Deductions on a Trust 1041 K-1

[trust812]

When a Trust which Inherits an IRA distributes this income to Beneficiaries via a K-1 can expenses such as Funeral costs for my late father, accountant fees, lawyer fees, and other expenses be passed on as deductions on the K-1 to the 3 Beneficiaries to offset the Inherited IRA income? Probably not 😔 

[M-MTax]

You can deduct all reasonable expenses incurred by the trust as a result of the property being held in the trust. 

For example, fiduciary fees can be deducted because they are incurred only by certain entities, such as trusts, as a result of property/cash being held in the trusts. Expenses that a hypothetical individual would incur cannot be deducted simply because the property is held in a trust (e.g., investment advisory fees).

Funeral expenses are never deductible on Form 1040 or Form 1041; they are only deductible on Form 706 if that form is required to be filed (which is relatively rare).

[trust812]

OK, thanks! You are correct that the Trust is below the $12.92 Million Form 706 threshold, way below, like $11.5 Million below. LOL. 

So it looks like fees such as the Estate Lawyer, Accountant and recording the Death Certificate would be deducted on lines 12 and 14 on the 1041. I have a question and I will use this simple example so that it will be easy for me to understand. Let’s say that in 2024 the Trust took a $10,000 distribution from the inherited IRA and issued a check to a Beneficiary for $10,000 in November 2024. The Lawyer, Accountant, and Fiduciary fees totaled $2,000. Then in January 2025 the Trust received a 1099-R for the $10,000 Inherited IRA distribution. When the K-1 is generated by H&R Block Tax software Line 5 “Other Portfolio and Nonbusiness Income” shows $8,000. So wasn’t $2,000 of the $10,000 given to the Beneficiary in November 2024 considered Corpus (Principal)? If this is true, it would be a Complex Trust. 

By the way, thank you for answering my many questions so quickly. You are very knowledgeable! You must be a Tax Lawyer, CPA or both 😀

[M-MTax]

Yes it would be complex, if you distributed $10,000 and the trust deducted $2,000 in expenses to leave DNI of $8,000. The extra $2,000 would be corpus.

[trust812]

Thanks!

[trust812]

My father’s house is in the Trust and I am currently trying to sell it. Unfortunately the real estate market is slow so it hasn’t sold during the 45 days it’s been on the market. I am considering renting it. My understanding is that expenses related to the house can’t be deducted unless the house is being rented. Is that correct? I know that if I put on improvements like a new roof it can be added to the basis of the house. 

The Trust pays for my father’s partner’s assisted living facility. He lived with her for 20 years. My understanding is that the assisted living costs can’t being deducted from the Trust but medical costs of course can be deducted by his partner on her tax return over the 7.5% threshold of income. 

[M-MTax]

Again, you are correct on both counts except that property taxes and mortgage interest can be deducted.

[trust812]

Good to know! On what line of the 1041 would the property taxes be deducted? Thanks!

[M-MTax]

Line 11 and note there is a $10,000 limit due to SALT in the TCJA.

[trust812]

Thanks!