In May 2013, soon after meeting with the belligerent beneficiary, my focus turned to the estate income tax returns (returns). After reviewing the tax documentation used for the final returns, I became uncertain about the tax documentation needed to prepare the estate income tax returns. That uncertainty gave me reason to pause. This is when I realized that this chaotic estate was going to close on time. After months of worrying about the run-down rental property, the tenants, and associated expenses, the estate would actually settle on time. So, with the returns not due until December 15^th, there was no need to rush. Furthermore, instead of wallowing in uncertainty, I called the tax professional for some guidance on the tax documentation.

Prepare the Tax Documentation

In the discussion with the tax professional, the tax professional wanted the following items to plan for the returns:

1. Social security numbers from each beneficiary due to inherit.
2. Compile income and expense data.
3. Send any additional 1099’s with the income breakdown, if necessary.

After looking at the list, the task to prepare the tax documentation was relatively easy. Since most of this information existed for the final taxes, the task required little effort. In fact, all the income breakdowns on the 1099’s were already in the hands of the tax professional. The only item that needed any effort was to convert the income and expense data into PDF files. However, obtaining social security numbers from the beneficiaries could create a problem. 

The Discussion on Who will Pay the Estate Income Taxes

At this point, the beneficiaries had no idea that passing the estate taxable income to the beneficiaries was an option. So, asking for social security numbers would warn the beneficiaries of taxes down the road. This may irritate some beneficiaries, especially the belligerent beneficiary. So, I made another call to the tax professional to discuss my concern. After initial pleasantries, I asked, “Why do we need to obtain social security numbers now? We’re not even sure that we will pass the taxable income to the beneficiaries.”

“We are still early in the process and I want to examine some strategies. Also, if we need the social security numbers, it’s better to get the them sooner than later,” the tax professional replied.

“Okay, I will get the social security numbers. However, I am a little uneasy because these beneficiaries aren’t expecting to inherit much. So, paying taxes may cause some unrest,” I replied.     

“There shouldn’t be a problem with the beneficiaries. This isn’t an unusual circumstance when the estate income is excessive. If there is a reaction, we’ll deal with it then,” said the tax professional.

“Well, there is a beneficiary that looks for a reason to annoy me. This just may get the beneficiary going again. However, that’s my problem. I will send you the tax documentation you requested to complete your planning,” I replied.

Later that day, I called my attorney to discuss the estate income taxes. The thought came to me that maybe probate has rules that decides who pays the taxes. Although the attorney confirmed that beneficiaries rarely pay estate taxes, there were no rules about estate income taxes. So, feeling certain that the tax professional would recommend passing the estate income to the beneficiaries, the uneasy feeling persisted.

Confronting the Rebellion Possibility

In the end, I sent the tax documentation to the tax professional a couple of days after our conversation. Additionally, I began asking the beneficiaries for their social security numbers. If there was going to be a rebellion over taxes, I wanted to confront the situation right away. However, after sending a group email about obtaining social security numbers, nothing happened and the uneasiness went away. Instead, all the beneficiaries were cooperative, including the belligerent beneficiary.

Was this article insightful? Did I make it clear that estate income taxes come with decisions and involve planning? Share your comments or questions in the comment box below.

Recommended Reading

How to Prepare the Federal Estate Income Tax Return – The article provides additional insight into the work needed to complete the complicated return.