Computing Distributable Net Income For Estate 1041 Income Tax Return

[ron6612]

I was able to delete the form on the bottom of the form and no longer there.  One more question:  tax advisor said we need to attach a statement that says something like this:  "Deductions That May Be Allowable for Estate Tax Purposes Administration expenses and casualty and theft losses deductible on Form 706 may be deducted, to the extent otherwise deductible for income tax purposes, on Form 1041 if the fiduciary files a statement waiving the right to deduct the expenses and losses on Form 706. The statement must be filed before the expiration of the statutory period of limitations for the tax year the deduction is claimed. See Pub. 559 for more information."

Is this something that can also be done in Forms Mode?

[tagteam · Accepted solution]

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@ron6612 wrote:

Is this something that can also be done in Forms Mode?

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If your tax adviser suggests filing the waiver, you can use Forms Mode to do so. There are (essentially) blank forms for "Additional Information" and "Miscellaneous Statement". There is also space in "Other Elections" on the Estate and Trust Elections Summary form.

[ron6612]

Everything working good now since the entity type was noted as a Simple Trust. I just noticed this from the intuit web site:

Simple Trusts

A simple trust is a trust that is required to distribute all of its income during the tax year in which it was received by the trust. In addition, only distributions of income are allowed to beneficiaries. Income, in this case, is defined under both local law and the governing instrument, the trust document. Historically, income has not included capital gains income; under most trust instruments and State laws, capital gains have been considered corpus. A trust will lose this classification if it distributes corpus in any tax year; thus, a trust cannot be a simple trust in its year of termination or any year of partial liquidation. Income of the trust is taxable to the recipient even if distributions are not made, although a simple trust itself can incur tax liability (i.e., realized long-term capital gains). In addition, the structure of a simple trust does not provide for charitable contributions.

That being said I just wanted to make sure that I have used the right entity type as a Simple Trust. My mom had a Revocable Trust stating that the assets were to be distributed to her two beneficiary children. On her Investment account it received a step up basis and the funds were transferred to her two children. After death the trust became irrevocable and there was a taxable annuity payment that was paid to the new EIN number. There also have been the expenses previously noted and the net income will be distributed on the K1’s all on the initial and final 1041. Just wanted to be clear on the specifics to make sure the entity type is simple trust and not a complex trust or estate. That is all of the details. 

[tagteam]

The following are the requirements for a simple trust:

1. The trust instrument requires that all income must be distributed currently;

2. The trust instrument doesn't provide that any amounts are to be paid, permanently set aside, or used for charitable purposes; and

3. The trust doesn't distribute amounts allocated to the corpus of the trust.

In the final year, everything is typically distributed (principal and income), so the trust is typically complex and, typically, part of the annuity payment is a return of principal so the trust would be complex.

[ron6612]

I hope that I didn't mess up the entity type when applied for the EIN number.  At the IRS website there was an option for estate and it asked for date of death.  There was another option for trust and it asked for date trust was started.  I selected estate and received the EIN number and the paperwork received with EIN number says "name of my mother and Estate."  That is why I selected estate at first in TurboTax Business.  The instructions on the paperwork received with the EIN says to use number and complete name exactly as shown on the form which has my mother's name and Estate.  If you are sure that this is a complex trust and not an estate entity type could I use the estate name that the IRS has instead of the name of the trust so that the names match up.  Or, should I call the IRS and let them know the name should be the trust name and not an estate name?

Thanks again!

[tagteam]

I would suggest that you simply apply for an EIN for the trust (use the date of death as the date created if you want to avoid issues).

The IRS is not going to switch the EIN to another entity type and you will be extremely fortunate to get through to anyone at this time, regardless.

When you, or anyone else, reads through this entire thread, it should be clear as to why most of us recommend professional guidance when confronted with matters such as the one presented here; they almost always appear to be much more straightforward and simple than they are in actuality.

[ron6612]

If I apply for another EIN what about the annuity income that went to the other EIN?

[tagteam]

In that case, you should probably just report under the original EIN (since any tax reporting statement you receive will display that EIN).

The only other alternative would be to report it under the original EIN as nominee for the trust (i.e., new EIN) which could be messy and create other issues as well. 

If you are questioned, you can always simply respond that you erred when you selected estate as the type of entity and, since this is the final return (all assets and income are being distributed), it should not make a huge difference anyway.

[ron6612]

Ok, then even though the entity type would be complex trust is it ok for the name of the entity to be my mom's name followed by the word "Estate?"  The IRS has the entity type as estate and the name as just noted?

[ron6612]

From intuit web website:

Decedent's Estates

The estate of a deceased person is a taxable entity that exists until all debts are paid, if possible, and assets have been distributed to heirs and other beneficiaries of the decedent. The income earned from the assets of the estate during the period of administration or settlement, which is usually no more than 3 years but can be much longer in some cases, is subject to tax. Generally, property received by the beneficiary of an estate, valued on the date of a decedent's death, is not taxable income to the beneficiary (with the exception of Income In Respect of a Decedent (IRD)items). However, any income accruing after the decedent's death will be taxed to whomever realizes the gain. Therefore, income received by the estate will be taxed either to the estate (if not distributed in the year that the income was received) or to the beneficiary. In addition, capital gains realized by the estate are ordinarily taxed to the estate. Income distributed must be reported on the beneficiary's income tax return and is allowable as a deduction for the estate .

[tagteam]

I would suggest entering the information as is printed on the EIN application (you can select trust (complex) as the entity type), but be prepared with an answer (to an IRS letter) explaining precisely what occurred when you applied for the EIN.

The end result should be the same regardless (e.g., the beneficiaries will received essentially the same K-1s with the same figures).

[tagteam · Accepted solution]

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@ron6612 wrote:

From intuit web website:

Decedent's Estates

The estate of a deceased person is a taxable entity that exists until all debts are paid.....

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Do you not understand that a trust bypasses the need for probate of an estate (with respect to the property held in the name of the trust)?

The decedent's property passes through the trust (which becomes irrevocable at death) to the beneficiary(ies). Essentially, a trust bypasses a decedent's estate (e.g., the property in the trust passes outside the estate).

[ron6612]

Thanks so much, that information I now understand.  I was going to call the IRS to see if there was some way that they could change the original application type from an estate to a trust with a trust name change.

[ron6612]

When entering trust name into Business do I use the name of the revocable trust or change it to irrevocable?  Same question if I apply for new EIN. I see how the date of death becomes trust creation date and that the program seems to work the same if it is simple or complex trust. 

Name REV Trust

     Or

Name IRV Trust

[tagteam]

Use whatever name that you entered on the application for the EIN.

The difference you will see between a simple and complex trust in the program is the amount of the exemption.