Moving income from Estate to Trust

[merlin00]

Trying to figure out if this is a CPA error or normal.

IRA was given to Estate EIN after death. Probate. It was the cashed out and transferred to Trust EIN. Trust was paid out to mostly charitable beneficiaries. CPA told us the plan was to move the income to the trust with a K-1 (done) and then write-off the taxes with the charitable donations deductions.

Now, we have both tax packets. Estate reports 1099-R income and generates a K-1 which has 200k listed as other income in Box 5 and -200k listed on Box 14, with code H. No statements attached other than the 1099-R.

Trust does not reflect this income or the charitable deductions, only the $15k in interest income (1099-INT) and deductions up to that amount.

I have mentioned this several times but she says it was done correctly. It just doesn't seem to match what she said in the initial consultation. Does it sound right to you?? The K-1 income NOT being listed anywhere by the Trust/K-1beneficiary?

She says the income and deduction are both listed on the estate and therefore do not need to be listed on the trust. But the deduction is only the pass-through income from what I can tell, or this Code H whatever it's supposed to mean, since it doesn't seem to have context in this situation (no investments were made).

She says the K-1 is all that is needed. Doesn't the trust still need to report it? And the donations? I am so confused. And she won't explain it to me and is now irritated by my question. My biggest fear is being audited.

If you think she's done this correctly, can you please explain it to me so I can stop irritating her?

If you think she's done it incorrectly, can you please tell me what I should say to her to explain the issue?

Thank you very much.

[NCperson]

@merlin00 - on the K-1, who is listed as the beneficiary in the lower left section (part II)? the trust or someone else? 

which entity actually made the donations? the estate or the trust?

regardless of your responses, it appears that there is documentation that the income was generated from the IRA distributions and there is documentation of contributions that net out the income to zero. 

What difference does it really make? The IRS isn't going to audit / fine / imprison you in a case where there is no tax due in any event.  The tax payments would be correct even if for some crazy reason the reporting is not correct.  

[merlin00]

1099-R was from distributing Estate IRA to Estate.

K-1 was for moving income from Estate to Trust (beneficiary).

Charitable donations were made by Trust.

[merlin00]

@NCperson added a little bit of extra information above regarding the Estate's K-1

[NCperson]

@merlin00 what I am specifically asking is if you look at the K-1, Part II, who is the beneficiary of the K-1? what is the name and whose SSN / TIN is listed?  the Trust or someone else? 

I would go back to the accountant and ask why Code H was used in Box 14 of the K-1.  The definition of Code H is:  

Code H. Net investment income tax.

This amount is the beneficiary's adjustment for section 1411 net investment income or deductions

The way I think about it, there should be no Code H.  and then on a Trust income statement the K-1 is copied over the Trust tax return and the Trust takes a $200,000 donation on Line 13 for Form 1041. 

lastly, on the Estate tax return, what is on Line 18 of form 1041? I would expect around $200,000. 

[merlin00]

Yes, the beneficiary is the Trust, and line 18 shows the $200k.

[merlin00]

@NCperson sorry, forgot the tag

[merlin00]

@NCperson  did you see my answers to your questions?

I asked the CPA about code H but she wouldn't give me a straight answer. She told me that she doesn't have time to give me a tax course.

[NCperson]

@merlin00 - then maybe you don't have time to pay her  😏

I can't understand why your description of the 1041 and the k-1 makes sense.  Sorry. 

[dmertz]

The $200K passed to the trust in box 8 of the Schedule K-1 from the estate should be present in Part III of the trust's Schedule E.  If the trust has losses that are reportable on Schedule E, those losses could reduce the total that propagates from Schedule E line 41 to Form 1041 line 5.

[NCperson]

@merlin00 let's go back to the beginning....as I am not confident what I did the first time.  I ran your scenario through a copy of Intuit's ProSeries software... and I got the same result the your tax preparer did. 

1) on the Estate Tax return, I placed $200,000 on Line 8 - Other income

2) then I generated a K-1, distributing all $200,000 to a beneficiary.  The software placed $200,000 on K-1 Line 5 - other portfolio and non-business income, It also placed -$200,000 on Line 14 with a code H. 

So while I do not have the expertise to explain the outcome, the software provided the same result as your tax preparer.  I would just let it go.