proceeds from house sold in estate?

This isn't exactly a tax question. It would depend on the precise wording of the will, and possible state law, to see if this is legitimate.

But it seems to me the estate's taxes would be screwed up if this is done. I cannot be sure, but I think what the estate should report on its income taxes is an installment sale of the house, and distribution of the monthly payments, which would lead to 1041 Schedule K-1s being sent to the beneficiaries. (Also depending on state law), capital gains are usually not considered "income" for the purpose of distribution of income to beneficiaries, so the estate may retain more income than is helpful. It would probably not be correct to directly allocate the interest and capital gains from the sale directly to the beneficiaries, unless the will requires that it be done.

-- Arthur L Rubin CRTP, AFSP (2015; 2016 pending) in Brea, CA

who "took back the mortgage"?

The will was very simple; it just called for splitting her assets between her two children. The only assets, other then the jointly held bank accounts, were a car that was given away, and the house.

It is New York State.

I was thinking the estate should keep the payments and distribute them when it is settled, along with the downpayment it has kept.

The house was sold for $38,000, with $5,000 down. The payments to date are obviously very small.

Good question; I had to look it up. The mortgagees are my wife and BIL. It beats me how they could take back a mortgage on a house the estate owns. Maybe this is where the K-1s come in. ARRGH. Should have found a better lawyer.

Assuming this is legal, the estate _distributed_ the (right to) the mortgage to the beneficiaries. Taxation of a distributed income-producing asset which contains a built-in capital gain is beyond me.

If the estate elects out of installment reporting on the sale of the house or if the sale was at a loss so that installment reporting is not allowed, I think the transaction can be separated sufficiently so that taxation can be handled.

Alternatively, if the estate closes in the same tax year the house is sold (noting that estates can select a non-calendar tax year for no reason at all), it might be possible to consider this a transfer of the house to the beneficiaries followed by a sale, rather than the other way around.

Should have bought a squirrel found a better lawyer.

(Will explain the humor privately, if needed).

-- Arthur L. Rubin CRTP, AFSP (2015), in Brea, CA

Here is my interpretation:

Your wife and BIL each got the cash from the joint bank accounts and the house was sold for a cash down payment and a mortgage. The mortgage on the house is an asset that was distributed from the estate to your wife and BIL (that is why your wife and BIL are mortgagees). The only asset left in the estate is the cash down payment from selling the house and the lawyer is hanging on to pay for any remaining estate espenses (probably 2015 legal and tax prep expenses).

It sounds like the estate is nearly settled. Most of the estate assets have already been distributed to your wife and BIL. The remainder should be sent to wife/BIL after the estate's 2015 tax return is prepared and filed.

First of all, if the "joint" accounts are joint tenancy accounts, they are not part of the probate estate, but automatically belong to the surviving joint tenant.

While estate assets generally are held in the estate until final distribution, it is possible that state law allows earlier distribution as long as enough is kept in the estate to pay for all estate expenses.