What to do with "new" asset of closed estate

"Ira Smilovitz" wrote

A similar event happened with a now former client of mine. About three years after she passed, and her personal as well as a decedents estate was settled and we thought closed, her son called to inform me that they "found" some assets and income that mom had. Short story is we filed another decedents estate return showing the additional income, and each beneficiary ended up with another K-1 with the resulting income. The basis in the asset though was not income, nor did this push the decedent's estate over the cap. When I asked the IRS how to proceed, they just said to "file another return" with explanations attached, which we did and haven't heard a peep.

-- Paul A. Thomas, CPA Athens, Georgia

The "Subject" you assign this query aggravated by how you state the underlying facts (e.g., your apparent presumption that someone, whoever it may be, is obliged to report the proceeds of the settlement to which you refer "as some form of income [sic]") raises but also begs the question: Why do you presume but without citing any provision of federal or state law that the proceeds of a wrongful death lawsuit the underlying claim of which was not made until after the deceased's death (so that not even a pre-suit claim much less the wrongful death lawsuit itself was pending while the decased was alive)* is an "asset of [whether or not a] closed estate" for estate tax or anyone's income tax purposes? (You also do not say in your posting whether the settlement was negotiated/worded to make clear that no portion of the settlement payment is recompense for punitive damages or anyone elses's other than the deceased's emotional stress; although, depending on the facts in these respects, these issues might raise other taxation questions.)

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• Distinguish the requirement that the value of a cause of action for the benefit of an estate, if pending when decedent died, must be estimated and included in the federal gross estate to be reported on the federal estate tax return (see Fed. Est. Tax Regs. § 20.2033-1).

It seems to me that it will depend on state law, who were the owners of which causes of action, and which payments were made on which causes of action. For damages paid on account of personal injuries (but not including punitive damages) there is no tax. For damages paid on account of other things like loss of earnings, tax would be payable. If state law says the estate is the owner of a cause of action for which taxable income is paid, the estate is the one that would claim the income and pay taxes. Generally, though, it's the survivors who are the owners of the cause of action, so they would be the ones who are taxed. Stu

knee jerk answer

file a new 706, as the statute is long expired & there may be a state estate filing required its not entirely clear by your message if the settlement is taxable income or not, so you should check into the nature of the settlement for income tax matters

The "Subject" you assign this query aggravated by how you state the underlying facts (e.g., your apparent presumption that someone, whoever it may be, is obliged to report the proceeds of the settlement to which you refer "as some form of income [sic]") raises but also begs the question: Why do you presume but without citing any provision of federal or state law that the proceeds of a wrongful death lawsuit the underlying claim of which was not made until after the deceased's death (so that not even a pre-suit claim much less the wrongful death lawsuit itself was pending while the decased was alive)* is an "asset of [whether or not a] closed estate" for estate tax or anyone's income tax purposes? (You also do not say in your posting whether the settlement was negotiated/worded to make clear that no portion of the settlement payment is recompense for punitive damages or anyone elses's other than the deceased's emotional stress; although, depending on the facts in these respects, these issues might raise other taxation questions.)

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• Distinguish the requirement that the value of a cause of action for the benefit of an estate, if pending when decedent died, must be estimated and included in the federal gross estate to be reported on the federal estate tax return (see Fed. Est. Tax Regs. § 20.2033-1).