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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I am the personal rep for the small estates of both my late

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I am the personal rep for the small estates of both my late mother and father, who passed away last year in that order. I opened bank accounts using EIN numbers in the name of the estate of each of my parents. I began to get checks this year and deposited these 4 into those accounts:
1) 1st check to close account in mother's name at the nursing home
2) 2nd check to close account in mother's name at the nursing home
3) Life insurance check for father (private insurance)
4) Fed employees group life insurance check for father (other 3 siblings also received a check for 1/4 of the total proceeds)

I have since received the first of the below 3, and am expecting the other 2 later this year:
a) Check to close account in father's name at the nursing home
b) Balance of father's retirement pay for month he passed away - 11/2012
c) Expected proceeds for small life insurance claim in mother's name

As my parents sold their house, and the proceeds went to Medicare and/or Medicaid, the above represents all of what we 4 siblings would "inherit" from our parents.

The life insurer for my father's private life insurance said that, because their debt interest on the amount was below $600, that they would not report this to the fed government, thus, no taxes were due. This is even after they'd insisted I had to open the account in the name of my father's estate (and so apply for an EIN) as a condition to issuing a check for the claim. Also, I was told by the fed gov't. that the balance of my father's retirement pay was not considered part of his estate.

Which of any of these proceeds or checks for claims must be reported for estate taxes or personal income taxes? And, is my depositing them into the bank account for the estate of either parent making them taxable as such?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
Several issues...
1.
As a recipient of inheritance - the person does not need to claim it as income. Regardless of the value. Please see for reference IRS publication 525 page 31 (left column) - http://www.irs.gov/pub/irs-pdf/p525.pdf
Gifts and inheritances. In most cases, property you receive as a gift, bequest, or inheritance is not included in your income. However, if property you receive this way later produces income such as interest, dividends, or rents, that income is taxable to you. If property is given to a trust and the income from it is paid, credited, or distributed to you, that income is also taxable to you. If the gift, bequest, or inheritance is the income from the property, that income is taxable to you.
Thus - a simple fact of depositing the check is not a taxable and inheritance received neither by the estate nor by beneficiaries - is not taxable.
2.
That includes all assets owned by the decedent at the time of death.
Other assets should be examined separately.
In particular - for life insurance proceeds - see the same publication - page 21


Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. However, interest income received as a result of life insurance proceeds may be taxable.
So far life insurance is not taxable and should not be reported to the IRS for income tax purposes.

LEV :

3.
Proceeds from the selling of the house must be reported. Assuming the property is sold by the estate - it should be reported on the income tax return of the estate - on form 1041.
However because the house was inherited - you will have stepped up basis equal to the fair market value - so when sold - most likely - there will be a small loss because of selling expenses - and there will not be any tax liability - still the sale transaction should be reported.
4.
Funds in the retirement account. When funds are distributed out - that income is classified an income in respect of a decedent (IRD). Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. Income in respect of a decedent realized AFTER the death is taxable the same way as it were taxable for the decedent. Income in respect of a decedent must be included in the income of one of the following.


--The decedent's estate, if the estate receives it.
--The beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it.
--Any person to whom the estate properly distributes the right to receive it.


When distributed - that amount is reported on form 1099R - which will report amounts of total distribution and taxable amount - AND the amount that was withheld

- from 1099R box 1 - total distribution
- from 1099R box 2a - taxable part of the distribution - if your mother made any after tax contributions - that amount would not be included. Otherwise - amounts in box 1 and box 2a will be equal.
- from 1099R box 4 - that is the amount of tax withheld which is credited toward tax liability.
In general - you may rollover funds into so-called "inherited IRA" and spread distribution over several years - thus effectively will reduce and defer your tax liability. Each beneficiary may have his/her own "inherited IRA" account.


LEV :

5.
Any income earned or received after the person's death - is taxable for the estate. For instance - if any interest is credited on the estate account that you opened - that is included into taxable income of the estate.
Most likely - there will not be any tax liability - but still - you will need to file an income tax return for the estate (form 1041). If there is no income tax liability for the estate - all distributions will be tax free for beneficiaries.

LEV :

Please feel free if you need any clarification or further help.

Customer:

Proceeds from sale of house were not inherited--went to pay medical expenses to qualify for Medicare. Seems your answer

Customer:

Proceeds from sale of house paid medical and nursing home expenses till exhausted, so they could qualify for Medicare/Medicaid, so, this money was not inherited.

Customer:

1) 1st check to close account in mother's name at the nursing home
2) 2nd check to close account in mother's name at the nursing home
3) Life insurance check for father (private insurance)
4) Fed employees group life insurance check for father (other 3 siblings also received a check for 1/4 of the total proceeds)

I have since received the first of the below 3, and am expecting the other 2 later this year:
a) Check to close account in father's name at the nursing home
b) Balance of father's retirement pay for month he passed away - 11/2012
c) Expected proceeds for small life insurance claim in mother's name

Customer:

House proceeds were spent at time of death, not inherited.
So, it seems your conclusions to my question can be summarized as follows, yes?:


1) 1st check to close account in mother's name at the nursing home - no taxes
2) 2nd check to close account in mother's name at the nursing home - no taxes
3) Life insurance check for father (private insurance) - no taxes
4) Fed employees group life insurance check for father (other 3 siblings also received a check for 1/4 of the total proceeds) - no taxes

I have since received the first of the below 3, and am expecting the other 2 later this year:
a) Check to close account in father's name at the nursing home - no taxes
b) Balance of father's retirement pay for month he passed away - 11/2012 - taxes
c) Expected proceeds for small life insurance claim in mother's name - no taxes

LEV :

Proceeds from sale of house paid medical and nursing home expenses till exhausted, so they could qualify for Medicare/Medicaid, so, this money was not inherited.
Inherited was a house - it was part of the estate. The house later was sold by the estate.
Proceeds from the sale of the house are received by the estate. How these proceeds are used - that is a separate issue.
In your case proceeds were used to pay off debts to Medicare.

Customer:

No, house proceeds were gone before death.

Customer:

No, I paid no debts with proceeds--parents did before death to qualify to resume Medicare.

Customer:

So, it seems your conclusions to my question can be summarized as follows, yes?:


1) 1st check to close account in mother's name at the nursing home - no taxes
2) 2nd check to close account in mother's name at the nursing home - no taxes
3) Life insurance check for father (private insurance) - no taxes
4) Fed employees group life insurance check for father (other 3 siblings also received a check for 1/4 of the total proceeds) - no taxes

I have since received the first of the below 3, and am expecting the other 2 later this year:
a) Check to close account in father's name at the nursing home - no taxes
b) Balance of father's retirement pay for month he passed away - 11/2012 - taxes
c) Expected proceeds for small life insurance claim in mother's name - no taxes

LEV :

Your assessments is correct.
Only distribution from retirement account will be taxable as income in respect of the decedent.
This income will be partially offset by the loss from the sale of the house.
The estate will also deduct some other expenses - for instance income tax preparation fees.

Customer:

Do not understand how house was ever part of estate, as they sold it before their death, and all proceeds were spent down to qualify for Medicare.

LEV :

No, house proceeds were gone before death.
In this case - the same transaction took place when your parents were alive - and is not related to the estate. The estate only includes assets owned by the decedent at the time of death.
If the house was used as a primary residence - the gain - up to $250,000 per person may be excluded from taxable income.

Customer:

The spending happened before their deaths, and the nursing home was their residence years later.

Customer:

Sorry I ever mentioned the house--thought you would want to know why it was not included in the list of things inherited.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 23251
Experience: Taxes, Immigration, Labor Relations
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