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I've lost track of all the details in this scenario, but some general thoughts:

If your wife pre-deceased her mother (or died within a short time of her mother (typically 30 days)), she may, under state law or the terms of MIL's Will, be ignored for the purposes of inheritance. Or MIL's Will may stipulate what happens to wife's share. If wife died sufficiently after MIL, then terms of wife's Will dictate what happens to the inheritance she is entitled to. If either person died intestate, you need to follow state law with regard to inheritance priority. Finally, any beneficiary can disclaim their inheritance, but they can't direct who will receive the disclaimed amount. If the Will doesn't address the matter, state law determines how the disclaimed amounts are distributed.

Ira
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Do I need to report her inheritance as income in 2019 or 2020 when I file tax returns for those years?

N.B.: I AM NOT AN ATTORNEY NOR A TAX ACCOUNTANT.

When my mother died, my sisters and I asked her executor what the tax consequence of getting my inheritance would be. He executor was an attorney in a company that specialized in trusts and estates.

She said our inheritances would be our shares of the assets, converted to money, and we should treat them as gifts (non-taxible) from the estate. In particular, the estate would issue no 1099 reports.

This was in Erie County in New York State in 2006. My mother died in about 2002, but it got stuck in probate court because the judge declared my mother died intestate. This was not true. This will was drawn up by an attorney in the company that specialized in trusts and estates. The judge declared that the witnesses were not present when my mother signed the will. The witnesses testified that they were both present, as did the notary public who notarized the will. The judge would have none of it.

It was a very simple will, and neither of my sisters, nor I contested, nor did anyone else. It divided my mother's estate into four equal parts: one to me, one to each of my two sisters, and one to her church. Trouble is, if she died intestate, an administrator would be appointed by the court and the administrator would follow the law which specifies that it goes 1/3 to each of her three children, and the administrator gets paid $20,000 from the estate for her troubles. That is why it took 4 years to get our share of the estate, and her church got its share too.
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If required, your brother-in-law should file an estate income tax return. It will generate K-1s for any income that is required to be reported. Most assets except a traditional IRA receive a new basis. The amount of income to be reported is normally a very small amount of the estate value. The K-1 is only way that you will know how much income there is to be reported.

Will your wife's inheritance flow to you or to your son? She didn't live for probate to be complete. I have no idea what happens in that case.

If your son is the beneficiary for her IRA, he needs to contact the IRA administrator and have it moved to an inherited IRA. Her RMD for the year will need to be distributed before the transfer. RMDs for inherited IRAs start the year after the year of death. Regardless of your son's age starting next year, RMDs will be required from the inherited IRA. Only a spouse my move an IRA to their name.
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Trouble is, if she died intestate, an administrator would be appointed by the court and the administrator would follow the law which specifies that it goes 1/3 to each of her three children, and the administrator gets paid $20,000 from the estate for her troubles.

This isn't true for all jurisdictions. I am an administrator (and only heir) for an intestate estate. I could take fees for being the administrator but it isn't in my interest and isn't required.
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Trouble is, if she died intestate, an administrator would be appointed by the court and the administrator would follow the law which specifies that it goes 1/3 to each of her three children, and the administrator gets paid $20,000 from the estate for her troubles.

This isn't true for all jurisdictions. I am an administrator (and only heir) for an intestate estate. I could take fees for being the administrator but it isn't in my interest and isn't required.


The main problem with my mother's estate was that the probate judge was corrupt. She was finding many people who had valid wills had died intestate because of witnessing problems. She then appointed the daughter of a friend of hers to be administrator. She made a big mistake with my mother's estate because one of the beneficiaries of the estate was her church, a recognized charity in the state. And the Attorney General of the state is automatically the attorney in such matters in the case of charities, and at the time, he was Elliot Spitzer who (whatever his other problems may have been) was a pretty good attorney general. He declared that my mother's was a valid one and would not allow the will to be settled as provided in case of people who died intestate, because then the church would get nothing. The A.G. and the lawyer who would be my mother's executor agreed to get the administrator fired (with no $20,000 fee), and my mother's desired executor would be appointed administrator. We (my sisters and I) all agreed and signed notarized statements that we would give 1/3 of what we got to the church. A nice consequence of all that was that the amount I gave to the church qualified as a deduction from my income tax. My sisters could not do this since they were living as citizens of the countries in which they had been living.

I wish I knew what happened to that judge. It was not so simple (separation of powers) that the a.g. could just fire her. I supposed he had to get her impeached and convicted, then tried in criminal court and convicted again.

When my mother's administrator took the entire check to the church, the minister broke into tears. It was the largest single donation that church had ever received.
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Trouble is, if she died intestate....
...
The main problem with my mother's estate was that the probate judge was corrupt. ...


Curiosity question: if the AG was able to declare the will valid after all, why couldn't the estate have been distributed IAW its specifications, thereby obviating the need for the three of you to go through that additional step?

Eric Hines
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Trouble is, if she died intestate....
...
The main problem with my mother's estate was that the probate judge was corrupt. ...


Curiosity question: if the AG was able to declare the will valid after all, why couldn't the estate have been distributed IAW its specifications, thereby obviating the need for the three of you to go through that additional step?


Because he was acting as the lawyer for the church; he was not acting as the a.g. And the a.g., as member of the executive department of the state, could not make changes in the judiciary. (separation of powers). But as attorney of the church, he could contest the judge's decision. Then a whole rig-a-marole of legal proceedings would have to occur, which could take 10 years or more. The a.g. and my mother's lawyer allowed the court's decision to stand, thereby requiring the appointment of an administrator to take the place of the executor, but not the administrator ordered by the judge. So we got the attorney who would have been the executor to be the administrator. But the administrator has no flexibility in distributing the estate. The part that pertained in the case of my mother's estate required her living children to each get 1/3 of the estate. The a.g. could not accept this, so to expedite matters (three years or so had already gone by), he agreed that if my sisters and I signed binding agreements with him to each donate 1/3 of what we received to the church, that he would not oppose that settlement of my mother's estate. I still hope he found a way to get her off the bench. IIRC, in NY state, probate judges are elected.

I wish she had spent her last penny the day she died, so there would have been no estate. It would have simplified matters considerably. I did not refuse my share, but I gave so much of it to charities that it came to over 50% of my adjusted gross income that year, so I could not deduct it all. I could carry the residue over to future years and deduct it then.
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The main problem with my mother's estate was that the probate judge was corrupt.

The local probate court is very slow but not corrupt. The only fee that was higher by a few hundred than I believed it should be was the real estate appraisal.

For now I just wish the county would give me the supplemental property tax bill. They have sent a letter stating the property would be reassessed. The next letter stated the amount of the assessment. The assessed value is reasonable. The final item I need to close probate is the actual bill. It may take 2 months to receive it because of the 60 day period to contest the reassessment.
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Getting back to the original question -

Generally an inheritance is not taxable income to the recipient.

The main thing that IS taxable is an IRA or other retirement plan. A Roth IRA would retain it's tax-free nature, but will have required minimum distributions once inherited. For these retirement accounts, the taxable amount is the amount withdrawn from the plan, not the value of the account.

Pretty much everything else that you ordinarily see - houses, cars, investment accounts, cash, jewelry - those are not taxable income when inherited. I don't know all of the state income tax laws, but I'm not aware of any that include an inheritance as taxable income.

This is a separate question from an inheritance or estate tax. There is still a Federal estate tax, but it doesn't affect estates which are worth less than about $11 million. I believe a couple of states still have an estate or inheritance tax. These are based on the value of the estate or inheritance received. So you might want to check any state laws.

--Peter
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My condolences to the OP. Terrible start to the new year; the only silver lining being that he has all of 2019 (or at least until mid-April) to get tax answers, so no need to rush at this point.

The main thing that IS taxable is an IRA or other retirement plan. A Roth IRA would retain its tax-free nature, but will have required minimum distributions once inherited. For these retirement accounts, the taxable amount is the amount withdrawn from the plan, not the value of the account.

Peter, OK if I re-write as:

The main thing that IS taxable is an IRA or other retirement plan. For these retirement accounts, the taxable amount is the amount withdrawn from the plan, not the value of the account. A Roth IRA would retain its tax-free nature, but will have required minimum distributions once inherited.

because for a Roth IRA, the amount withdrawn is not taxable, correct?
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because for a Roth IRA, the amount withdrawn is not taxable, correct?

Correct.

--Peter

PS - I wasn't thrilled with that paragraph, either. Just too lazy to re-write it. Thank you for the assist.
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While I was working, I opened a spousal IRA in her name and she designated our son as the beneficiary.

Because she was older than 70.5 at her death, she will have an RMD from her IRA for 2019. If that RMD was already removed as of the date of death, it will simply be included as ordinary income on your annual joint tax return for 2019. If the RMD has not been withdrawn as of the date of death and your son is sole beneficiary, then he'll need to make the withdrawal from the IRA before the end of the year and include it in his income. He'll need to go to the IRA custodian with the death certificate and his own ID and have the IRA retitled as an inherited IRA, from which he must begin manadatory withdrawals beginning in 2020.

You wife's inheritance from her mother will definitely require the assistance of an estate attorney. But generally, depending on your state and the form of inheritance, it will likely pass through her estate to her son per stirpes. All jointly held assets, assuming you are the joint holder, will pass to you.

If your wife's only assets titled only to her is the IRA and a taxable account holding MF shares, again, through the assistance of an estate attorney, if the MF account is titled 'Transfer on Death' to you or son, you may not even have to file an affidavit for a small estate, as there is nothing but small personal items in her probate estate. However, if the MF account is intestate, if it meets the state's definition of a small estate, then an affidavit may be required, which is much less costly than a full probate and much faster.

As to the inheritance, only 6 states have an inheritance tax where a tax is calculated based on the value of the inheritance, although spouses may be exempt: NE, IA, KY, PA, MD and NJ. If her estate is under about $5.5MM, she need not file a Federal estate tax return. However, if the estate generates more than $600 in income, an estate income tax return will be required. Nolo provides a good explanation of this at https://www.nolo.com/legal-encyclopedia/filing-income-tax-re...

Sorry for your loss. Best wishes.

BruceM
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Curiosity question....

Because he was acting as the lawyer for the church....


Thanks

Eric Hines
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If the RMD has not been withdrawn as of the date of death and your son is sole beneficiary, then he'll need to make the withdrawal from the IRA before the end of the year and include it in his income.

My wife's IRA is rather small. She has always made the RMD withdrawals in December. As she hadn't withdrawn the 2019 RMD of $1089 at the time of her death, the 2019 RMD will need to be reported on our son's 2019 tax return because he is the designated beneficiary for her IRA.

We had gotten her name changed to her married name on the State Street mutual fund but for some reason it got changed back to her maiden name when BlackRock acquired the mutual fund from State Street. Although the reinvested dividends were reported on our joint tax return, I don't recall it being very much until 2017 when the reinvested dividends and capital gains were around $12,000 and almost $8,000 in 2018. I tracked the current value of the mutual fund in Quicken but was never able to establish the cost basis for her holdings.

As to the inheritance, only 6 states have an inheritance tax where a tax is calculated based on the value of the inheritance, although spouses may be exempt: NE, IA, KY, PA, MD and NJ.

I had discovered that Nebraska had an inheritance tax. It seemed a little strange as it is only collected from residents of Nebraska and the amount of the tax was based on the relationship to the decedent. Unfortunately my wife died before her mother's estate completed probate. Does her inheritance devolve to me because we lived in a community property state?

Her brother is executor for their mother's estate. I am wondering whether it might be better to waive any rights that I might have to the estate and have it pass to our children.
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Hello,

I am sorry for your loss.

As a non-spousal beneficiary of an inherited IRA, I am going to say both your wife's RMD and your son's treatment of the IRA are not plain and simple or very complex. However he has some choices to make. He should talk to a professional for tax/financial advice.

Regards

SJ Coleman
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My wife's IRA is rather small. She has always made the RMD withdrawals in December. As she hadn't withdrawn the 2019 RMD of $1089 at the time of her death, the 2019 RMD will need to be reported on our son's 2019 tax return because he is the designated beneficiary for her IRA.

Are you certain? I am under the impress (which could easy be wrong) that the RMD would belong to the estate and not to the beneficiary.
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I am wondering whether it might be better to waive any rights that I might have to the estate and have it pass to our children.

Waiving your rights might not result in it passing to your children. If the estate is small, then the simplest solution might be to lets the chips fall where they may and then gift the proceeds to your children.
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I believe a couple of states still have an estate or inheritance tax. These are based on the value of the estate or inheritance received. So you might want to check any state laws.

And here in New Jersey, there is both an estate tax and an inheritance tax. My attorney warned me about this when I had her draw up my most recent will. So I assigned beneficiaries to my to life insurance policies and my two IRAs (std and Roth), so they are not part of my estate. My beneficiaries may have to pay the state inheritance tax, but the estate will not need to pay the estate tax.
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Jean,

What if I assigned charitable org’s as beneficiaries? They wouldn’t pay tax would they?

The way I have my will set up now is that everything is liquidated///house, cars, contents, etc. and then distributed to charitable org’s.

Would there be any benefit in changing that?

Thx
Lucky Dog
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So I assigned beneficiaries to my to life insurance policies and my two IRAs (std and Roth), so they are not part of my estate. My beneficiaries may have to pay the state inheritance tax, but the estate will not need to pay the estate tax.

Are you absolutely sure that it will work like this? Did you confirm this with your estate attorney? I ask because, generally speaking, having a beneficiary does not remove an asset from your estate. You still own it, and it is still counted when figuring estate taxes. Having a beneficiary generally only removes the asset from Probate, but that is not the same as removing it from your estate because you do own this thing.

I highly recommend that you double check this with your attorney as things can and do work differently in different states, but this one does not sound right to me. Better to be safe than sorry on it.
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So I assigned beneficiaries to my to life insurance policies and my two IRAs (std and Roth), so they are not part of my estate. My beneficiaries may have to pay the state inheritance tax, but the estate will not need to pay the estate tax.

Are you absolutely sure that it will work like this? Did you confirm this with your estate attorney? I ask because, generally speaking, having a beneficiary does not remove an asset from your estate. You still own it, and it is still counted when figuring estate taxes. Having a beneficiary generally only removes the asset from Probate, but that is not the same as removing it from your estate because you do own this thing.

I highly recommend that you double check this with your attorney as things can and do work differently in different states, but this one does not sound right to me. Better to be safe than sorry on it.


I did check with my attorney. The two life insurance policies go immediately into an irrevocable trust to someone, and paid slowly by the trustee to an individual. Similarly, the proceeds of my IRA and my Roth-IRA are paid directly to the beneficiaries. So my executor never sees those assets.

You are certainly right about checking with an attorney. The laws vary from state-to-state and from time-to-time; this is definitely not a do-it-yourself thing.
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Similarly, the proceeds of my IRA and my Roth-IRA are paid directly to the beneficiaries. So my executor never sees those assets.

But that's not the question. The question is whether the IRAs are part of your taxable estate. The taxable estate and the assets managed by your executor are not the same thing.

I realize it likely doesn't apply to you, but for Federal Estate Tax purposes, your IRAs are part of your taxable estate, no matter who is named the beneficiary. The part I don't know is whether your state estate tax follows this same process. It would not surprise me if they did. And it wouldn't surprise me if they did not.

--Peter

PS - If a charity were named as the beneficiary of your IRA, the taxable Federal estate would get a deduction for the contribution to charity, effectively removing that from the estate. But both parts of this transaction would be reported - the existence of the IRA and the charitable deduction.
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I am wondering whether it might be better to waive any rights that I might have to the estate and have it pass to our children.

Waiving your rights might not result in it passing to your children. If the estate is small, then the simplest solution might be to lets the chips fall where they may and then gift the proceeds to your children.


The value of the assets held solely in my wife's name at the time of her death are small; however, her inheritance from her mother that is going through probate is significantly larger. Her brother is executor of their mother's estate. He suggests that my wife's inheritance may be in excess of $500K.

At the time of my mother-in-law's death, her direct descendants were her son, her daughter (my wife), and her three grandchildren (our three children). I don't understand the laws governing inheritance but assume that me wife's inheritance would pass to her estate as she died before distribution of her mother's estate.

I had over saved to ensure that we had sufficient wealth for mt wife and I to live to 100. I don't need another $500K added to what is now my estate. Having my wife's inheritance be distributed directly to our children seems like it would make more sense and benefit them.
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I've lost track of all the details in this scenario, but some general thoughts:

If your wife pre-deceased her mother (or died within a short time of her mother (typically 30 days)), she may, under state law or the terms of MIL's Will, be ignored for the purposes of inheritance. Or MIL's Will may stipulate what happens to wife's share. If wife died sufficiently after MIL, then terms of wife's Will dictate what happens to the inheritance she is entitled to. If either person died intestate, you need to follow state law with regard to inheritance priority. Finally, any beneficiary can disclaim their inheritance, but they can't direct who will receive the disclaimed amount. If the Will doesn't address the matter, state law determines how the disclaimed amounts are distributed.

Ira
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Having my wife's inheritance be distributed directly to our children seems like it would make more sense and benefit them.

In that case, once you receive the money as surviving spouse (as would seem to be the most likely end result), you could set up a trust or other vehicle to pass the money on. Otherwise it would seem you are depending on other people to do what makes sense to you.

And due to the intestate nature, there seems to be a very high chance you would seem to be depending on the probate court to make this judgement (and not your no doubt reasonable BIL).
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And due to the intestate nature, there seems to be a very high chance you would seem to be depending on the probate court to make this judgement (and not your no doubt reasonable BIL).

With an intestate decedent there are no discretionary choices. State law determines who inherits and who the contingent beneficiaries are if an inheritance is disclaimed. The administrator's only option is to follow state law.

Ira
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MCCrockett:

[[[I am wondering whether it might be better to waive any rights that I might have to the estate and have it pass to our children.]]]

<<<Waiving your rights might not result in it passing to your children. If the estate is small, then the simplest solution might be to lets the chips fall where they may and then gift the proceeds to your children.>>>


"The value of the assets held solely in my wife's name at the time of her death are small; however, her inheritance from her mother that is going through probate is significantly larger. Her brother is executor of their mother's estate. He suggests that my wife's inheritance may be in excess of $500K.

At the time of my mother-in-law's death, her direct descendants were her son, her daughter (my wife), and her three grandchildren (our three children). I don't understand the laws governing inheritance but assume that me wife's inheritance would pass to her estate as she died before distribution of her mother's estate."


My condolences; you and your family have had a really bad run.

I have read all the posts to now, but I am too tired to go back and confirm all the dates.

As I understand your MIL dies intestate, residing in unnamed state. Her assets should be distributed by the intestacy laws of the state of MIL's residence. I would SWAG half to your BIL and half to your now deceased DW. I have no idea whether any state's intestacy laws have survival requirements (though many wills have them). First issue to confirm is the distribution scheme of MIL's unnamed state's intestacy laws. Second issue to confirm is that whether MIL's unnamed state's intestacy law has any survivorship requirements.

You mentioned that you live in a community property state, but I do not recall you mentioning it. In some community property states, inherited assets are separate property and not community property. Assuming that some part MIL's assets are going to you DW's estate, whether they are separate or community property.

Fourth issue is to review and confirm the distribution scheme of your and DW's unnamed state's intestacy laws.

once you have all that information, then you can decide whether a disclaimer or partial disclaimer makes any sense, in light of your intended goals.

With my sympathy, JAFO
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