Estate form 1041- K-1 "Beneficiary's Allocation Smart Worksheet" is this based on percentages given in Will or as a proportion of Distributions in same calendar year? CPA says the Allocation is proportional since "Cash basis"

[mae5818estate]

Estate form 1041- K-1 "Beneficiary's Allocation Smart Worksheet" is this based on percentages given in Will of just taxable income or as a proportion of Distributions of taxable income in same calendar year? CPA says the Allocation is proportional against distributions only in 2021 since "Cash basis".

Fourteen Beneficiary's benefitted from Capital Gain in sale of residence of the deceased in 2021.  Each Beneficiary is to receive an equal percentage of the distributions from the Estate (per Will). The sale transaction and distribution of the Capital Gain was all in 2021.

 Eleven of the Beneficiary's received a full distribution from the Estate in 2021. Three had received prior year distributions from the Estate (nothing to do with Capital Gain as was Cash in bank accounts), so got less in 2021, but ultimately got the same exact total distribution from the Estate as the others did once the residence property was sold.

An accountant originally did a 1041, but placed the Allocation of Capital Gains as a Proportion of the distributions in just 2021. The AMT method was used to minimize the taxes. Thus as the accountant entered the numbers those who had prior year distributions would benefit by not owing as much tax as those who only got a distribution in 2021. As well the other eleven are penalized by those prior year distributions.

This Proportional Allocation is what bugs me as each Beneficiary gained equally from the sale of the residential property in 2021 and all received those funds in 2021. Logically it should not matter if one or more Beneficiary got non taxable distribution in a prior year. The Will dictates the Allocation...Correct?

In the end the IRS still gets the correct amount of Tax paid.

I flagged that (IMO odd allocation) and requested a Equal Allocation to each Beneficiary as stated in the Will rather than Proportional to the funds distributed just that year. The accountant more or less said "No, because it is on a Cash Basis".

The full and Final distribution per Beneficiary was well over $20K. The Capital Gain was a little more than $2K per Beneficiary. All Beneficiary's received more than $10K in 2021. So no issue of the Capital Gain being more than any one Beneficiary received in 2021.

I can make the entry in TT 2020 1041 K-1's (line 4a) to be the Equal value per Beneficiary. So is the accountant being stubborn or am I missing something?

[tagteam]

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@mae5818estate wrote:

(nothing to do with Capital Gain as was Cash in bank accounts)

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Then, technically, the beneficiaries who received only corpus (principal) in the form of cash, do not even need to receive a K-1 since the distribution is not income or gain.

Were these beneficiaries supposed to share in the proceeds from the sale of the residence?

[mae5818estate]

Yes, as per the Will, each remaining Beneficiary was to share equally in the proceeds from the sale of the residence. The property was held for 5 years from date of death, so it became a Long Term Capital Gain asset for the Final 1041.

I understand no K-1 required if cash assets only.

The residence sold in 2021 for about $50K more than reported on the original Inventory, Appraisal and List of Claims, thus a nominal Capital Gain after expenses of a bit more than $40K to be distributed as Capital Gain Income in the 2021 Final 1041 as per allocation to remaining fourteen Beneficiaries defined in Will.

The Beneficiary allocation in the Will was to sell all assets, pall all bills and expenses,  and then finally distribute to a church $50K (done from cash holdings in a prior tax year) and remaining funds equally distributed to remaining named Beneficiaries. That is each of the remaining Beneficiaries was to receive an equal total distribution of 7-1/7 % .

The Will, as I understand things, if the controlling instrument which allows myself as the Executor to set the Income allocation equally to all fourteen remaining Beneficiaries. 

The accountant thinks the Income allocation is based on just the distributions in 2021. This method does not equally distribute the Income allocation in 2021 to all Beneficiaries.

I will upload a spreadsheet showing the differences on the K-1s as developed by the accountant and one developed by myself.

As previously stated three Beneficiaries received early/prior distributions in prior tax years from Cash assets. By using a proportionate to distributions in just 2021 the accountant is 'discounting' the Income allocation to these three. Calculation of Income allocation by the accountant appears to be a prorated value based in just distributions in 2021.  This in effect places a greater tax burden on the remaining eleven Beneficiaries. As well the three Beneficiaries benefit improperly from the accountants version of Income allocation.

[tagteam]

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@mae5818estate wrote:

As previously stated three Beneficiaries received early/prior distributions in prior tax years from Cash assets. 

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Yes, but that is the problem and you should consult an attorney and/or a tax professional (i.e., get another opinion other than that provided by your accountant) in your local area (or the state of residence of the decedent).

The threshold question might be whether you had the authority to make early/prior distributions and, if so, were the distributions deemed to have come exclusively from corpus (since the property had not been sold when the distributions were made) or whether the tax burden should be allocated (after the fact), pro rata, to the three beneficiaries who received early distributions.

[mae5818estate]

Thank you for your time in responding.

Seems never a simple answer.

As far as Corpus goes, yes there was plenty of Cash available upon death to cover those early distributions. So those early distributions had to come exclusively from the Corpus as the property had not sold when those distributions were made.

Since I renewed the letters Testimony once a year or so and was the only Executor the whole duration, I would think unless specifically limited in the Will (I was not), I had said authority to make early distributions as I saw fit - as long as it was to the Benefit of the Estate (or at least not a detriment to). I recall asking the lawyer who drafted the Will if I could make these early distributions and he said it was fine as long as documented well.

If no other responses here, I will seek a local tax lawyer or a different CPA for a second opinion.

[tagteam]

@mae5818estate 

If you have the authority to make early distributions, then there should be no issues with allocating according to your plan. 

Recall, however, that you would be indicating that the distributions were made in the current tax year (2021), the year in which the property was sold, which is actually not the case.

You should seek local tax counsel so that you are covered from the standpoint of liability as executor, if for no other reason.

[mae5818estate]

RE: "Recall, however, that you would be indicating that the distributions were made in the current tax year (2021), the year in which the property was sold, which is actually not the case."

The 2020 1041 was filed earlier this year (just Interest Income - a few hundred dollars). The Estate owed no taxes for 2020.

This discussion is about the 1041 as a short year 1041 as a Final return for 2021

By .."indicating that distributions were made in the current tax year (2021)..."

Do you mean to say "...indicating prior early distributions were made in the current tax year (2021)..."

If so it makes no sense and not at all what would be reported.

The prior year early distributions to the three were from the Corpus of cash assets. These cash distributions were already reported in prior tax years on each of the 1041s and the Estate paid all income tax on Interest Income those prior year 1041s. 

The distributions in 2021 included the remaining Corpus cash assets and the funds derived from the sale of the residence in 2021. Did I mention the cash on hand at start of 2021 was more than the sale price of the residence itself?  Income produced in 2021 was only distributed in 2021.

As such distributions in 2021 were primarily the remaining Corpus of cash assets and secondarily the smaller amount of the proceeds from the sale of the residence, less expenses.

[tagteam · Accepted solution]

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@mae5818estate wrote:

Did I mention the cash on hand at start of 2021 was more than the sale price of the residence itself?  Income produced in 2021 was only distributed in 2021.

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No you did not mention that fact and it is relevant to the allocation.

Personally, I would simply ensure that the three beneficiaries affected understand exactly what is happening with respect to their distributions for 2021 (i.e., their tax liability) and make the allocations accordingly.

[mae5818estate]

One more follow up question...

The "Beneficiary's Allocation Smart Worksheet" section A 1 & 2.

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A Enter the beneficiary's dollar amount of:

1.) Income required to be distributed. 

2.) Other amounts paid, credited, or otherwise required to be distributed (second tier).
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The response to # 1 is obvious.

The response to # 2 ...would this be total distributed less what was entered in # 1?

...or Total distributed including the amount in # 1?

Say # 1 income is entered as $ 500
Total Distribution including the income indicated in # 1 was $3000

Would # 2 be entered as $2500 or $3000?

That is in the Supporting detail form calculation I could enter $3000, then an entry for less the -$500 in income (which populates the allocation worksheet with $2500) for # 2 entry...or do I just enter the total distribution of all funds as $3000 (which populates the worksheet with $3000).

It would seem to reason the $3000 total distributed less the  $ 500 in income (or just entering $2500) is the correct way to populate the worksheet...based on the term "Other"

I enter it in these various ways and see no changes to the K-1 other than what is entered for # 2 on the worksheet. Nor do the percentages change in the worksheet.

[mae5818estate]

This post is a similar question and my findings on what #1 Distributions of (first tier) & #2 Distributions of (second tier) are.

IRS guidance:

https://www.irs.gov/instructions/i1041#idm[phone number removed]984

Other thread:
https://ttlc.intuit.com/community/retirement/discussion/distribution-to-the-beneficiary/00/43481

[tagteam]

First tier distributions are those that are required by the relevant document to be distributed to the beneficiary (whether they are distributed or not - meaning that the beneficiary may be responsible for paying any tax due on proceeds not actually received).

Second tier distributions are everything distributed other than first tier distributions.