1041 - Tax Return for An Estate

My father was receiving some class action awards prior to his death in 2006. They were not considered taxable to my father when he was receiving them. His death was not related to the class action cases. Some class action awards will be coming in for several years still, according to the lawfirm handling them. In order to continue receiving these awards my mother had to have his will probated in Florida and a bank account opened in the name of my father's estate, as awards will be "Payable to the Estate of .........." Part of this process was the issuance of an EIN for the estate. The estate has no assets as everything else was jointly owned, and passed into my mother's name. The IRS sent my mother a letter telling her to file a 1041 for the estate for 2006. The estate had no income in 2006. Questions:

Are the class action awards still tax free? If yes, and the estate generates no other income, does she still have to file a 1041 for the estate. If an award does come in, and she cashes the check in the estates bank account, and then transfers it into her personal bank account, is it considered taxable income to her. Thanks.

P.S. As a side note, we have confirmed that there is no "estate tax" due.

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Reply to
sgallagher
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I'm not going to address the issue of what is being collected is taxable or not. That is way beyond the scope of what can be addressed here. Sounds to me like the estate collected this class action award & distributed it to the beneficiary of the estate. You should read the instructions for filing form 1041 to determine if you need to file it. Same applies to any state income tax for an estate. This has nothing to do with the

706 - the estate tax. Just because your father's assets were held jointly & passed directly to your mother only is indicative that there is no probate estate. A 706 may still need to be filed, depending on many different factors. ___________________________________

-----> real address on hobokeni or hobokenx

Reply to
Benjamin Yazersky CPA

The payor wanted to be sure that mom was taking the money without paying the funeral bills, and that mom was the sole heir. There were simpler ways to do it than Probate, but the Probate shouldn't have cost you anything, or very little.

Don't file a return then.

YES

Yes if they (the estate income) are over $600

NO it is a flow-through tax free settlement. No tax to the

1041 and no tax to mother.

P.S> It will be unusual to keep an estate open for several years, but it looks like you'll have to. Maybe. after a year, they'll write the checks to mom and you can close out the estate with a final 1041. ed

Reply to
ed

It sounds like there might be an estate tax due. Did you confirm that the right to future payments was included in the estate? With regard to the other issues, it sounds as if you will want to review the income in respect of a decedent rules in order to report any taxable income. Your tax attorney or accountant should be able to easily address these issues for you. Kreig Mitchell

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Reply to
Kreig Mitchell

You're correct, the lawyer that we dealt with charged a flat $500, to have the will probated. A few lawyers wanted to collect a percentage of every award that might ever be ordered in the future and we walked away from them. The awards waiting to be paid have more than covered the $500 already.

We weren't sure whether a return was required even if no income was generated.

But since you say that the awards should still be tax free and I threw in the comment that if the estate generates no other income, it would appear that the $600 threshold would never be reached.

The lawyer handling the class action suits says to expect awards for the next few years, as they have multiple cases open. Thanks to all for their replies.

Reply to
sgallagher

Look at the instructions for form 1041 "Who must file" at

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and make your own decision.

ed

Reply to
ed

Are you truly referring to "estate tax" filed on form 706, or tax on the estate's income filed on form 1041? If you are referring to the former, and since the value of these awards cannot be determined unless and until they awarded, there would be no way to include them in the estate's gross value, currently. A question I have is whether, for estate tax purposes, can any future awards still be included under the estate tax exemption, if there is room, which there is. If you are referring to the latter, tax on income of the estate filed on 1041, then yes it would be prudent to check the rules on income in respect of a decedent. I will only add that they were not taxable to my father when he was alive.

My question would be how could the right to future payments be given any monetrary value prior to their cases being determined? The amounts that are received would have to be significantly higher than what is being expected before even pushing the value of the estate over the exemption amount. We don't expect more than a total of $5,000.

Reply to
sgallagher

Why?

If the money from the class action suit is in effect a refund for overcharges, then (unless the payments were deducted in the first place) they aren't taxable at all (though they should be included in the value of the estate). Seth

Reply to
Seth Breidbart

If it's a class action settlement or judgment, there is probably a schedule of payments to be made in the future. The present value of that future income stream can be determined and should be included in the taxable estate for estate tax purposes. It's like when you lend someone money, and they pay you back over time with interest. If you die your estate still has to include that asset for estate tax purposes.

It's called actuarial value, and that kind of calculation is done all the time. See IRS Publication 1457 here:

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here:
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Stu

Reply to
Stuart A. Bronstein

I see the misunderstanding. There's no schedule of payments because this isn't one class action settlement with multiple payments. It's multiple class action cases (against multiple manufacturers of the same type of product) with single payments. Some of the cases have yet to be settled, so there's no way of knowing what the payments will be (although they're not expected to be large). That's why it's not possible to know the future income or the value of the class action settlements at this time.

If this were as you had presumed, one settlement with a schedule of payments, it would be easy. As I explained above, it's multiple cases, and we don't know what the payments are going to be until the cases actually settle. But even so, the expected payments if included in the estate's gross value, would not even cause it to go anywhere near the exclusion for estate tax.

Reply to
sgallagher

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