Taxation of Estates and Gifts

Income in Respect of a Decedent

Income in respect of a decedent (money earned before death but not paid before death) is not subject to income tax for the normal cash basis taxpayer. This income tax leak is patched by IRD.

Income in respect of a decedent is taxable income for his estate or beneficiary (whoever receives it). 26 U.S.C. § 691(a)(1).

The estate will file the return on income that comes in while the estate still owns it. If income still is being paid after such rights are distributed, the beneficiaries must pay the income tax on them.

Royalties for earnings after death are not IRD, but just income for the estate/beneficiary, so they are still included on income tax, but no longer estate tax.

It is ideal for the estate to earn as little income as possible, because high tax rates kick in very quickly for them. 26 U.S.C. § 1(e).

This applies even if it is a contractual agreement to pay a survivor, and it does not go through the estate.

IRD is also included in the gross estate under 26 U.S.C. § 2031 & 26 U.S.C. § 2033.

Dividends, unlike rent and interest, do not accrue until they are "declared and recorded."

  • Declaring a dividend means that the dividend is announced.
  • The date a dividend is recorded is the date that the stock must be owned to receive the dividend.