An important task for an executor is to track the estate income. Earned income from the decedent’s assets doesn’t stop earning income at the date of death. Therefore, as detailed in the article Tax Returns and the Date of Death, if earned income from estate assets reaches an income threshold, taxes will result. So, for proper income reporting, the executor needs to track the estate income from the date of the death.

Determine the Reporting of Earned Income 

An executor needs to determine the reporting of earned income from the decedent’s assets. Basically, in the decedent’s final year, before death, earned income is reported on the Final Return. At the date of death and beyond, earned income is reported as follows:

1) If the decedent, during life, didn’t designate beneficiaries to the asset, the earned income from the asset defaults to the estate. As a result, the executor needs to file a fiduciary income tax return to report the earned income if the income reaches the $600.00 federal threshold.

2) If the decedent, during life, did designate a beneficiary to the asset, the earned income belongs to the beneficiary. The beneficiary reports the income on their personal return. In general, any assets that have designated beneficiaries assigned to them are not property of the estate. At the date of death, the asset becomes the property of the beneficiary.

3) The personal return of any person to whom the estate properly distributes the right to receive the income through the will. The beneficiary will receive a Schedule K-1 that details the distributions.

Types of Income that Needs Tracking

In general, the typical types of income an executor will need to track are the following:

• Interest Income
• Dividend Income
• Rental Income
• Capital Gains

The executor needs to monitor the assets earning income after the date of death until the settlement of the assets. Unless the assets belong to a beneficiary, the executor must wait until officially appointed executor by the probate court before settling the assets. Therefore, since the approval process takes a month or two, the executor should plan on tracking income for at least a couple of months.

Track the Estate Income

The best way to track the estate income is to identify when the payment of income occurred. To check for the payment of interest and dividends, an executor should monitor any bank statements and brokerage statements belonging to the decedent. Also, if the decedent had rental property or received dividend checks rather than reinvest the dividends, the executor will need to monitor the mail for rental checks or dividend checks. After identifying the income, the executor should record the following:

• Type of Income
• Amount of Income
• The payment date of the income.
• Disposition of Asset – Note if the decedent reinvested dividends and received a special dividend. If the decedent received a special dividend classified as a return of capital, tax treatment of dividends as a return of capital is different than a regular dividend. The statement provided by the financial firm will provide this information.

The executor should record this information in a notebook, analysis pad, or a spreadsheet. When it comes time to deliver this information to the tax professional, prepare a report in Excel, Word, or any software of preference. In addition, include all 1099’s received for the estate. With this information, reporting the earned income becomes easier for the tax professional.

Was this article helpful? Did the article make clear on why tracking the estate income is important? Share your comments and questions in the comment box below.