Estate & Trust Taxes

[blkgrape]

Greetings everyone perhaps someone with some knowledge on Estate/Trust Taxes can lend a hand.

My father passed away Dec 7, 2010 and now the Estate and Trust Taxes are almost due. One of the three accounts that funded the estate account was a 401K. When the 401k was distributed to the estate account they held 10% of the total for IRS taxes. I went to a CPA today and he said that the money should have been rolled over/distributed in total with out any percent being withheld since you are suppose to be paying taxes on the interest accrued not the initial deposit that went into the account. My question is if this is true and now that the IRS is holding almost $12,000.00 of the estates/trust funds how do I go about getting it back**************..what form(s) need to be filed???

 

[anteater]

First...

It isn't clear whether you are speaking about a probate estate or a trust.

Second...

...since you are suppose to be paying taxes on the interest accrued not the initial deposit that went into the account.

In most cases, all the funds that have gone into a 401(k) are pre-tax. Which means that, when the funds come out of the 401(k), they are all subject to tax. Either this 401(k) was unusual in having after-tax contributions, you aren't actually dealing with a 401(k), or the CPA's understanding of the tax law is a bit shaky.

Third...

When the 401k was distributed... the money should have been...

I note the past tense and the "should have." The IRS is not in the habit of issuing mulligans when it comes to retirement plan distributions.

I would suggest that you consult with a tax professional familiar with retirement plans and their distribution to review what exactly has occurred and if there are still alternatives available.


ADDED: Forgot about this part...

My question is if this is true and now that the IRS is holding almost $12,000.00 of the estates/trust funds how do I go about getting it back**************..what form(s) need to be filed???

It's like any other income tax withholding. The taxpayer completes and files the income tax return. If the withholding is greater than the tax liability, the taxpayer gets a refund. If the tax liability is greater than the withholding, the taxpayer pays.

 

[LdiJ]

First...

It isn't clear whether you are speaking about a probate estate or a trust.

Second...

In most cases, all the funds that have gone into a 401(k) are pre-tax. Which means that, when the funds come out of the 401(k), they are all subject to tax. Either this 401(k) was unusual in having after-tax contributions, you aren't actually dealing with a 401(k), or the CPA's understanding of the tax law is a bit shaky.

Third...

I note the past tense and the "should have." The IRS is not in the habit of issuing mulligans when it comes to retirement plan distributions.

I would suggest that you consult with a tax professional familiar with retirement plans and their distribution to review what exactly has occurred and if there are still alternatives available.


ADDED: Forgot about this part...

It's like any other income tax withholding. The taxpayer completes and files the income tax return. If the withholding is greater than the tax liability, the taxpayer gets a refund. If the tax liability is greater than the withholding, the taxpayer pays.

The 401k never should have gone into the trust. It should have been rolled over directly to the beneficiaries, into IRAs of the beneficiaries of the trust, in order to avoid the immediate need to pay taxes.

Or, the 401k itself should have become part of the trust...without any distribution happening. See a tax professional immediately. This could be a serious problem and its unlikely that the tax liability would be limited to 10%.

 

[blkgrape]

What is the actual tax rate based on?

Since the 401k was distributed my question is what is the actual tax rate the money is being taxed on? My deceased fathers tax rate (he was 75yo), my mother (also 75) and the beneficiary of the Trust or does a Trust have a different tax rate which assets like a distributed 401k will be judged on?

 

[anteater]

You do not want this to be taxed at trust tax rates. The highest marginal rate for trust income - 35% - begins at about $11,500.

Get to a tax professional! You want to see if it is still possible to pass this through as an IRA for your mother.

(I'm not sure that I get this. Was the trust named as the beneficiary of the 401(k)? Did your mother waive her right as the 401(k) beneficiary? Are we talking some small amount?)

 

[blkgrape]

Re:

I don't want the money to be rolled into an IRA because the RMD monthly payout will be too high and exclude her from public benefits.

The money was first rolled into an estate account and thus the estate taxes are due and this is where the 401k taxes will have to be paid. Does that affect the tax rate since it was not rolled into the Trust first? It was later moved into a Trust account the last two months of 2011 and the total amount of interest accrued was $7.99

 

[anteater]

You know, usually we don't let posters get away without answering the first question in a new thread about the applicable state.

I bring that up now because you keep talking about estate taxes. Since you mention mother's public benefits, the conclusion must be that your father's estate was not terribly large. That would mean that a federal estate tax liability is very low probability. And the only possibility is that this is in a state that still has an estate/inheritance tax that kicks in at a lower estate value.

I really don't know what you mean by an "estate account" and a "trust account."

But the point is that a taxable event (income taxes) occurred when the 401(k) was distributed without properly rolling it into another qualified tax-deferred account. Unless contributions to the 401(k) were after-tax money (which is possible but not all that common), then the entire distribution is subject to income tax.

Once again, you need to take all the facts to a tax professional. I don't want to be insulting, but I think you are in way over your pay grade.

 

[tranquility]

I believe the OP is not using words precisely or does not understand their meaning. One does not "rollover" a 401(k) to an estate. Others too.

 

[LdiJ]

I believe the OP is not using words precisely or does not understand their meaning. One does not "rollover" a 401(k) to an estate. Others too.

He clearly didn't roll anything over, he distributed to the money to the trust. However I do agree that either he is not using words correct or perhaps doesn't understand their meaning, which is why I said he needed to get himself to a tax professional asap.

 

[anteater]

Receiving a 1099-R can be a real "Aw, Snap!" moment.

 

[blkgrape]

Re:

State: FL


You are most correct I am not familiar with the process or terms of Estate/Trusts. That is why I am posting on this board so I can get peoples advice that are more familiar and experts in this area. When people come to me for advice in my world of expertise I dont tell them well you really should know this because to be honest they really shouldn't, thats why they are in front of me asking questions. Besides that I do appreciate the constructive advice that has been offered and yes I do have a CPA on board to manage the tax returns. I am just looking for others advice to make sure everything goes as smooth as possible.

 

[anteater]

...and yes I do have a CPA on board to manage the tax returns.

1) Not all CPA's practice in the area of taxes. Hopefully, this is a CPA that does.

2) Again, when money is distributed from a 401(k) without properly rolling it into another qualified tax-deferred account, it is subject to income tax. And an "estate account" and/or "trust account" is not another qualified account.

3) If the CPA does not understand that or can't provide you with some understandable explanation for why it is not taxable, then you need to see someone else.

4) Did you receive a 1099-R?

 

[blkgrape]

Re:

A 1099-R was received.