What is 'Income In Respect Of A Decedent - IRD'

Income in Respect of a Decedent (IRD) refers to untaxed income which a decedent had earned or had a right to receive during his or her lifetime. IRD is taxed to the individual beneficiary or entity that inherits this income. IRD also counts toward the decedent's estate for federal estate tax purposes, potentially drawing a double-tax hit. However, the beneficiary may be able to take a tax deduction from estate tax paid on IRD. 

The beneficiary must declare IRD as income for the year in which the person received it. 

BREAKING DOWN 'Income In Respect Of A Decedent - IRD'

Income in Respect of a Decedent is defined in I.R.C. section 691

Examples include uncollected salaries, wages, bonuses, commissions, vacation pay, and sick pay; uncollected rent; interest and dividends accrued; distributions from certain deferred compensation and stock option plans; accounts receivable of a sole proprietor; and gain from the sale of property if the sale is deemed to occur before death, but proceeds are not collected until after death. 

IRD will be taxed as if they were taxed upon the decedent if he or she were still alive. For example, capital gains would be taxed as capital gains and uncollected compensation would be taxed as ordinary income on the recipient's tax return for the year he or she received it. 

There is no step-up basis for IRDs. 

IRD as it Relates to IRAs and 401(k)s 

Other common examples of IRDs are distributions from tax-deferred qualified retirement plans such as 401(k)s and traditional Individual Retirement Accounts (IRA) that are passed onto the account holder's beneficiary. If an individual dies leaving behind a $1 million IRA to his beneficiary son, the inheritor will be responsible for paying taxes on any distributions made from the account.

The beneficiary usually would have to start taking required minimum distributions (RMD)s at a certain point. A living spouse who is the sole beneficiary has certain rights not granted to another type of beneficiary. For example, a spouse can roll over the decedent's IRA assets into his or her own IRA and postpone RMDs until age 70.5. Either way, each beneficiary has specific RMD rules to follow and would be liable for applicable taxes. 

If the decedent died on or after reaching age 70.5, his RMD for the year of death will factor into his or her estate. If this were to push the decedent's estate beyond the federal exemption (roughly $10 million in 2018), an estate tax of 40% will kick in. 

To try to minimize this impact, several individuals and married couples devise estate-planning strategies that involve transferring assets to trusts such as a credit shelter trust, which postpones estate taxes until death of the surviving spouse.  

RELATED TERMS
  1. Interest Rate Differential - IRD

    An interest rate differential measures the gap in interest rates ...
  2. Administrator

    An administrator is a court-appointed individual who handles ...
  3. Beneficiary

    A beneficiary is any person who gains an advantage and/or profits ...
  4. Primary Beneficiary

    A primary beneficiary is the first person in line to receive ...
  5. Terminal Year

    Terminal year is the year in which an individual dies, in the ...
  6. Death Taxes

    Death taxes are taxes imposed by the federal and/or state government ...
Related Articles
  1. Financial Advisor

    Why You Need to Find the Right IRA Beneficiary

    It definitely matters who you pick as your IRA beneficiary—and how you go about it. And in some cases, your best option may be to go with a trust.
  2. Retirement

    5 Reasons to Consider a Roth IRA

    A Roth IRA should be considered as part of a retirement plan for these five reasons.
  3. Retirement

    What You Should Know About IRA Beneficiaries: Part 2

    Here's how IRAs, and the beneficiaries you name, work with wills and trusts.
  4. Retirement

    Why Your Estate Shouldn't Be Your IRA Beneficiary

    Here are five reasons why you should not name your estate as your IRA beneficiary.
  5. Retirement

    Distribution Rules for Inherited Retirement Plan Assets

    If you've recently inherited a retirement plan, you must get to know the rules for distributing the funds.
  6. Retirement

    3 Deadlines For Retirement Plan Beneficiaries

    To take full advantage of new RMD regulations, beneficiaries need to take action before important deadlines.
  7. Retirement

    A Look at Protecting Children With an IRA Trust

    Too many people make huge and irreversible mistakes when naming the beneficiaries for their retirement accounts.
  8. Managing Wealth

    Why Your Will Should Name Designated Beneficiaries

    Find out how to make the tough decisions when it comes to choosing beneficiaries for your will.
  9. Retirement

    Designating a trust as retirement beneficiary

    Designating a trust as your IRA beneficiary can be beneficial, but it requires proper planning to avoid problems.
Trading Center