2010 Estate Tax

[gman]

Taxpayer dies in 2010. He has several annuities with interest totaling 75,000.00. Will this be tax free to heirs since death was in 2010? Will a tax return be requred?
Prorated between the beginning of the year to date of death. None of the annuities were cashed until after death.

[FEDUKE404]

I'm confused

Heirs generally don't pay any tax in the first place, except upon later disposition of or income from the asset received.

As for the deceased, sounds as if the annuities could be an estate issue. ("2010 is a good year to die.")

One would think a 2010 income tax return for the deceased may still have to be filed, depending upon the total income/date of death/etc.

"Follow the 1099's, Luke......."

FE

[DaveO]

If the money from the annuity would have been taxable to the decedent it will be taxable to their heir. The demise of the Estate tax has nothing to do with income tax. unless there are more assets than the $75k mentioned no Estate Tax Return will be needed. An Estate Income Tax return may or may not be required same as for the Decedent's Final return. The filing reqirement is determined for each return independent of the other returns.

[FEDUKE404]

Clarification

.... The demise of the Estate tax has nothing to do with income tax. unless there are more assets than the $75k mentioned no Estate Tax Return will be needed.

Bad choice of words on my part. Obviously a "mere" $75k estate will not be subject to any federal estate tax (with or without the 2010 issues).

What I should have said was that the annuities etc may be part of the legal filings with the state/county of residence, regardless of any estate tax issues. For that reason, it would be necessary to determine when the change in ownership of the annuities actually occurred, to include inside/outside of probate and related beneficiary or non-beneficiary.

Regardless, it is likely the recipients at some point will have some income tax exposure.

Along a similar line, one would think the annuities were generating some (taxable) income to the decedent in prior years and before death in 2010?

FE

[DaveO]

Depending on your local laws there may be inheritance tax issues to be sure. If the decedent hadn't withdrawn any funds from them there wouldn't be any taxable income. There are so many kinds of annuities out there you may need to do some research to determine taxability. I encountered a pre-TEFRA annuity a while back and battled the IRS and the insurance company for almost a year over the taxability of the withdrawals.

[appelman]

Forget about inheritance tax.

You cannot even file an estate tax return for 2010. Form 706 doesn't exist! As DaveO points out, the question is one of income tax to the beneficiaries of the annuities. If the annuities are paid out, I would think that SOMEONE is going to be taxed on the value over basis. (I don't think you can ever step up the basis of an annuity!)

[Snaggletooth]

Type of Annuity

There are all manner of annuities.

What often becomes an issue is the type that are tax-DEFERRED. These are often sold to high income taxpayers as a feature which saves taxes and pushes the taxability into later years when income is low. These things become IRD (Income in Respect of Decedent), which means they are treated the same in the hands of the beneficiary as they would in the hands of the decedent.

If your experience is the same as mine, tax-savvy clients who purchase these in their productive years most likely are in an even higher income bracket AFTER they retire. Most commonly, they do not cash out such annuities for fear of launching taxable income. So the annuities become part of their estate, and the beneficiaries end up with IRD.

The fact that an estate tax is not filed in 2010 (or any other year for whatever reason) does not spare the beneficiaries from IRD.

[Burke]

What I should have said was that the annuities etc may be part of the legal filings with the state/county of residence, regardless of any estate tax issues. For that reason, it would be necessary to determine when the change in ownership of the annuities actually occurred, to include inside/outside of probate and related beneficiary or non-beneficiary.
FE

If the annuities named a beneficiary, like life insurance they will not pass through probate, and the estate has no control over the asset. The insurance company will pay benefits directly to the bene's depending on what kind it was (IRA, TDA, etc) according to the appropriate rules. Basically, the beneficiary will pay income tax as it is paid out to them individually, over and above any basis the annuitant/owner had in the product. They will receive a 1099-R each year benefits are received. If the estate was named beneficiary or by default (named bene's were deceased, for example) then the estate receives the proceeds, it does go through probate, and it is paid out to the heirs in the process of normal distributions at the direction of the executor (taxable income first.)