IRA with beneficiary count as estate income

What is the name of your state? New York

My question is in regard to estate income tax.
My widowed mother died 4/2007 and I am trying to close her estate.
The modest estate consists of house,car,cash,bonds,life insur,IRA and were valued at a total of about $300,000, so I believe it is not subject to estate "death"tax.

House & car sold at a loss that offsets the income from the interest on bonds.
The IRA had beneficiaries and separate beneficiary IRAs were established in both mom & bene. names
I don't think that we owe estate income tax, but my probate atty thinks the whole IRA counts as income to the estate. Is he right?
If I'm right and we don't owe income tax, do I still need to file an estate income tax form?

Any IRAs, 401ks or life insurance that had named beneficiaries (other than to the estate) are NOT part of the decedent's "estate. Those pass outside probate.

Tax wise, they are a part of the estate. Well, not all, but some.

tranquility said:

Tax wise, they are a part of the estate. Well, not all, but some.

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LIfe insurance?

I think I'm getting tripped up because it seems to me that what is considered part of the "estate" is different when talking about estate tax, estate income tax, or probate.
Here is what I had in my head - I'd really appreciate it if you can tell me where I'm going wrong.

when looking into "estate tax", I found a publication from an expert who said that the IRS view is that since the IRA owner (Mom) had a right to the money inside the IRA at the time of her death, the IRA was part of the estate and subject to estate tax.

in regard to "estate income tax", I thought that only money brought into the estate after my mother's death was taxable for the income tax.
If the estate had been the IRA beneficiary, we would have had to pay "estate income tax" on the IRA and file an "estate income tax return" 1041. But since there were named beneficiaries, it is the beneficiaries that would be paying income tax when they received distributions from the bene.IRAs.
I'm hoping the only income we would be dealing with is the interest from the savings bonds which were cashed after her death.

Everyone agrees that the life insurance and IRA passed to the beneficiaries outside of probate, but the attorney said it might be possible that it counts when it comes to calculating the probate costs by the court.

I'm using my Mom's attorney to probate the estate and deal with the taxes, and this is commonly part of his practice in her small town. He doesn't inspire a lot of confidence, but I don't have any real reason to question his competence. It's just that his tone seemed a little flippant, and since it was contrary to what I had supposed the case to be, I thought I should look into it before we met again.

Thanks so much for looking at this. You're so incredibly generous with your time.

Life insurance is part of the "gross estate" for estate tax purposes (unless the policy is owned by someone other than the deceased more than 3 yrs before death), even though it does not go through probate and named beneficiaries are not taxed directly. That is something I learned when another poster was trying not to have his insurance included in his gross estate to his girlfriend. Any insurance going to spouse is deducted from gross estate before figuring estate tax. Annuities are also part of gross estate (unless a qualified IRA). See IRS.gov Form 706 and instructions, and Publication 950.

I do NOT believe that IRA's with real people as beneficiaries are part of gross estate (unless the estate or a trust is the beneficiary). Tax deducted contributions and gain from inherited IRA's (except Roth) do get taxed when distributed from the account, but undistributed amounts can remain tax deferred until distributed if you properly follow all the rules for beneficiaries. If IRA's are not properly handled, the tax can be due much sooner at a likely higher tax rate.

If there is any doubt figuring it all out, seek an estate professional. For example if a significant IRA is handled improperly, it can cost you big time.

tired executrix said:

The IRA had beneficiaries and separate beneficiary IRAs were established in both mom & bene. names
I don't think that we owe estate income tax, but my probate atty thinks the whole IRA counts as income to the estate. Is he right?
If I'm right and we don't owe income tax, do I still need to file an estate income tax form?

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Income from IRA's occurs when distributions from the IRA's are made. If the IRA was properly split and re-titled, then there was no distribution and, therefore, no income for the estate.

If I recall correctly, the income threshold for an estate is $600 before the estate must file a federal return. Don't know about New York.

efflandt said:

I do NOT believe that IRA's with real people as beneficiaries are part of gross estate (unless the estate or a trust is the beneficiary).

.... For example if a significant IRA is handled improperly, it can cost you big time.

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Unfortunately, as many people find out, they are part of the gross estate. That is why a lack of planning can result in 60%+ of IRA being drained away by various taxes.

Instead of an attorney, you should try to consult with a CPA or tax accountant who has experience with filing estate tax returns to get your questions answered.

Just for my own curiosity and education, where does IRS Form 706 or instructions mention Individual Retirement Account, 401(k), 403(b) or similar when figuring the gross estate?

Form 706 Schedule "I" regarding Annuities, mentions IRA in relation to "individual retirement arrangements" for "annuity" contracts or similar. But that does not appear to apply to individual retirement accounts and other retirement accounts that are not an annuity as defined there.

efflandt said:

Just for my own curiosity and education, where does IRS Form 706 or instructions mention Individual Retirement Account, 401(k), 403(b) or similar when figuring the gross estate?

Form 706 Schedule "I" regarding Annuities, mentions IRA in relation to "individual retirement arrangements" for "annuity" contracts or similar. But that does not appear to apply to individual retirement accounts and other retirement accounts that are not an annuity as defined there.

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I don't believe that it mentions them specifically and I admit that I am not certain where they would go on Form 706.

But, there is nothing that excludes them from the gross estate. Certain states may exclude IRA's and other retirement plan assets from state estate/inheritance taxes, but not the feds.

The Gross Estate of the decedent consists of an accounting of everything you own or have certain interests in at the date of death (Refer to Form 706). The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your "Gross Estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. Keep in mind that the Gross Estate will likely include non-probate as well as probate property.

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