What is Income In Respect of a Decedent?

If a deceased taxpayer was a party to a financial arrangement providing that income which he earned is to be paid after his death to his estate or his heirs, such income is referred to as “income in respect to a decedent” (“IRD”). Income which the taxpayer was unconditionally entitled to receive prior to his death, but which was not actually received until after his death (by the estate or heirs) is considered as having been constructively received by the decedent and must be included in his income tax return for the year of death [I.R.C. §691(a)]. This differs from income in respect of a decedent in that in the case of income in respect of a decedent the taxpayer did not have the right to receive the income before the date of his death. IRD is included in the gross income of the recipient (i.e., the estate or heir to whom the rights passed) as of the date(s) of actual receipt. IRD does not take a stepped-up basis in the hands of the recipient.

IRAs and Other Qualified Plan Accounts

When a participant in a qualified retirement plan, including a traditional IRA, dies, his or her undistributed account balance becomes payable to the account’s designated beneficiary. Because the account would have been ordinary income if distributed to the account owner prior to death (except to the extent of any unrecovered basis resulting from non-deductible contributions), it is income in respect of a decedent when received by the beneficiary.

If the account owner’s estate is the beneficiary (whether by designation or because there is no other beneficiary), the income in respect of the decedent must be reported as taxable income of the estate.

Robert Adler, Esq. is an attorney who focuses his practice on wills, trusts and estates. He can be reached at 212-843-4059 or 646-946-8327.