Final pension payment is IRD

[cwatt]

My mother-in-law, an Illinois resident, passed away on June 19 of this year. She received a final pension payment on July 1, which I believe is income in receipt of decedent as defined by IRC §691. The rest of her assets are either in her separate trust or her late husband's trust, both of which have their own FEINs. Consequently, the only item of income that should be reported by the estate, as I see it, is the final pension payment of about $2,000. Given this, would you open a separate FEIN for her estate, or would you simply report the $2,000 pension payment on her final return?

To add to this, she also had some medical insurance premiums withheld from the final payment. If we do report the payment on her estate 1041, must we still deduct the premium, along with her other medical expenses, on her final 1040? I'm thinking yes based on my reading of Publ. 559.

Thanks for your advice.

 

[davew128]

Ordinarily pension received after death would be IRD. I would question whether the estate was entitled to the payment though, as either a named beneficiary should receive payments after death or payments cease which means the money should be returned.

The premium would go on her final return, but again, I question what it was for, as it seems rather foolish to make July insurance premiums on a dead person who passed in June.

 

[cwatt]

Thanks for your comments. The payment was actually for the month of June; her pension payments were made in arrears. She definitely was entitled to the July 1 payment; I confirmed that with the payer. She was the surviving spouse, so no beneficiary was named and no further payments are due. Consequently, it appears the final payment needs to go on the Form 1041 for her estate.

You basically confirmed what my thoughts were. I just hate to have to apply for a separate FEIN and file an estate 1041 if the only thing on it will be the pension payment -- but that's life in the tax world. The income will pass through to the two beneficiaries under the terms of her will.

It looks like I'll need to prepare three 1041's -- one for her estate, one for her (now irrevocable) trust, and one for her late husband's trust. Fortunately the trusts already have FEIN's, and I've been filing 1041's for them all along.

 

[LdiJ]

Thanks for your comments. The payment was actually for the month of June; her pension payments were made in arrears. She definitely was entitled to the July 1 payment; I confirmed that with the payer. She was the surviving spouse, so no beneficiary was named and no further payments are due. Consequently, it appears the final payment needs to go on the Form 1041 for her estate.

You basically confirmed what my thoughts were. I just hate to have to apply for a separate FEIN and file an estate 1041 if the only thing on it will be the pension payment -- but that's life in the tax world. The income will pass through to the two beneficiaries under the terms of her will.

It looks like I'll need to prepare three 1041's -- one for her estate, one for her (now irrevocable) trust, and one for her late husband's trust. Fortunately the trusts already have FEIN's, and I've been filing 1041's for them all along.

I doubt that an estate return is necessary. The pension payment should go on her personal 1040. The payer is going to report it on her personal 1099-R and it would simply cause problems not to include it on her personal return.

 

[davew128]

I doubt that an estate return is necessary. The pension payment should go on her personal 1040. The payer is going to report it on her personal 1099-R and it would simply cause problems not to include it on her personal return.

You know better than that. Even wages unpaid before death go on the 1041.

OP, I will suggest that you make an election to treat the irrevocable trust as an estate and file one return for both entities.

 

[cbg]

A word in the health insurance premium...If the pension payments were in arrears, it's likely that the health insurance payments rolled backwards and not forward. A payment made on June 30 that was for the month of June would not be withholding for July - the health insurance premium would also be for June.

 

[LdiJ]

You know better than that. Even wages unpaid before death go on the 1041.

OP, I will suggest that you make an election to treat the irrevocable trust as an estate and file one return for both entities.

Sorry but I disagree. Deferred wages would be included on an estate return but not current wages. Current pension payouts are no different. What's more, from a purely practical standpoint (as I previously mentioned) the money will be included on the final 1099-R for the deceased. If its not included on the final 1040, the person responsible for the estate will end up getting a CP-2000 regarding the mismatch a year or so down the road, for reporting a different amount of the 1040 than what was reported on the 1099-R.

 

[davew128]

A word in the health insurance premium...If the pension payments were in arrears, it's likely that the health insurance payments rolled backwards and not forward. A payment made on June 30 that was for the month of June would not be withholding for July - the health insurance premium would also be for June.

Either way its deductible on the final 1040 not the 1041.

 

[davew128]

Sorry but I disagree. Deferred wages would be included on an estate return but not current wages. Current pension payouts are no different.

I will disagree because the nature of a pension is different than wages. It would be helpful though to get clarification on the nature of the pension as a defined benefit payment would be viewed differently than a payment from an IRA or a defined contribution plan.

What's more, from a purely practical standpoint (as I previously mentioned) the money will be included on the final 1099-R for the deceased. If its not included on the final 1040, the person responsible for the estate will end up getting a CP-2000 regarding the mismatch a year or so down the road, for reporting a different amount of the 1040 than what was reported on the 1099-R.

Such a reporting issue is easily dealt with as with any other incorrect 1099 reporting.

 

[cbg]

Either way its deductible on the final 1040 not the 1041.

Not debating that point. You know more about that than I do. I'm just referring to a reference made earlier about premiums for the month of July. For some reason everyone seems to assume that health insurance premiums always roll forward, when actually they rarely do.

 

[cwatt]

It would be helpful though to get clarification on the nature of the pension as a defined benefit payment would be viewed differently than a payment from an IRA or a defined contribution plan.

The pension plan was a defined benefit plan provided by the Teachers' Retirement System of Illinois. It provided equal monthly payments payable for the retired teacher's lifetime, with a monthly survivor benefit payable to the surviving spouse for her further lifetime. The monthly payment stream ceased upon the death of the survivor. No further payment of any kind will be made.

The monthly pension payments were made on the last day of the month and pertained to that particular month. In this case the surviving spouse was entitled to payment for the month of June since she died during the month of June. The payment was dated June 30, 2014 and will be included on the 1099R issued for the 2013 tax year along with all of her earlier payments in 2013.

The pension was not an IRA distribution, and the plan was a defined benefit plan, not a defined contribution plan.

By the way, her final periodic payment was dated June 30, not July 1 as I believe I stated in previous posts. Her payments were always dated as of month end and represented payment for that month. My mistake.

Such a reporting issue is easily dealt with as with any other incorrect 1099 reporting.

How so? I'm not sure you can nominee this out as you can interest and dividends. An explanatory attachment, perhaps?

 

[LdiJ]

The pension plan was a defined benefit plan provided by the Teachers' Retirement System of Illinois. It provided equal monthly payments payable for the retired teacher's lifetime, with a monthly survivor benefit payable to the surviving spouse for her further lifetime. The monthly payment stream ceased upon the death of the survivor. No further payment of any kind will be made.

The monthly pension payments were made on the last day of the month and pertained to that particular month. In this case the surviving spouse was entitled to payment for the month of June since she died during the month of June. The payment was dated June 30, 2014 and will be included on the 1099R issued for the 2013 tax year along with all of her earlier payments in 2013.

The pension was not an IRA distribution, and the plan was a defined benefit plan, not a defined contribution plan.

By the way, her final periodic payment was dated June 30, not July 1 as I believe I stated in previous posts. Her payments were always dated as of month end and represented payment for that month. My mistake.



How so? I'm not sure you can nominee this out as you can interest and dividends. An explanatory attachment, perhaps?

Please see a tax professional. I am 100% certain of the position I am taking and I assume that Dave feels the same way about his position. You will need a local tax professional to give you the final word on the subject.