Computing Distributable Net Income For Estate 1041 Income Tax Return

[ron6612]

I am working on a 1041 estate return for our family.  The trust agreement states that all  accrued, accumulated and undistributable income and assets goes to two children upon death, 50-50.  After coming up with Net Income before DNI for the estate does that mean all of the income needs to be distributed?  Or, could some income be left in the estate undistributed at around the $8,000 level to avoid any taxes on this amount?  Under this approach, the DNI "to be distributed" would be reduced by $8,000 saving the beneficiaries and the estate taxes on that amount.

[Anonymous]

the sentence you provided does not tell us what the trust agreement provides for the annual distribution of income.  however, if the estate has terminated and made distributions of all assets any current income would be distributed. 

The trust agreement states that all accrued, accumulated and undistributable income and assets goes to two children upon death, 50-50.  

[ron6612]

There is no mention for the annual distribution of income, just the one sentence about accrued, accumulated and undistribitable income. So, are you saying that the DNI deduction should equal the net income after accounting for the $600 estate exemption?  And, there can be no profit of about $8,000 left in the estate to take advantage of the low tax rate?

[tagteam]

Has the estate (or trust, as the case may be) terminated and is now filing its final return? 

If so, all assets (including income) are (or should have been) distributed to the beneficiaries.

[ron6612]

The death just happened so it will be the first filing if estate 1041. The only income is a death benefit. The expenses should all be known and accounted for this year. I want sure if was going to state final return on the check box. 

[tagteam]

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@ron6612 wrote:

The death just happened so it will be the first filing if estate 1041. The only income is a death benefit. The expenses should all be known and accounted for this year. I want sure if was going to state final return on the check box. 

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I believe you need to provide more details in order to receive some sort of sensible and accurate answer.

What is the source of the death benefit and was it payable to the estate itself? If the source were from a life insurance policy, for example, those proceeds are typically not taxable.

Also, is the death benefit (whatever the source) the only income and there are no other assets whatsoever? Did the estate actually receive the benefit or were beneficiaries named other than in the will or trust?

For that matter, was there a will or trust (or both)? To which document are you referring?

[ron6612]

Thanks for your help!  The income noted is the taxable amount from an annuity death benefit payout. Benefit was payable to trust and going to estate ein number. That is only income of estate. The other financial assets are being distributed directly to beneficiaries and have no tax impact. There is no estate return to file except for 1041. The document noted is the revocable trust noting the allocation to the two beneficiaries. 

[tagteam]

If you have wound up the affairs (in terms of administration) and have distributed the assets (income in this instance) to the beneficiaries, then the 1041 would be marked as the final return.

[ron6612]

If the income to trust is only taxable annuity payment and the only deductible expenses are paid administrative expenses and a deductible casualty loss due to national emergency (this is allowable trust deduction) and all cash is distributed  to beneficiaries before year end, can the non cash casualty loss be used to reduce the DNI?  For instance would this be allowable:

Annuity income.   $100

Administrative expenses   $10

Casualty loss  $20

DNI. $70

Net 1041 Gain/loss. $0

This would result in no 1041 taxes and K1 income to beneficiaries of $70

[tagteam]

An actual casualty loss would be reported on Line 15a and would reduce DNI. 

As for the propriety of claiming that loss in this instance, I would reserve judgment.

[ron6612]

Thank you!  I was wondering if I needed to manually compute the DNI that would go to the K1’s or if Business could automatically make the computation based on the taxable amount noted in my example?  It’s an easy computation in our situation as there is only one income source and two expense types. The goal is to distribute the allowable amount to zero out tax liability to trust. 

[tagteam]

You need to make a distribution in Business, typically.

Click the Federal Taxes tab and then Distributions.

[ron6612]

So are you saying to manually enter the distribution amount based on the net income of the trust?

[tagteam]

For a trust, the program should calculate the TAI (i.e., show you the accounting income) and you can select percentages or distribution amounts.

If your trust document specifies 50% to each beneficiary, then you can select percentages (which should wind up calculating the correct amount to each beneficiary if you entered them into the program initially).

[ron6612]

Could not find where to enter the 50% for each beneficiary.  It only asks for the names and social security numbers.  Do not see any area where the software could compute the DNI without manually entering the number based on the net income.  Also, the software is generating a 4684 and 4797 for the casualty losses.  Are both of those forms also needed for the return?