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My mother outlived my father and she has named me executor

of her estate. There are 3...
My mother outlived my father and she has named me executor of her estate.
There are 3 siblings and we are to share eveything in equal shares. I have put beneficiaries on all her financial assets except the house which the way the will reads goes to the estate which again means us three. Is there anything I should do differently. The estate total is less then $400,000
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Answered in 44 minutes by:
6/29/2013
Lev
Lev, Tax Advisor
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LEV :

Hi and welcome to Just Answer!
Appreciate for specifically requesting me.
Please let me some time to reply.

LEV :

Having beneficiaries on financial accounts will allow to avoid lengthy probate procedure and have access to these accounts immediately after the death.
Other options includes POD - payable-on-death (or TOD - transfer-on-death) provision on the account - which woudl have a similar effect. That will not affect the tax liability.
Inheritance is not taxable on the federal level. Income received AFTER the person dies is classified as IRD - income in respect of the decedent - and is taxed for beneficiaries or for the estate the same way as it woudl be taxed to the decedent if he/she were alive.
If the house is on your mother's name - it will be passed to her estate - but the Will will be probated - and that will take approximately 6 months plus some overhead. To avoid probate - your mother might create a living trust and transfer the property to the trust.
While the living trust generally ignored for income tax purposes - after the settler's death - the trust becomes irrevocable - means - it will be a separate legal and taxing entity. In this case probate would not needed. Your mother as a settler may be also a trustee and you could be named a succeeded trustee.
That is something you might want to consider.

Customer:

Are you saying by putting the house in a trust will make it taxable to the heirs? If a trust is set up does she loose ownership in the sense that her property taxes are frozen do to age and income.

Lev
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In most situations a living trust is used - which is a revocable grantor's trust. Such trust is ignored for income tax purposes - and if the trust received any income - such income is treated as received by the grantor. For instance - if the trust owns CD in the bank which earns interest income - that interest is reported on grantor's individual tax return.
The property transferred into the living trust - for property tax purposes is treated as owned by the grantor - and all benefits - including property tax reduction due to her age will be in effect - nothing will be lost.
However - the situation will changed after the grantor's death - the trust becomes irrevocable - and a named succeeded trustee will be in charge. After that the trust will be a separate legal and taxing entity.
That will help to avoid probate - but will not provide any tax saving.
So far - because inheritance is not taxable income in the US - so - if the house shortly after the death will be distributed to beneficiaries - that will not be a taxable income.
Despite the house would be owned by the trust - it will be included into grantor's estate for estate tax purposes and will get stepped up basis equal to the fair market value at the time of death. That means - if the house will be sold - shortly after the death - there will not be any gain - and nothing will be taxable. If you decide to keep the house in the trust for instance - several more years - and it will be sold later - for higher price - the gain will be taxable.
That is based on the current tax law.
Lev
Lev, Tax Advisor
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Hi Jack,
I noticed your another question about inherited IRA.
For income tax purposes - inheritance is not taxable income - so neither the estate nor beneficiaries are responsible for income taxes on the inheritance.

However the distribution from IRA account is classified as income in respect of the decedent (IRD) - and that is taxable income upon distribution - because the distribution will take place AFTER the death.


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.
Because your mother's estate is the beneficiary of the IRA - that income will be reported on the income tax return of the estate - and likely will be passed to beneficiaries.

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.

On form 1041 the taxable portion is reported on line 8 as Other income. If passed to beneficiaries - the taxable amount is deducted on line 18 and reported to beneficiaries on K1 forms - line 14.
www.irs.gov/pub/irs-pdf/f1041.pdf‎
www.irs.gov/pub/irs-pdf/i1041.pdf‎
www.irs.gov/pub/irs-pdf/f1041sk1.pdf


There are certain rules related to inherited IRA - generally you may spread distribution over several years and might be able to avoid large taxable income in any single year.

To accomplish that - you may rollover funds into so-called "inherited IRA" and spread distribution over several years - thus effectively will reduce and defer your tax liability.

Let me know if you need any details.
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