K1 Question

[JimmyH1]

Our mother passed away in 2022 and all of her assets were cashed out and placed in a Trust Savings Account (earming almost zero interest) all in 2022. This included cashing out an IRA, some stock and selling her home. The executor (one of the 6 beneficiaries) filed the deceased tax return and paid taxes on the IRA and Capital gains along with her SS taxes, etc. on her 2022 return. This was substantially higher than her normal tax due to the gains. The total estate was valued at less than 300k (including property).  The distributions were made in May 2023 to the 6 beneficiaries of the trust and since the taxes were paid by the trust in 2022, we were told that no K1s were necessary and no federal taxes would be due. Is that correct? The 6 beneficiaries reside in Arizona and Missouri (which has no estate tax) and Illinois (estate tax only if over $4M). We just want to make sure this is correct. Thank you for your help!

[Mike9241]

sorry for your loss.  by law any income received by your mother before she passed goes on her final 1040. after that it goes on the estate income tax return form 1041 not her 1040. So cashing out the IRA, selling the house and stocks post-mortem should have gone on form 1041 for her estate.  The stocks and house would get a date of death value so there should have been little or no gain or loss if sold shortly after she died. The IRA does not get a date of death value and there are special rules if she was required to take an RMD.  I won't go into the financial aspects of "selling everything". if she died intestate (no will or trust holding the assets) state law decides on what the executor can do.  Even with a will or trust, most states give the executor discretion as to whether to pay the income taxes at the estate (1041) level - no k-1 to beneficiaries. they split the remaining assets tax-free or the executor distributes the income via k-1s to the beneficiaries, and they pay the taxes on the income. 

[Anonymous_]

I am also sorry for your loss and also agree with @Mike9241.

Further, since you specifically mentioned it, be careful not to conflate estate tax with estate income tax.

Moreover, you might want to discuss how the entire matter (in terms of income tax filing) was handled (or more likely, mishandled) with the executor. 

[JimmyH1]

Thank you both for the help. The executor had the stocks and IRA cashed out and everything was deposited a trust account (using the tax ID of the trust). The 2022 tax filed was a 1040-SR and taxes were paid on the capital gains and all other income including pensions and retirement funds. A 1041 wasn't filed since the funds were still held in the trust savings account until May 2023.

The home was sold in February and had been mom's sole residence since 1987. Those funds were then placed into the trust savings account. In May, 2023 the account was dissolved and the funds dispersed 6 ways. The savings interest for 2023 was near zero and there were no income into the estate. 

Since the taxes were paid in 2022 on the 1040 and there were no additional income in 2023 to the estate, is a 1041 and K1s required or is everything already completed?

Thank you so much for tour help!

[dmertz]

"The executor (one of the 6 beneficiaries) filed the deceased tax return and paid taxes on the IRA and Capital gains along with her SS taxes, etc. on her 2022 return."

As others have said, this IRA and capital gains income is in respect of a decedent and was to go on an estate income tax return, Form 1041, not the decedent's final tax return.  It seems that the executor has made substantial errors if this income was reported on the decedent's final tax return.  Whether this is 2022 income or 2023 income depends on whether the estate uses a calendar year or a fiscal year for reporting income.  If it uses a calendar year, the 2022 Form 1041 is late, subject to substantial penalties for being late.  If the estate uses a calendar tax year, the home sold in 2023 would go on the 2023 estate income tax return, not the 2022 estate income tax return that was to include the 2022 IRA income and capital gains income.  It might be beneficial for the estate to use a fiscal year for its tax year, which might not yet be due depending on when the IRA was distributed and the stock was sold, making this 2023 income to the beneficiaries passed though on Schedules K-1.

[Mike9241]

@JimmyH1  if you are correct as to what the executor did, you along with the other beneficiaries need to consult with a lawyer. the executor totally mishandled the reporting of the post-mortem sales and cash out of the iRA. they proabably should be replaced but that is a legal issue not a tax issue.  what the excutor did could come back to haunt the benficiaries not to mention any tax penalties that could be asserted against the executor (and estate that could end up coming out of the beneficiaries pocket).         

[JimmyH1]

Thanks Everyone. The executor was working with a lawyer -- but I know they used a tax person to file the return for them. It may have been their person that has done the deceased taxes all of these years and not an expert in estate taxes. Thank you very much! I will find out more and then contact my lawyer.