Contribution to a deceased partner

[Guest jetfaninmn]

If a partner of an LLC died during 2005, and his compensation will not be determined until 2006, can a 2005 deferral contribution be made at that time.

Thanks!

[Guest mjb]

Deferral by who? If the partner made pre tax contributions before death then the contributions will be reported on the K-1 for 2006 which will reduce the partner's income on the 1040. What other contributions are you thinking of?

[Guest jetfaninmn]

Deferral by the deceased participant. I believe that even though the participant has income due in 2006, the fact that he is deceased and his estate will be receiving his income, no deferral contribution can be made on his behalf. Am I correct?

[Guest mjb]

The partner and his estate are separate taxapayers under the IRC. See IRC section 1(a) for tax rate on estates and trusts. The partner owes income tax on all income paid to him until the date of death (reduced by applicable deductions, credits, personal exemptions for the year) which will be reported on the 1040. The deduction for 401k elective contributions made before death is taken on line 32 of the 1040.

The estate is separate taxpayer which is taxed on all income due/paid to the partner after his date of death e.g, stock dividends, wages earned but not paid prior to death, and files a 1041 form. The estate will be taxed on all income paid to it each year including distributions from the participant's retirement plan which are not distributed to other taxpayers. In other words the 401k contributions are deducted from the partner's income in the year of death and included in the estate's taxable income when paid by the plan.

Taxation of decedents and their estates is extremely complicated and should be handled by a professional tax preparer.