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What to do with "new" asset of closed estate

Unusual situation here. Decedent died in 1993. Estate Tax return filed and relevant taxes paid (taxable estate was over $600K) and estate closed in mid-1990s. In 1999, evidence was uncovered that a third party could have been responsible for the decedent's death (and others) (a la Erin Brockovich) and lawsuits are filed. In 2007, settlement is reached. The question is: how (and by whom) is the settlement reported for tax purposes. Does the executor reopen the estate and report the settlement as an asset of the estate? Or, do the beneficiaries report their shares of the settlement as some form of income? Or, is there some other way this is handled? Does the fact that the evidence that led to the lawsuit wasn't discovered until well after the estate was closed have any impact on the answer? Any advice or suggestions how to further research this would be appreciated. Ira Smilovitz

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Reply to
Ira Smilovitz
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"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

Reply to
Paul Thomas, CPA

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

Reply to
Stuart Bronstein

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

Reply to
Benjamin Yazersky CPA

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