Our disinherited brother claims our parents forgave his $400,000 debt to them, (now the bankrupt estate) before our parents died. No proof of forgiveness exists, but there is a promissory note for part of the debt... but for the sake of argument lets assume our brother was either forgiven or "worked off" his debt to my parents, or the statute of limitations on collecting the debt has run out. The question remains for us, as co-trustees and co-executors, is whether or not we have an obligation to report the forgiven or worked off debt, or the statue of limitation on collecting unpaid debt of our brother to the IRS? We want to make sure we report accurately, as we do not want to do anything illegal and get in hot water for improper accounting practice to the estate. Many thanks!I know this seems like a complicated question and in need of more information. But if someone could answer to just whether or not forgiven debt, worked off, debt, or expired by statue of limitation of debt must be reported to the IRS; this would help a lot. We simply need to know if we, (as co trustees and co executors of our deceased parents estate) must file any forms on behalf of the estate for ANY TYPE of uncollected debt, (owed to the estate) with the IRS? Thank you.
Please be careful here. You should get (1) a good trusts attorney, and (2) a good CPA. There are two issues here, (1) the reporting of the debt forgiveness to your brother (cancellation of debt income) on Form 1099-C, and (2) the reporting of the possible uncollectible debt by the estate (bad debt deduction).
Keep in mind that the brother may have to report the forgiveness of debt as income on his income tax return unless he qualifies for an exclusion under IRC sec. 108. Ouch!!! That could put him in the 39.6% Federal tax bracket and the 11.3% California income tax bracket. Nobody wants a $200,000 tax bill for your brother for forgiveness of debt without any money to pay it. Forgiving his debt could unintentionally ruin him financially.
Actually, I recommend that you email or call Mr. Shields who also answered this question and discuss with him what I've written about the taxation of this transaction and see if he has a way to plan around the cancellation of debt income issue for your brother. While I could tell you the tax consequences of this transaction (well, I just did), he would be better at a strategy for the trust to avoid or reduce this liability.
Yes. Debt forgiveness is a type of income reportable by brother. If it is in fact true, it must be reported on trust tax return. Not sure what is meant by "worked off".
Yes. Successor trustees do have responsibility to accurately report trust financial information to IRS. Failure to do so may result in personal liability.
Because forgiveness of debt is a reportable income items get your CPA involved.
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