How should taxes be withheld when taking distributions from an estate?

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How should taxes be withheld when taking distributions from an estate?

Both of my in-laws passed away 2 years ago. My wife is the executrix for both wills. Each sibling received a one-time distribution from the estate, which still has money yet to be distributed, last year. At the recommendation of the accountant, 25% of the distribution was withheld by the estate, not the beneficiaries, for taxes. Now, each of the beneficiaries is being taxed on the distribution. Did we make a mistake? Should the withholding been made by each of the individual beneficiaries? Will the estate receive returns from the withholding?

Asked on April 11, 2012 under Estate Planning, New York

Answers:

FreeAdvice Contributing Attorney / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

Custom and practice with respect to trust and estate administration is to have the decedent's personal income taxes paid from the assets of the estate before distribution of assets to the beneficiaries. If there is a lag time regarding taxable years, for example the decedent died June 2010, but the estate was not ready for final distribution until March 2012, there will be a personal tax return for the decedent for 2010 tax year, and two estate tax returns for the estate for 2011 and 2012 (income and possibly estate tax).

Since there was no payment of taxes before the distribution, the beneficiaries are now being assessed the taxes of the estate and the decedent from what you have written. I recommend that you consult with a tax attorney to assist you and the beneficiaries in clearing up the tax issue where the assets should not have been distributed to the beneficiaries until the taxes were paid first and accepted as payment in full by the IRS and your state's franchise tax board.


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