Irrevocable Trust Tax return

[mitchden1]

My dad passed away and  I am the Trustee.  After getting an EIN, the revocable living trust was converted to an irrevocable trust and per his Will,  the assets (all equities) were sold and distributed to his beneficiaries. There are significant  long term capital gains in the Trust from the date he died (step-up) until I sold the assets (all equities).

My dad wanted the Trust to pay any and all capital gains taxes so his beneficiaries wouldn't have any tax liability. Will the Trust capital gains be provided on a 1099?  All the Trust assets were in 1 brokerage account so I expect only one 1099. Is it simple to prepare the Trust Tax Return? Also, I plan to pay the entire tax liability with my personal check. Is that allowed? I will close the Trust Account before the end of the year.

[Critter-3]

Talk to the broker ... the account should have been closed as of the date of death and the estate account opened using the DOD values so that 2 separate tax forms should be issued next Jan.  

Also paying taxes at the estate rate may not be the best option ... please talk to a local tax pro to discuss the options allowed.  

https://www.irs.gov/publications/p559

[mitchden1]

The revocable living trust account was closed on the date of his death. The irrevocable trust account was opened as soon as I provided the irrevocable Trust EIN. The equities  were stepped up and there was a long term capital gain when I sold all the equities in the Trust. Since my dad didn't want the beneficiaries to have any tax liability, can I pay the IrrevicableTrust tax liability with my personal check? Will I get a 1099 for the Irrevocable Trust? I know I will get one for the revocable living tryst.

[fanfare]

The problem with your Dad's will is that if the Estate pays the tax it is at a much higher tax rate than if the Estate passes the gains to the beneficiaries via K-1 and they pay at individual rates .

As a fiduciary you should pass the gains to the beneficiaries.

[mitchden1]

You are correct, however, dad wanted the Estate to pay all the taxes, not the beneficiaries. Can I pay the taxes due on the capital gains by a personal check? Since I will get one 1099 for the irrevocable trust, I hope the 2022 Trust tax return will be simple.

[Critter-3]

Both dad and the trust should each get a 1099 from the broker for the income up to the DOD and the income after the DOD.  

[mitchden1]

I agree. Again, my question is can I pay the tax liability with my personal check?  It will be a significant amount.

[NCperson]

the estate can pay the estimated taxes and then use Form 1041-T to report it to the beneficiaries. 

https://www.irs.gov/pub/irs-pdf/f1041t.pdf

The Estate is going to file a Form 1041 and Form 1041-T is one of the attachments.  Further the Estate should be sending a Form K-1 to each beneficiary which gives each of them the details of the income to place on their personal tax returns and the FOrm 1041-T shows them the payments they can put on Line 25 C of their personal Form 1040.

While there may be one 1099 to reflect the Estate activity, there needs to be a K-1 for each beneficiary. 

Might be worth hiring a tax accountant as this can be a complex undertaking if this is a 'one and done' situation that you have never done before (and may never do again).  It can be tricky and if there is that much money involved, best to hire an expert; it'll avoid a lot of headaches and ensure there are no mistakes - family harmony can be a delicate situation to navigate and an expert will give everyone confort that is was done correctly and accurately. 

[NCperson]

by the way, there is  one problem you may run into, and this is where the tax expert is best utilized...

Each benficiary is going to report their fair share of the income on their personal tax return.  As noted that is reported to them on the K-1.  But most likely each beneficiary is in a different tax bracket.  So even if you allocate the estimated payments based on their share of the estate as stated in the will to each beneficiary, it doesn't mean that estimate will exactly cover the tax liability - because each is probably in a different tax bracket and tax situation, so in some cases a beneficiary will receive 'too much' estimated tax payments and others won't receive enough.

And I suspect you are supposed to distribute the estate  to each beneficiary as stated in the will so playing "KIng Solomon" and deciding how much estimated tax payments gets allocated to each beneficiary is asking for trouble! (and probably compromises your fiduciary responsility to follow the terms of the will) 

[mitchden1]

Since each beneficiary received their share according to dad's will, they won't receive a K-1. As Trustee, I will pay the total tax liability based on the capital gains that will be reported on the 1099 for the Irrevocable Trust. All equities were sold in the Irrevocable Trust and the proceeds were distributed to the beneficiaries based on the percentages identified in the Will.

[NCperson]

talk to a tax accountant and your lawyer.

I am not confident you can do what you are proposing. The tax rules may require the reporting of the income via a K-1 (I am not 100% positive). Somehow you have to report to the IRS that the distribution occured; just sending them cash doesn't do it.  The IRS is going to expect the beneficiares to pay tax on the cash received, unless there is supporting evidence (those K-1s) what the cash really was.

the trust will get taxed at 20% capital gains rate beginning at $13,000 of income; the 3.8% NIIT tax kicks in as well.  

The beneficiares will pay no more than 15% in capital gains tax, as long as their income is below $400,000 and can avoid the 3.8% NIIT tax if their income is below $200,000 or $250,000 

This is what @fanfare was referring to that the tax rates for the Estate are burdensome compared to distributing the income and then the beneficiaries pay the tax out of the cash they received.

Check with your lawyer if you are fulfilling your fiduciary responsibility by having the trust distribute in the manner you suggest; I wonder if a beneficiary could challenge you as some of the money they were due under the will paid for taxes in a manner that wasn't in the benficiary's best interest (which as the executor you have an obligation to act in their best interests)

bottom line: discuss with an expert (tax accountant and lawyer) - and NOT an anonymous community board  before you act! if taht much money is at stake, a few dollars paid to these experts is well worth the cost for family harmony.

[Mike9241]

yes, you can but you get no tax deduction for the payment.  personally, you will be paying 100% of the tax while only getting a portion of the net proceeds.  what about the other beneficiaries.  you may also have to file a gift tax return not that there would be a tax liability.  

you also need 2 1099's  - one for income earned by the trust before he died which will go on his final return and a second for income after he died. 

what should have occurred is that the trust pays the taxes (since I can't see the trust document I can't say but normally it would pay his other debts and funeral expenses), for any income taxes owed on his personal return and taxes owed on the capital gains and other income of the trust after he died. normally it's the remaining cash that is distributed pro-rata to the beneficiaries. 

[NCperson]

the more I thought about this the more concerned I am with the approach.

Any INCOME generated by the estate in 2022 has to be reported on Form  1041 and any DISTRIBUTIONS of the INCOME that occurs in 2022 has to be reported on Form 1041 (and then reported to the beneficiaires on a K-1).   The estate tax return is a 'pass through' if there are distributions, making the beneficiaries resposnible for reporting the income and paying the tax on their personal tax returm,

From the 1041 instructions (page 29): 

"If the estate or trust was required to distribute income currently or if it paid, credited, or was required to distribute any other amounts to beneficiaries during the tax year, complete Schedule B to determine the estate's or trust's income distribution deduction.

Did Dad verbally instruct you to have the estate pay the tax? it may have beeen his wish, but it's not the way the IRS rules work (assuming the income is generated in the same year as the distributions occur).  Talk to a tax accountant

[tagteam]

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@NCperson wrote:

it may have beeen his wish, but it's not the way the IRS rules work (assuming the income is generated in the same year as the distributions occur).  Talk to a tax accountant

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I generally agree, particularly with the advice to consult with a tax professional. 

However, if the trust pays any and all tax due, the property (primarily or totally cash in this case) is 100% corpus and, as a result, K-1s do not need to be issued solely for distributions of corpus.

[Critter-3]

Just one more nugget ... if estimated taxes are paid on behalf of the trust then the trust must report them on their return ... estimated taxes paid cannot be passed thru to the beneficiaries.  So if  you decide to pass thru the gains later the estate would need to file for a refund of the unused taxes ... things could get messy or silly ... please seek professional guidance in this matter since you have the responsibility to get it done right.