If an annuity was closed out right before death but the check was deposited after death, does that count as estate income? – North Carolina

Short Answer

In North Carolina, an annuity payout that was triggered before death but received (or deposited) after death is often treated as an estate receipt, but whether it is “estate income” depends on what the payment represents. Many annuity payouts are treated as principal for probate accounting purposes, while the taxable portion may be reportable as post-death income to the estate (or to a named beneficiary) under federal “income in respect of a decedent” rules that North Carolina generally follows for fiduciary income tax. The deposit date alone usually does not control the tax answer; the key is who was entitled to the payment at death and what portion is taxable.

Understanding the Problem

In North Carolina estate administration, the question is whether an annuity payout that was processed right before death—but not deposited until after death—must be treated as estate income for purposes of the estate’s accounting and whether that timing triggers an estate income tax return. The decision point is typically whether the decedent had a right to the payment at death (or whether a beneficiary had the right), and whether the payment is treated as principal versus income during the administration period.

Apply the Law

North Carolina fiduciary income tax for estates generally tracks federal fiduciary income tax concepts, meaning the estate’s North Carolina taxable income is largely determined the same way it is determined for federal purposes, with North Carolina-specific adjustments. Separately, for probate accounting, North Carolina uses principal-and-income rules that help a personal representative decide what is “income” during administration versus what is “principal” that will be distributed as part of the estate’s assets.

Key Requirements

Who was entitled to the annuity payment at death: If the decedent had a fixed right to the payout before death (even if the check arrived later), the payment is commonly treated as something the estate is collecting. If a beneficiary designation controls and the annuity pays directly to a beneficiary, it may not be an estate receipt at all.
What the payment represents (principal vs. earnings): For accounting, many “cash-out” annuity proceeds are treated as a principal receipt (an asset being converted to cash). For income tax, the taxable portion (often the earnings portion) may be reportable as income when received by the estate or beneficiary.
Whether an estate fiduciary income tax return is required: North Carolina requires a fiduciary return when the estate has taxable income and is required to file under federal rules, or when the Department of Revenue requests one.

What the Statutes Say

N.C. Gen. Stat. § 105-160.2 (Tax on estates and trusts) – North Carolina imposes income tax on an estate’s taxable income, generally determined using federal concepts, with certain adjustments.
N.C. Gen. Stat. § 105-160.5 (Fiduciary returns) – A fiduciary must file a North Carolina fiduciary income tax return when the estate has taxable income and is required to file under federal rules (or when the Secretary requests a return).

Analysis

Apply the Rule to the Facts: The annuity was “closed out” right before death, but the funds were deposited after death and taxes were reportedly withheld. That pattern often means (1) the estate may have received the money as part of collecting the decedent’s assets, and (2) some portion of the payout may be taxable when received, even if the transaction started before death. The key follow-up facts are whether the annuity paid to the estate (no living beneficiary or payable-to-estate designation) and what tax form was issued (for example, whether the payer issued a Form 1099-R to the decedent, the estate, or a beneficiary).

Process & Timing

Who files: the personal representative (executor/administrator). Where: the estate administration is supervised by the Clerk of Superior Court in the county where the estate is opened; tax filings go to the IRS and the North Carolina Department of Revenue. What: the estate accounting typically reflects the receipt as an estate collection item; income tax reporting is typically on the estate’s fiduciary return if required. When: timing often turns on the tax year in which the estate (or beneficiary) actually received the taxable portion, not merely when paperwork was initiated.
Confirm payee and tax reporting: obtain the annuity closing statement and the tax reporting document from the payer. If the payer treated the payment as belonging to the decedent, it may be reported on the decedent’s final return; if treated as payable after death, it may be reported to the estate or beneficiary.
Match the accounting to the tax treatment: for probate accounting, the receipt is commonly shown as a principal receipt (asset converted to cash), while any post-death earnings component and deductible administration expenses are handled under the estate’s income/principal rules and the fiduciary income tax framework.

Exceptions & Pitfalls

Beneficiary designation controls: If the annuity paid directly to a named beneficiary, it may bypass the estate entirely, which can change both the probate accounting and who reports the taxable portion.
Deposit date is not the whole story: A check deposited after death can still be tied to a right that existed before death, and tax reporting often follows who had the right to the income and when it was received for tax purposes.
Withholding can mislead: Taxes withheld by the annuity company do not automatically mean the estate owes tax or must file; withholding may have been applied based on default rules, and the correct taxpayer might be the decedent, the estate, or a beneficiary depending on how the payer coded the distribution.
Final accounting timing: Near the closing stage, a late-issued tax form (or a corrected form) can require revisiting the final account or delaying closing until the reporting is consistent.

Conclusion

In North Carolina, an annuity payout initiated before death but received after death is usually an estate receipt if it was payable to the estate, but it is not automatically “estate income” just because it was deposited after death. The controlling questions are who was entitled to the payment at death and what portion is taxable when received. The practical next step is to obtain the annuity’s closing statement and tax form and confirm whether the payer reported the distribution to the decedent, the estate, or a beneficiary before filing (or skipping) the estate fiduciary income tax return.

Talk to a Probate Attorney

If you’re dealing with an annuity payout that landed around the date of death and it is holding up the final accounting, our firm has experienced attorneys who can help you understand your options and timelines. Call us today at [919-341-7055].

Disclaimer: This article provides general information about North Carolina law based on the single question stated above. It is not legal advice for your specific situation and does not create an attorney-client relationship. Laws, procedures, and local practice can change and may vary by county. If you have a deadline, act promptly and speak with a licensed North Carolina attorney.