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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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Illinois inheritance / probate question on tax liablilty

Customer Question

My girlfriends father just past away in Illinois. He had a will and it stipulates that all assets go to her. She is inheriting about $600,000 in pension funds / IRA funds, and a house in Chicago worth $260,000 and a house in Michigan worth $76,000/ Additionally he had just sold a rental property before he died and he did not yet deposit the check for $140,000. She has a joint savings account with him and the check is already signed. Can she deposit it and what tax liablities is she facing?
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

 Based on the numbers you have provided it does not appear that there will be an estate tax filing requirement.  However, you did not indicate that there was a revocable living trust in place so for your girlfriend to take possession of all the assets, she will need to have the will probated.


Before she does anything she should contact an estate/probate attorney to get the ball rolling and to get her appointed as executrix.  He/she will explain the process and tell her what to do with the check.  Also, with respect to the pension account she will have some decisions to make and should contact the the plan administrator for the necessary paperwork to get the account converted to a beneficiary account (if the plan allows). The pension plan administrator will tell her what her options are.  Distributions from this account will be taxed.  The IRA accounts should be converted into beneficiary accounts that will allow her to withdraw minimal amounts over her lifetime (she can always withdraw more).  This will be a great retirement/deferral opportunity for her.  The IRA custodian should be able to explain her options.  Distributions from the IRA account will also be taxable.  In lieu of this she should talk with a qualified CPA to explain her options. 


Her Father's sale of the rental property will need to be reported on his final tax return

         
Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: So the assets in the IRA / Pension if liquidated would be taxable? At what rate? Also the property in Michigan is a lake cottage and not a rental, so it would be considered a second home for tax purposes.

On the $140,000 gain on the rental sale - half of it is owed to her aunt and she gets to keep the other half. Since it was a sold rental property, can she roll the gain into another rental here in California on a 1031 exchange? Or if not, what would the tax rate be.
Finally, how long approximately does probate take in Illinois on a sole heir situation. I'll pay you an extra $10 for your help on these follow up questions - thank you.
Expert:  Christopher Phelps replied 11 years ago.

The pension and IRA distributions would be taxable as ordinary income at your girlfriends marginal tax rates.  With the IRA she has the choice to either empty the account within 5 years of inheriting it or to spread out the distributions over her projected lifetime (assuming she takes the first distribution in the year following the year of her Father's death).  I really recommend talking with a qualified CPA or tax attorney on this point.  As I said above I recommend taking the second approach as its a great deferral opportunity for her.


You are correct about the lake house.  Property taxes and interest paid by her father prior to his death will be reportable on his final tax return.  Your girlfriends cost basis in the property when it is sold will be its Fair Market Value (FMV) as of the date of her father's death.  Thus she will only be taxed on any gain subsequent to the date of death.  The same goes for the Chicago house.


The estate/probate attorney may have a better take on this but I would hold that the Aunt should file a claim against your girlfriend's Father's estate for her share of the proceeds from the sale of the rental property.  Payout should be from the estate, not by your girlfriend.  As to deferral, its to late for the Aunt.  In order to complete a 1031 exchange the proceeds needed to have been routed through an "accomodator" with all the appropriate paperwork executed, replacement property's identified, etc.  Since her Father (and thus the Aunt) already received the check they had constructive receipt of the proceeds from the sale, so the transaction is irretrievably taxable to them (i.e. one-half to the Father's final return and one-half to the Aunt).  Assuming the property was held for more than one year the gain will generally be considered capital gain subject to a maximum rate of 15% Federal (IL will tax as well).  There may be some depreciation recapture (depending on what depreciation method was used and what assets beside the building are being depreciated) which may result in a small amount of the gain being treated as ordinary income taxable at marginal tax rates.  I suggest employing a CPA to do the final return as well as any estate income tax return that may be due.  The cost will be worth saving the potential hassle down the line if you try to do it yourself.


Depending on the complexity of the estate probate can take anywhere from six months to two years.  The attorney will be able to pinpoint it but this one will likely be on the short end of that range.


 


  

 

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