Navigating the Finances of a Deceased Loved One
Income in respect of a decedent: the money that arrives after a death, the tax that follows it, and how to work through the transition.
When someone dies, they may still have income that was earned or accrued prior to their death. This income would be included on their final tax return and known as "income in respect of a decedent (IRD)." It includes wages, pensions, Social Security benefits, annuities, investments, and other forms of income. IRD must be reported on the deceased person's final tax return unless it has already been included on previous returns. Life insurance can provide the needed funds to cover this final tax return.
What Is Income in Respect of a Decedent (IRD)?
IRD refers to income that a deceased taxpayer had a right to receive but had not yet received at the time of death. Common examples include:
- Wages or salary earned but not yet paid at the time of death
- Pension or retirement distributions that had begun but not been fully distributed
- Traditional IRA distributions that would have been taxable to the deceased
- Accrued interest or dividends not yet received
- Business income from a sole proprietorship
IRD Can Be Taxed Twice
IRD can be subject to both estate tax and income tax — a double taxation that can significantly reduce what heirs receive. Life insurance provides the liquidity needed to pay these taxes without forcing the sale of assets.
How to Navigate the Financial Transition
Beyond IRD, there are many financial tasks that fall to surviving family members after a death. These include notifying Social Security, canceling or transferring accounts, filing the final tax return, distributing retirement accounts, and settling the estate through probate.
Life Insurance Provides Breathing Room
A life insurance payout gives the surviving family liquid funds to handle all these financial obligations — without having to liquidate investments, sell property, or go into debt during an already difficult time.