1041 - Tax Return for An Estate


S

sgallagher

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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B

Benjamin Yazersky CPA

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.

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

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.

___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] >>>
-----> real address on hobokeni or hobokenx <-----
 
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E

ed

sgallag...@rogers.com said:
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 .........."
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.
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.
Don't file a return then.
Questions:

Are the class action awards still tax free?
YES

If yes, and the estate generates no other income, does she
still have to file a 1041 for the estate.
Yes if they (the estate income) are over $600
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.
NO it is a flow-through tax free settlement. No tax to the
1041 and no tax to mother.
P.S. As a side note, we have confirmed that there is no
"estate tax" due.
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
 
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K

Kreig Mitchell

sgallag...@rogers.com said:
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.

P.S. As a side note, we have confirmed that there is no
"estate tax" due.
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
www.irstaxtrouble.com
www.irstaxtrouble.com/blog.htm
 
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S

sgallagher

My father was receiving some class action awards prior to
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.
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.
Don't file a return then.
We weren't sure whether a return was required even if no
income was generated.

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

ed

...
We weren't sure whether a return was required even if no
income was generated.
Look at the instructions for form 1041 "Who must file" at
www.irs.gov and make your own decision.

ed
 
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S

sgallagher

My father was receiving some class action awards prior to
It sounds like there might be an estate tax due.
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.
Did you confirm that the right to future payments was
included in the estate?
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.
 
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S

Seth Breidbart

The estate has no assets as everything else was jointly
It sounds like there might be an estate tax due.
Why?

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.
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
 
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S

Stuart A. Bronstein

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 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.
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.
It's called actuarial value, and that kind of calculation is
done all the time. See IRS Publication 1457 here:
http://www.fvginternational.com/documents/tax/misc_tax/IRS_Pub_1457.pdf
or here: http://snipurl.com/1bxay

Stu
 
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S

sgallagher

It sounds like there might be an estate tax due.
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.
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.
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.
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.
 
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