Question

Costs, Legal Expenses, and Judgement Costs to Collect Annuity

Forum|Forum|1 year ago
May 30, 2024
1 reply
0 views

[BACKGROUND]

The decedent died in 2021.

All assets passed outside of probate other than an unpaid Annuity, discovered after decedents death.

The insurance company refused to pay the Annuity.

The Executor (heir) loaned the estate the funds (to pay all filing and other costs to bring the case to court).

The Estate booked an Accounts Payable (AP) to the Heir.

No legal fees were incurred by the Estate, because the case was handled pro-se by the Executor (Heir).

The Judgement awarded the Estate the Annuity (won on the merits). This is 1041 Income.

The Judgement required also, the Estate pay the Defendant's legal fees + interest if not paid.

The Executor/Heir loaned the Estate the funds to pay the legal fees.

The Estate paid off the AP, in full. for the loan related to costs only.

The balance of the Annuity proceeds will be used to pay the AP related to the loan for judgement interest.

The Estate balance is NOT enough to pay the AP (judgement loan) in Full.

The 1041 will be both an initial and final.

[QUESTIONS]

1) Is a 1041 and K1 required? (i.e. the estate had > $600 in income)

2) Is the shortfall (unpaid loan for the judgement deductible?

3) If deductible, is it considered a NOL?

4) If not, where on the 1041 and K1 report the AP?

Thanks

Not A Product Question

M-MTax

1) Is a 1041 and K1 required? (i.e. the estate had > $600 in income)

Yes to the 1041 because the estate had more than $600 in gross income. A K-1 won't be necessary since the estate is technically insolvent and there's nothing to pass through to the benes.

2) Is the shortfall (unpaid loan for the judgement deductible?

No.

3) If deductible, is it considered a NOL?

Not deductible and wouldn't be an NOL anyway.

4) If not, where on the 1041 and K1 report the AP?

The AP is not reported anywhere on the 1041. It's not a deduction for the estate....which is unable to pay its debts.

The executor/heir may be able to claim a nonbusiness bad debt since he loaned funds to the estate and was never repaid by the estate

D

dw85745Author

M-MTax. Thank you for your time and response.

So basically the Estate is paying income on the Annuity (over its basis), even though the cost to collect that Annuity was greater than the Annuity itself?

M-MTax

Not really because the estate can deduct the amount it paid to the executor/heir as reimbursement for the expenses. It can't pass through a loss for the amount if did not pay and it wouldn't be an NOL for the estate.