An executor becomes a nominee when the estate receives a 1099 showing income for the entire year and a part of that income belongs to other parties. In the article How to Report 1099 Income on the Final Return, the “Nominee Distribution” represents the earned income after death. Therefore, excluding the nominee distribution from the final return becomes necessary because that income goes to the estate or to the beneficiaries. As a result, the executor becomes the nominee and must distribute the income labelled nominee distribution to the rightful owners. Otherwise, the executor will face fines for non compliance.

Distributing the Nominee Distribution

In essence, without beneficiaries listed on the asset earning the 1099 income, the executor claims the distribution for the estate. If required, the executor must report the income on the estate income tax return Form 1041 (refer to article Tax Returns and the Date of Death for the requirements needed to file a Form 1041). If the asset has beneficiaries listed, then the executor will distribute the income to the beneficiaries using the following procedure:

• File a new Form 1099 with the IRS for each beneficiary showing the amounts allocable to each. The Federal copy will go to the IRS and the Taxpayer copy will go to the beneficiary.
• File each new Form 1099 with Form 1096 with the IRS Service Center in your area.
• On each new Form 1099, list the nominee as the “Payer” and the beneficiary as the “Recipient”.
• On Form 1096, list the nominee as the “Filer”.
• The nominee(executor), not the original payer, is responsible for filing the subsequent Forms 1099 to show the amount allocable to each beneficiary.

Conclusion

Basically, this procedure corrects the original 1099’s and issues new 1099’s. The new 1099’s allow the estate or each beneficiary the ability to report income received on the proper tax returns without confusion. Also, the procedure pertains to Information Returns designed to inform the IRS of changes to the original information sent to the taxpayers. In the end, this procedure is not difficult, but it could become tedious if the estate involves many beneficiaries.  

References:

IRS Publication 559 Survivors, Executors, and Administrators 2015, Pg. 16 Information Returns.

IRS Publication General Instructions for Certain Information Returns.

IRS Form 1096 Instructions.

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