Legal Question in Wills and Trusts in New York
creditors and taxes
Hello...I will try to make this a brief as possible. My mother passed away 2 years ago leaving me her estate. The Will was not contested and was probated last March. My first question is, is it true that my mother's creditors would have had 7 months to make any claims from the date of probate? After the 7 months passed and no actions were taken, can anything be done after that time period has expired? My last question has to do with a particular creditor. It was a credit card that my mom had card protection insurance on. They cancelled the debt. I just received a 1099-c from that company stating the amount that was cancelled. Would this be considered income and if so, why? Also, would it badly affect my tax return? It was about $1600.00. Thank you.
2 Answers from Attorneys
Re: creditors and taxes
If you published a Notice Limiting Creditors, they have a limited time period to submit their claims to the Executor for payment by the estate. Failure to do so does not eliminate the debt, but only allows you, as Executor, to distribute the assets and have no personal liability for payment of the debts. The creditors have full statutory time limitations (usually 6-7 years) to get paid, even if the Notice was issued. The Notice merely allows you to distribute the assets as the Will provided and close out the estate with the Surrogate's office. The creditors can sue and follow the assets distributed to get paid. Presumably, if the estate has been closed with the Surrogate's office, a Release and Refunding Bond was received from the estate beneficiaries which would include language that if a subsequent debt was asserted against the estate, each beneficiary would return that portion of their distribution pro rata to their share of the estate, to pay the debt. Finally, while the debt was cancelled, income tax law treats the foregiveness of the debt as income, subject to income tax. Since it was your mother's debt that was foregiven, the possible tax liability is attributable to her, not you. An income tax return will be required to be filed for her, even though it may cover a period after her death, with this income being reported as if she were still alive. With deductions and exemptions, the possible tax may be minimal, depending upon the amount involved. You can sign the return as Executor of her estate. If you need more information or help in preparing the return, contact me directly.
Re: creditors and taxes
Your question focuses on the 'forgiveness of debt'.
If this is a pure forgiveness, then it is income under the state and federal tax codes. Since this amount is a credit card that was insured (that part is important), I would recommend not filing a new or amended tax return.
Since the account was insured, then the insurance must pay the debt. That makes this a 'gift' and the taxability of such a gift is a complex issue.
Because the insurance premiums were paid, the estate is not the real 'debtor'. The real person who benefitted from the forgiveness is the insurance company. They are the true receivors of the forgiveness and should report the income.
Did the insurance company issue the estate money to pay this? Was a claim filed?
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