Income taxes when I die

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
ikowik
Posts: 392
Joined: Tue Dec 23, 2014 5:52 pm

Income taxes when I die

Post by ikowik »

I and my spouse wish to discuss this with our only child to have her prepared and informed. We have a straightforward plan leaving what is left to our daughter via Beneficiary designations and prepared Wills. Once both of us are dead, how is the income tax for the last year filed? Can our daughter file it for us? Do investment companies send tax information to the Beneficiary for that account?
prd1982
Posts: 1786
Joined: Sun Jan 08, 2017 3:43 pm

Re: Income taxes when I die

Post by prd1982 »

That is one of the jobs of the executor. The executor also contacts the financial firms. You should get 2 sets of 1099s, if your executor is lucky: one for the time before your death, and one for the time afterwards. If she only gets one set, she will have e to split the reported proceeds between the 2 periods. She will need to create 1099s for the period after death, Two income tax forms must be filed: your last 1040, and one for the estate. The estate 1041 might want to create K-1s to pass any estate income to the beneficiaries.

I’m sure there are lots of exceptions to this process, but I think the above description is common.

Thanks Spike for pointing out my mistake.
Last edited by prd1982 on Sun Oct 17, 2021 2:19 pm, edited 1 time in total.
Spike Holland
Posts: 14
Joined: Fri May 29, 2020 10:34 pm

Re: Income taxes when I die

Post by Spike Holland »

prd summarized it well, although I believe the estate would issue K-1's (not 199's) to the estate beneficiaries to pass on estate income to them.

Spike
Spike Holland
Posts: 14
Joined: Fri May 29, 2020 10:34 pm

Re: Income taxes when I die

Post by Spike Holland »

Sorry for the typo. I meant 1099's, not 199's.

Spikee
tibbitts
Posts: 23716
Joined: Tue Feb 27, 2007 5:50 pm

Re: Income taxes when I die

Post by tibbitts »

prd1982 wrote: Sun Oct 17, 2021 1:55 pm That is one of the jobs of the executor. The executor also contacts the financial firms. You should get 2 sets of 1099s, if your executor is lucky: one for the time before your death, and one for the time afterwards. If she only gets one set, she will have e to split the reported proceeds between the 2 periods. She will need to create 1099s for the period after death, Two income tax forms must be filed: your last 1040, and one for the estate. The estate 1041 might want to create K-1s to pass any estate income to the beneficiaries.

I’m sure there are lots of exceptions to this process, but I think the above description is common.

Thanks Spike for pointing out my mistake.
I don't understand the 1041, but I have very limited experience with this situation. I had to deal with preparing a 1041 (and getting a Tax ID number, etc.) due to a trust being involved, but without a trust would there even be "estate" income? I would think income would be either be the parents', on their 1099s and filed with their final return, or the child's, filed on her 1099.

Having said that, the odds of both parents passing away simultaneously seem remote.
bsteiner
Posts: 9208
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Income taxes when I die

Post by bsteiner »

tibbitts wrote: Sun Oct 17, 2021 2:39 pm ... but without a trust would there even be "estate" income? ...
The estate might have income between the date of death and when the executor distributes the assets.
Retired Bill
Posts: 105
Joined: Sun Sep 12, 2021 5:18 pm

Re: Income taxes when I die

Post by Retired Bill »

It may not be quite as complex as mentioned above. If nothing is subject to the will (subject to probate), but rather everything goes to your daughter either as beneficiary, TOD, POD, JTWROS listed on the titled accounts and property, then you daughter is the owner and subject to tax on any income the property generates after date of death, and income earned received before death of death is taxable on the decedent's final return. Your daughter could prepare your final return and sign it as personal representative for decedent. The IRS instructions for Form 1040 cover this situation.

As far as getting a financial institution to issue 2 separate 1099's before and after date of death, that just does not happen. Depending on how accounts titled, your daughter will need to first obtain death certificates. Armed with the death certificate(s) and personal identification she should then be able to get the property and accounts transferred into her name. This can happen as fast as 30 days or less, but tends to run longer, and much longer if something subject to probate. Once accounts re-titled the financial institutions will issue 1099's for each account. The IRS has instructions on what to attach to the decedent's tax return and the heirs returns if you split a 1099 amount between two different returns. If amounts involved are small, most tax preparers' just ignore the split. Larger amounts, yes, prepare the Form 1041 for the period of administration of the estate as noted above. It's a judgement call based on how much tax involved.

If the estate has IRA's subject to RMD's, your daughter needs to make sure the RMD has been taken for the year of death. For this reason I usually recommended clients take their RMD once a year in January, or set it up for automatic monthly distributions on the 1st of the month so the beneficiary can avoid dealing with this if death is near end of year. Most financial institutions will not talk to her even if listed as TOD, POD, beneficiary, until she provides proof of death. Personally, I also provide my children with a net worth statement showing asset/liability descriptions, account name/description, account number/legal description, contact phone numbers/address, insurance details (health, life, property, liability, etc.) on an annual basis. The net worth statement or another statement can include location of safe deposit box, details of credit cards, web site user names/passcodes and other information. You can include a personal "last letter" or link to or media of final conversation in your safe deposit deposit if you are inclined.
User avatar
Watty
Posts: 28859
Joined: Wed Oct 10, 2007 3:55 pm

Re: Income taxes when I die

Post by Watty »

ikowik wrote: Sun Oct 17, 2021 12:22 pm Once both of us are dead, how is the income tax for the last year filed?
It is easy to overthink this.

After my parents died one of my siblings was in charge of the estate. They just collected the paperwork and handed it over to an accountant to do the final tax return.

I am sure there there were some follow-up questions that the sibling that was the executor had to handle but the accountant took care of everything that needed to be done.

Unless money is real tight and it is a small estate then having the taxes professionally done is well worth the modest cost.
Fired2020
Posts: 39
Joined: Sat Jan 23, 2021 3:12 pm

Re: Income taxes when I die

Post by Fired2020 »

Question for the OP: Does your daughter live close to you, and will she have access to your USPS mail if you pass?

I've settled two estates, and found that the Post Office will not process a mail-forwarding request without articles of administration from a probate court. There are...ways around this but it's something that an administrator should be prepared for. Having passwords to your financial accounts would be a way around this as it would allow access to 1099 forms.
Soon2BXProgrammer
Posts: 3289
Joined: Mon Nov 24, 2014 10:30 pm

Re: Income taxes when I die

Post by Soon2BXProgrammer »

tibbitts wrote: Sun Oct 17, 2021 2:39 pm
prd1982 wrote: Sun Oct 17, 2021 1:55 pm That is one of the jobs of the executor. The executor also contacts the financial firms. You should get 2 sets of 1099s, if your executor is lucky: one for the time before your death, and one for the time afterwards. If she only gets one set, she will have e to split the reported proceeds between the 2 periods. She will need to create 1099s for the period after death, Two income tax forms must be filed: your last 1040, and one for the estate. The estate 1041 might want to create K-1s to pass any estate income to the beneficiaries.

I’m sure there are lots of exceptions to this process, but I think the above description is common.

Thanks Spike for pointing out my mistake.
I don't understand the 1041, but I have very limited experience with this situation. I had to deal with preparing a 1041 (and getting a Tax ID number, etc.) due to a trust being involved, but without a trust would there even be "estate" income? I would think income would be either be the parents', on their 1099s and filed with their final return, or the child's, filed on her 1099.

Having said that, the odds of both parents passing away simultaneously seem remote.
Easy example.. If you have a taxable investment account, that doesn't have a "Transfer on death" designation, but passes via will/probate, one could easily have dividends/interest while the assets are in the estate. Or if the executor chooses to sell the investments, that would either have a gain or loss from the step up value.

Vanguard doesn't allow Transfer on death beneficiaries on joint accounts. So if both spouses simultaneously die, it will go through probate.
More common though is one has a joint account, then one spouse dies, and the survivor doesn't add a beneficiary/transfer on death provision to the account. This is pretty common if the spouse that is alive is in a diminished mental capacity, and therefore can't actually make the update.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
tibbitts
Posts: 23716
Joined: Tue Feb 27, 2007 5:50 pm

Re: Income taxes when I die

Post by tibbitts »

bsteiner wrote: Sun Oct 17, 2021 2:54 pm
tibbitts wrote: Sun Oct 17, 2021 2:39 pm ... but without a trust would there even be "estate" income? ...
The estate might have income between the date of death and when the executor distributes the assets.
Yes, I guess I with the mention of beneficiary designations, I was thinking all the income-producing assets would be transfer/pay-on-death, with the disposition of the personal possessions left for the will. In my case all the income producing items were in the trust, and just the miscellaneous possessions left for the will.
donall
Posts: 1079
Joined: Tue Mar 13, 2012 6:45 am

Re: Income taxes when I die

Post by donall »

As Executor/Trustee, apply for an EIN for the Trust or estate. If you have both, apply for an EIN for the Trust. With an EIN, death certificate, and any other documents such as Trust agreement open a checking account at a bank, brokerage, credit union. The checking account is where you should pay estate expenses, deposit refunds, deposit house proceeds, and income, etc. Distributions to beneficiaries can be done through this account. Keep an accurate spreadsheet of income, expenses, and distributions for the accountants to prepare the final 1040 and 1041 tax forms. Income and expenses before death will be on the 1040. Income and expenses after death belong on the 1041. The accountants can determine the best classification for some expenses. Separate tax forms should be generated for any accounts with the new EIN.

But if I gave those directions to one of my kids, their eyes would glaze over after the first sentence. If your daughter is your primary beneficiary, add her to your checking or savings account. She can use the funds in the joint account to fund the trust/estate checking account. Pick an accountant that specializes in estate returns. Have your daughter follow their directions.
:D
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Income taxes when I die

Post by celia »

Retired Bill wrote: Sun Oct 17, 2021 4:13 pm As far as getting a financial institution to issue 2 separate 1099's before and after date of death, that just does not happen.
Yes it will, if you move the assets to a new account. Then a separate 1099 will be issued for each account: the account opened during parents' life (and taxable to them) and for the beneficiary's account (which is taxable to the beneficiary).
Depending on how accounts titled, your daughter will need to first obtain death certificates. Armed with the death certificate(s) and personal identification she should then be able to get the property and accounts transferred into her name.
Now the second account is open!
Once accounts re-titled the financial institutions will issue 1099's for each account.
To clarify, the 1099s are issued after the end of the year. You don't file the deceased's taxes right after they die, unless they died in December. :oops:
Topic Author
ikowik
Posts: 392
Joined: Tue Dec 23, 2014 5:52 pm

Re: Income taxes when I die

Post by ikowik »

Many thanks for all who replied, I found everyone of them helpful. To clarify and answer some questions:
-It was not clear in my post, I did not mean a situation where both of us die together, though possible since we plan some traveling, corona permitting. I was thinking of what would happen when the survivor between myself and spouse dies, and daughter will have to address filing of income tax returns for that year.

-Daughter does not live close by, and this is a good point regarding access to US mail. I have an individual password account with 1Password, could convert it to a Family account and give access to daughter. But then there was a recent thread on the legality of accessing a dead person's online account. We have written instructions on possible liabilities (utility bills, property taxes etc;) which she could follow.

-Yes, I am probably overthinking this. Tends to happen with me :D

-Despite my best efforts, I see some assets which are not easily transferable by Beneficiary designation- house, and as one of you posted above, we have a joint Brokerage account at Vanguard that does not allow designation of a Beneficiary. Annoying.
-I agree and appreciate the suggestions to seek good tax and legal help as needed. Daughter will have enough to deal with otherwise.
-It is reassuring to read that once our investment accounts have been transferred to our daughter, separate 1099s will be issued for before and after.

-Lastly, do I have to explicitly appoint daughter as executor of our estate? I though Beneficiary designations and a good Will would be enough.
SuzBanyan
Posts: 2015
Joined: Thu Jun 02, 2016 11:20 am

Re: Income taxes when I die

Post by SuzBanyan »

ikowik wrote: Mon Oct 18, 2021 6:42 am-snip-

-Lastly, do I have to explicitly appoint daughter as executor of our estate? I though Beneficiary designations and a good Will would be enough.
The executor is usually named in your will. Doublecheck that you have named your daughter (probably as a successor if your spouse has passed away).
bugleheadd
Posts: 920
Joined: Fri Nov 29, 2019 10:25 am

Re: Income taxes when I die

Post by bugleheadd »

general question: if no executor is named, would the IRS go after the daughter if no income taxes are filed for deceased parents?
Katietsu
Posts: 7676
Joined: Sun Sep 22, 2013 1:48 am

Re: Income taxes when I die

Post by Katietsu »

The original post expressed concern about filing income taxes. On the list of things to worry about, this would be low on my list. The IRS has some of the most flexible rules there are regarding post death financial dealings. Pretty sure that if there is no executor/personal rep and no surviving spouse, I could even file my neighbor’s tax return with some stipulations.

What the OP can do is to keep the daughter informed as to where to find the information needed to easily complete the tax returns. Are there paper files? Are documents such as past statements and tax returns electronic? Is the cost basis of assets documented just in case they need to be sold by a surviving spouse?

Also, the scenario seems to presume that there is a black and white line between at least one parent being alive and handling tax returns and both parents deceased with the daughter taking responsibility. In my personal experience, this is often not the case. A surviving spouse might need help if the deceased spouse was the one who handled finances. And most of the situations where I have been involved had a period at the end of life of at least months where an illness necessitated assistance from another on managing financial matters. Have you made plans for such a scenario? POAs? Trusts?
miket29
Posts: 1065
Joined: Tue Jun 20, 2017 9:07 pm

Re: Income taxes when I die

Post by miket29 »

ikowik wrote: Mon Oct 18, 2021 6:42 am -Despite my best efforts, I see some assets which are not easily transferable by Beneficiary designation- house, and as one of you posted above, we have a joint Brokerage account at Vanguard that does not allow designation of a Beneficiary. Annoying.
This issue goes away if the house and brokerage accounts are held in a living trust. According to some posters probate is not that big a deal in some states. I happen to live in on, CA, where it is a hassle. Having these assets held in a trust means that your daughter can be the successor trustee and then transfer the assets as successor trustee to herself or to whomever you designate in the trust (eg. gifts to charity, etc)
Topic Author
ikowik
Posts: 392
Joined: Tue Dec 23, 2014 5:52 pm

Re: Income taxes when I die

Post by ikowik »

SuzBanyan, thanks. I checked and our Wills have clear language about Executor of estates. We have named each other as Executor, and "in the event that, ....., shall for any reason fail to qualify or cease to act as Executor", my daughter is nominated as Executor of the state. I am not sure if this covers the contingency of the first nominee being alive but not cognitively functional to act as Executor. It is not clear how the "for any reason fail to qualify" part will be interpreted.

Katietsu, thank you. Your post is very relevant to us. When we had our wills drafted by a lawyer, there was no mention of a Power of attorney at all, and we did not discuss the scenario of incapacity rather than death. Recently I became aware and am in the process of getting POAs. The pandemic held up notarization, but this process also made us aware that POA authority ceases once the grantor dies. Then the Executor of the state has to take over. Hence my original question.

miket29, thanks. I will have to think this over. We have shied away from trusts on the general notion that these are unnecessarily complicated for our situation, but will have it give it more thought now.
Post Reply