The CPA Journal

ESTATES AND TRUSTS

By Edward Mendlowitz, PFS, ABV, CPA, Mendlowitz Weitsen LLP CPAs

Income in respect of a decedent (IRD) is both taxed to the recipient as income and included in the estate as part of the taxable assets. Earned but unpaid compensation, fees or commissions, IRA distributions, pension plan or variable annuity payments, and U.S. savings bond interest are examples of IRD. Although Roth IRA distributions are not subject to income taxes, they are still subject to estate taxes.

Beneficiaries will be subject to income tax as the funds are distributed to them. Recipients will pay tax on those funds along with any other income they may have in the year in which a distribution is made.

If grandchildren or other beneficiaries in younger generations inherit assets that exceed the generation-skipping transfer (GST) exemption ($1,100,000 in 2002), the assets will also be subject to GST tax.

While IRD is taxed for both income and estate purposes, it may not be a full double tax, because there is an income tax deduction (deductible on Schedule A and not limited to more than 2% of adjusted gross income) allowed for the estate tax attributable to that taxable distribution. Also, the income tax is assessed as the amounts are distributed to the beneficiary. For example, IRA or pension payments can be stretched over many decades, which will delay the income tax payment and also allow for greater tax-deferred accumulation.

The example in the Exhibit shows how the double taxation works:

Assume the deceased was unmarried and that there is no additional state estate tax. No prior gifts were made and the gross estates are $2 million and $30 million.

The GST tax is not a factor.

The estate tax has been calculated with and without the IRD so the IRD is taxed at the highest marginal rate. This is the proper way to calculate the tax for the purposes of determining the maximum itemized deduction amount. If there were an apportionment and the IRD beneficiary had to reimburse the estate for its share of the estate taxes, it would be calculated as shown in the accompanying article, “Estate Tax Apportionment.” Even though the reimbursement to the estate would be at a lower amount, the itemized deduction would be at the higher amount as calculated in the illustration.

Estate tax rates and exemptions for 2002 have been used.

The itemized deduction is for the federal estate tax, not the total estate tax. Each state has an estate tax at least equal to the federal estate tax state credit (this will change in 2005). That portion of the estate tax is not partially recoverable with the itemized deduction.

The income tax deduction for the estate tax can be taken a number of ways. One way is in proportion to the amounts received until the total deductions equal the total estate tax attributable to the IRD received. Although the 2001 Tax Act reduces or eliminates the federal state tax credit, the income tax deduction for net federal tax paid on IRD will be increased.

Editors:
Mitchell A. Drossman, JD, CPA
U.S. Trust Company of New York

Robert L. Ecker, JD, CPA
Ecker Loehr Ecker & Ecker LLP

Contributing Editors:
Peter Brizard, CPA

Jeffrey S. Gold, CPA
J.H. Cohn LLP

Ellen G. Gordon, CPA
Margolin Winer & Evens LLP

Jerome Landau, CPA

Lawrence M. Lipoff, CPA
Weinick Sanders Leventhal & Co., LLP

Harriet B. Salupsky, CPA

Debra M. Simon, MST, CPA
The Videre Group, LLP

Richard H. Sonet, JD, CPA
Marks Paneth & Shron LLP

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