Legal Question in Wills and Trusts in New York
I am executor on an estate valued at about 1.2M. We gave 2 partial advances in 2012. When the CPA did the return, K-1s were sent to each of the heirs showing that the income the estate earned had been divided 8 ways. It caused hard feelings, as each of the 8 had additional tax to pay when these were received after 2 extensions. (They received these in October, 2012. The deceased died in 2011.) Is it required that on partial distributions, that the heirs have to pay income tax on the estate income. I had always heard the estate paid all the taxes due. We would like a answer before the 2012 season is in full swing. Thank you so much for your help.
2 Answers from Attorneys
Not having seen or read the Will, this response will be general. The Will may cover this, but the general rule of tax accounting for an estate is as follows: If the income is not distributed to the heirs and taxable to them when distributed, year by year, the estate itself can pay the tax each year. However, when finally distributed, forms K-1 are issued to the heirs who then report the total income that was accumulated and not distributed, but may claim a credit for their pro-rata share of the taxes paid by the estate. While the general rules only delays the reporting of income by the heirs, it may actually lead to a higher tax liability on the heirs, as paying as earned, rather than when distributed, may result in lower rates. Since the heirs ultimately pay the taxes on income earned by the estate, it may be irrelevant when this is done. Once distributed, taxes become the heirs responsibility.
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