I am the executor for my aunt's estate (based in the U.S.). The estate has beneficiaries from four different countries (including the U.S.). The estate was funded by her savings account, checking accounts, her CDs, her IRA and a qualified annuity. The annuity had a beneficiary who died before my aunt did, thus the annuity became part of her estate. I took a lump sum payment (for the estate) and had the company withhold money for tax purposes. In addition, I just wrote a check to the Treasury department to cover the taxes fully (for the IRA, the interest in the CDs, the lump sump payment from the annuity). I though that withholding seventeen percent for Federal tax purpose was enough. Nope - apparently, the estate has to pay taxes on the annuity (and residual income from interests) at the maximum thirty seven percent rate.
As the executor, I want to make two distributions of the funds from the estate. The first distribution will be under the value of the estate principal (checking account + savings account + CD). Of course, the CDs earned interest income and I the estate is paying the taxes on all the interest income. At this point, since all the money is in an estate account that does not have any interest, I foresee one 1041 filing - this year, for this is the year the annuity was cashed and I was named the executor of the account, although she died last year. I made sure that her final income tax submission incorporated all income (including interest) incurred in the whole calendar year that she was alive.
The first question is if I make a distribution from the principal, which includes no income, do I need to inform the IRS that I am distributing money to non resident alien beneficiaries? From my understanding, since the distribution is coming from the estate's principal, there will be no tax liability to the beneficiaries. I assume that since I am not distributing income, and since I paid the taxes due for the annuity and other interest, that the beneficiaries need not receive a K-1 form (for U.S. citizens and residents) and that the non resident aliens need not have any percentage of their inheritance taxed. Again, this is because the principal, is being distributed, not income the estate received.
The second question is that next year, the estate will not be reporting an income. I have paid taxes on the income for this year. Thus, any further distributions need not trigger the issuance of K-1's for beneficiaries who are U.S. citizens or U.S. residents AND that I don't have to withhold taxes on any distribution to non resident alien beneficiaries since taxes have already been paid on the previous year's income.
The third question is this. I am going to pay taxes on the income and the annuity payment, but do I consider the remaining sum from the annuity as principal (for this year) or as taxable income (for this year). I understand that if I don't make a distribution from this income this year (and if I pay the taxes due), then the money will not be treated as income (it will be treated as estate capital) the following year.
Is my interpretation correct? I called the IRS Business Tax helpline but they didn't really have an answer for my questions. Thank you for any guidance that you may offer.
