[dmertz]

Payment of the 403(b) distribution incorrectly also presents potential problems for correctly dividing the remaining balance in the 403(b) among the beneficiaries.  In dividing the 403(b) among the beneficiaries, the payment deposited into Kid #3's account must be treated as coming entirely from Kid #3's respective share of the 403(b) unless Nominee Distributions are made to each of the beneficiaries in proportion to each beneficiary's respective share.  Treating it entirely as Kid #3's distribution instead would require determining how much of Kid #3's respective share remains in the 403(b) after accounting for the distribution.  For example, if there are 3 kids who are equal beneficiaries and the 403(b) contained $63,000 immediately prior to a distribution of $3,000 into Kid #3's account to be treated entirely as Kid #3's distribution, Kid #3's share in the remaining balance in the 403(b) would be reduced from 33.333% to 30% and the shares of the other two kids would increase to 35% each.  I don't know how the plan administrator would handle that if they are unwilling to correct the reporting of the incorrect distribution.  Whether or not to treat the distribution as Kid #3's entirely or as some amount to each of the beneficiaries will need to be a group decision.

[TaxNoviceLearner]

@dmertz, thanks for your very thoughtful watch-out.  Agree, I don't think that the plan administrator would be willing to help and I feel that having a series of Nominee Distributions might make things too murky.  Fortunately, the three of us get along well and have been very good with making the numbers right across the three of us the past number of months.  I have heard horror stories of how a decedent's estate/money, however small, caused significant friction in a family, for years.  We're very fortunate here.  Thanks again for your awesome wisdom and guidance.

[TaxNoviceLearner]

@dmertz, one follow-on question:

With how much specificity should I explain the situation to the IRS on an accompanying statement?  If Nominee Distributions associated with 1099-R forms aren't as common as with 1099-INT forms, do I need to lay everything out?  I have currently typed out a concise half page statement to accompany the tax returns.  Thanks.

[dmertz]

Since the IRS has no knowledge of the beneficiary designations on the 403(b), I imagine that you would want to provide sufficient explanation for the IRS to be able to determine who is truly responsible for the tax liability on distribution.  That would include describing the beneficiary designation, the date of Mom's death, the date of the distribution, the fact that, upon the death of Mom the 403(b) by operation of law became maintained for the benefit of the beneficiaries and distributions made after the date of death can only be distributions to the beneficiaries, and how the distribution is being allocated to the beneficiaries to correct the administrators inability to correct the reporting themselves.

[TaxNoviceLearner]

@dmertz I hope that you are having a good winter.  Thank you again for your kind help back in the fall.

Now that I'm getting down to the execution of this, I wanted to see if you could kindly check my logic.

• I just received Fidelity's 2019 1099-R to Mom, which covered payment #1 (when Mom was alive), and payments #2, #3 (deposited after Mom passed, deposited into Mom's joint account with Kid #3...Fidelity and bank couldn't reverse the payments because an account received the payments, please see rest of above thread as refresher).  So Fidelity's payments are tied to Mom's 2019 income, as are Fidelity's Fed and state income tax withholdings from Payments #1-3 that Fidelity will send to the IRS.
• I am trying to decide which party, Mom or Mom's estate, should be the formal "Payer" on the 1099-R form, the Nominee Distribution to Kid #3.  Since Mom will need to formally record receipt of the Fidelity income on her 1040 Line 4b, then it would make sense that Mom's 2019 1040 should be the Payer of the Nominee Distribution to Kid #3.  Mom's 2019 1040 income would then be partially offset for payments #2 and #3 by a negative "Other income" on Schedule 1, Line 21.
• I don't see how any other mechanics would work.  I considered Mom giving Mom's Estate a Nominee Distribution, and then Mom's Estate would give Kid #3 a Nominee Distribution, but that might possibly get confused with Income in Respect of a Decedent (IRD), which this isn't.  403(b) money with named beneficiaries should never be commingled with money in an estate.
• A beneficiary of a 403(b) needs to take the RMD that the decedent/Mom would have taken by end of year of the decedent's/Mom's death, which is what payments #2 and #3 took care of, to beneficiary Kid #3.

So my main question is whether you could confirm that Mom, not Mom's Estate (which never touched Payments #2, #3) should be the Payer to Kid #3 for Payments #2 and #3 as a Nominee Distribution.

Thanks for your ongoing kind help!

[dmertz]

If the income is reported on Mom's final income tax return, it would be Mom, not Mom's estate, who would be the nominee, entering the nominee amount as an amount of negative income to offset the taxable amount being added by the distribution having been paid inappropriately to Mom and the executor or personal representative would be competing the filing of the Form 1099-R that passes this income to the rightful beneficiary on behalf of Mom.

[TaxNoviceLearner]

Perfect, thanks @dmertz.  You rock!

Yes, Fidelity sent the 1099-R for the three payments (one correct, two erroneous) to Mom.  So Mom formally has the total income (in the eyes of Fidelity and IRS) to push the erroneous part over to a beneficiary/Nominee Distribution, Kid #3.

Thanks again.