1041, K-1, moving money from Estate to Trust

[merlin00]

Does this make sense to anyone?

My CPA's original plan was to move money from Estate to Trust, then the Trust donates everything to charities and deducts it, and neither pays any taxes since it's all deductible. But instead of a straightforward K-1 from the Estate, and listing that income and individual charitable deductions for the Trust, they've issued an Estate K-1 to the Trust that lists the income in Box 5 but also lists a Box 14 Code H deduction for the same amount. So now the Trust isn't reporting the income or charitable deductions. I don't get it.

Details:

• We moved $200k in 1099-R IRA income from the Estate to the Trust.
• The Trust was the beneficiary listed on the K-1.
• The Trust paid out all $200k to charities. No charitable contributions from Estate.
• Estate reports the 1099-R income on the 1041, and generated a K-1 to the Trust, which has 200k listed as other income in Box 5 and -200k listed on Box 14, with code H. ($200k is also listed in Box 18 of form 1041.)
• Code H is for net investment income tax or deductions.
• Trust is not reporting this K-1 income or the related charitable deductions. (I'm guessing because Box 5 minus Box 14 is 0.)

I have mentioned my concerns to her several times but she says it's fine as-is and refuses to explain it to me further. I just don't want an audit so I'm quite paranoid. She says the income and deduction are both listed on the estate and therefore do not need to be listed on the trust. But I have no idea how Code H is at all relevant for the Estate, especially when the Trust is the one who should be listing the deductions. It's very confusing. Is this plan of hers just a simpler alternative that achieves the same thing with less work?

[Hi Palms]

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@merlin00 wrote:

My CPA's original plan was to move money from Estate to Trust, then the Trust donates everything to charities and deducts it.......

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That's a problem right there since neither an estate nor a trust can deduct charitable contributions that are NOT paid or set aside from income. Contributions that are made from corpus (principal) are NOT deductible on Form 1041 (they are on Form 706).

The Line 14H figure is strictly for the purposes of Form 8960 (calculating NIIT) and does not reduce the overall net income. 

[merlin00]

@Hi Palms thank you for responding. For clarification, the estate had income only, in the form of the 1099-R (IRA distribution). It passed that to the Trust via the K-1. No principal in the Estate account, only the Trust account.

Neither an 8960 nor a 706 was attached to either filing.

How can I explain it to her that she's doing this wrong? Every time I try to express my concerns, she tells me that she has 30 years experience with this and does not have time to give me tax lessons, and says I would not want to pay her for her time explaining it to me. I feel like there's nothing I can say; she's being so mean about it because she's under pressure with the looming deadline. And she's told me that this method works just fine, and if I want her to redo it, it's going to cost more money. I'm so worried about it all but I just don't know how to explain the error to her!

[Hi Palms]

What exactly is your concern? The IRS doesn't really care who pays the tax on the income as long as it gets paid.

The estate could have paid any tax due and then passed the balance through to the trust tax-free for the trust to distribute accordingly. Obviously, that didn't happen.

Charitable contributions out of estates and trusts are tricky. An estate can only make charitable contributions that are deductible on a 1041 if they come from income AND are specifically provided for in the will. 

Re trusts, only the trustee can make charitable contributions out of the trust and even then they must be provided for in the terms of the trust (or give the trustee discretion to make them). Then, of course, the contribution is deductible on a 1041 only to the extent the trust has income.

[merlin00]

@Hi Palms my concern is being fined and penalized, or god forbid taxed >40% on the $200k income because it was all done incorrectly. I just don't want to get in trouble for any of this, for the CPA's mistake, and end up owing money I can't afford.

The will and Estate (probate) left everything to the Trust. The Estate's 1041/K-1 shows the 1099-R income transferred to the Trust with that weird Code H.
The Trust donated all the income from the Estate (1099-R) and Trust (1099-INT).
But the Trust 1041 doesn't report the K-1 income from the Estate or the extensive charitable donations (beyond the -INT income).

I'm just an anxious person and I'm worried about this causing problems for me in the future.

[Hi Palms]

Something happened at that initial level. The estate probably did not need to file a 1041 because the trust could have done so initially. Otherwise, the estate could have reported the income and taken the charitable deduction (if provided for in the will) and there would have been nothing to "transfer" to the trust.

The H code is nothing more than an NIIT adjustment. If the threshold for filing an 8960 is not reached, then you need not be concerned with Line 14 with an H code.

Anyway, this could have been handled differently (and better) but it clearly was not. At this point, you might try to get an amended K-1 from the estate showing the deduction on Line 11 as a final year deduction. That way you could enter the deduction on Schedule A of the trust's 1041.

[Hi Palms]

See also https://www.irs.gov/publications/p559#en_US_2024_publink[phone number removed]

You might want to consider additional filings, namely Form 5495. If you do not have any of the decedent's or trust's property, it would be difficult for the IRS to assess penalties on you, personally, if you relied on the advice of a qualified tax professional. Filing Form 5495 should relieve you of all personal liability, regardless.