What Is Income in Respect of a Decedent (IRD) in Florida?
The IRS defines income in respect of a decedent (IRD) as income your loved one had a right to receive before their passing. A key feature of IRD is the fact that it passes to the estate with outstanding taxes owed. If your loved one passed away with IRD, you should understand how the IRS treats it for tax purposes. If you believe that you might pass away with IRD, you should also consider the estate planning implications while you still can. Contact an experienced estate planning attorney in Tampa for further guidance.
What Counts as IRD in Florida?
Many different types of income may fall under the IRS category of IRD. A common example is simply a paycheck that a decedent earned but never received. Suppose your loved one earns a $5,000 paycheck every two weeks. If they die one week into their pay cycle, they will have approximately $2,500 in IRD.
Of course, IRD can be far more complex and much more lucrative. A CEO at a major corporation might earn a bonus for achieving a specific performance goal. If they pass away before the company provides this bonus, the estate will receive it as IRD.
The same general logic applies to vested stock options, IRA distributions, and (in some cases) unvested stock options. If an employee began working at a startup many years ago and the company eventually becomes one of the biggest tech companies in the world, their stock options could be worth a fortune. Other examples include uncollected rent and dividends.
IRD Becomes “Ordinary Income”
From an estate planning perspective, the main issue with IRD is its tax treatment. Unlike many other types of property that beneficiaries inherit, IRD does not benefit from the “step-up in basis.” In other words, the beneficiary may owe a considerable amount of money in capital gains taxes once they receive the IRD.
In many cases, IRD is relatively straightforward. In the case of an unpaid paycheck, the family does not need to worry about state income tax because Florida has none. However, the family may need to pay federal taxes.
On the other hand, vested stock options can lead to more complex tax implications. If the beneficiary decides to exercise the stock options and then sell them, they will owe capital gains tax with no step-up in basis. In other words, it will be as if the decedent sold the shares while they were still alive. Normally, the IRS “steps up” the initial purchase prices to the current fair market value, thereby wiping out capital gains taxes. This is not the case with IRD.
If the beneficiary decides to exercise the stock options and then simply hold them, no capital gains tax applies (unless they sell later). However, the “spread” between the initial purchase price and the current fair market value would still trigger ordinary federal income taxes. Note that ordinary federal income tax is higher than federal capital gains taxes. You should also know that if the beneficiary sells the stocks much later, capital gain taxes also apply (but only based on the cost basis at the time of inheritance).
Can a Seminole Estate Planning Lawyer Help With IRD?
IRD may include highly lucrative assets, such as unpaid corporate bonuses or stock options. Assistance from an experienced estate planning lawyer in New Port Richey could be helpful in this situation, especially since IRD does not benefit from the step-up in basis. Continue this conversation by contacting Knudsen Law at 727.398.3600.
Source:
investopedia.com/terms/i/income_respectof_decedent.asp
