Estate and Trust 1041, and purchase of property

[Shabbate]

I know it is late to the date of filing but this was just dumped in my lap by my husband (1 of 2 executors for Dad's estate) as the hired accountant put the estate on hold until AFTER tax deadline. Here is where I struggle.

The estate account was created using the balance of checking/savings account, the sale of the family's home (below market value for the area) and the sale of personal property. All of this is considered corpus correct?

1. The beneficiaries received around $95,000 for 1st distribution from the estate last year. There isn't any income to the account, outside of what I mentioned. So I don't have to file a 1041 for 2022 as there are no gains above $600 - do I understand that correctly? If not, can I wait and generate the K-1 information for total distribution to benefactors when I file and close the estate??
2. The estate still has property in another state that has to be sold. If the timber on the property is harvested and sold, then the property is sold, the timber would be an income gain for the estate but not the property - correct? Then I would file a 1041 for the estate for the year this occurs showing the gain only.

This estate has a trust in which a beneficiary's share from the 1st distribution of the estate was placed so it would not be squandered away but used to purchase a permanent home for the beneficiary (2022). The home was purchased below FMV and the trust paid for the home plus property taxes and other fees. The trust owns the home and will be passed on to the beneficiary's surviving child when the beneficiary passes. 

1. Does the trust need to file a 1041 since purchasing the home from funds received from the estate?  Does the trust gather the information for a K-1 to show that $6,000 from the trust was distributed to the beneficiary? Are there taxes due when monies comes from a trust versus an estate?
2. Is the home treated as a gain, income, or corpus to the trust? Unless some very major improvements are done to the house, I do not think it will ever really appreciate over time. The trust has enough current funds to cover property taxes for the next 5-8 years, maybe longer.
3. This trust will gain additional deposits from the estate when all the rest of the property is valued and sold and the estate is closed.

I am sure I will have more questions before tomorrow night. Thank you all for helping me out on short notice.

/hugs

Shabbate

[tagteam · Accepted solution]

I am sorry for your loss.

You really do need to consult with a local tax professional as there are most likely state issues with which you must deal as well as the federal issues.

The threshold questions would be whether an extension was filed and the date of death. The latter is important since a fiscal year return may be able to be filed as the initial return which would provide more time for preparation and filing (e.g., if the date of death was 6/5/2022. then the initial return could be a fiscal year return with a beginning date of 6/1/2022 and ending date of 5/31/2022 - a 1041 would not be due until 8/15/2022).

[tagteam · Accepted solution]

---

@Shabbate wrote:

The estate account was created using the balance of checking/savings account, the sale of the family's home (below market value for the area) and the sale of personal property. All of this is considered corpus correct?

---

You are correct in that the savings account (cash), the home, and the personal effects would be corpus. 

However, any interest earned on the savings account would be income to the estate and the fact that the home is "below market value" is not relevant. The estate's basis for the home is the fair market value on the date of death and the difference between that figure and the sales price (less selling expenses) determines whether the estate has a gain or loss.

[Shabbate]

Thank you for the sentiments.

Dad passed away Dec 15, 2020. An individual tax return was filed on his behalf for the 2020 tax year. The estate's creation date would have been when he passed. However, the first account filing was to  cover the period Feb 25, 2021 to  Feb 2022 and end the account on any day of the month of February to balance accounting.  No federal tax return was filed for the estate for the 2021 tax year as there were only deposits from checking/savings accounts as the house was not sold until 2022.

Does this help?

Shabbate 

[RonRRabun]

First, be sure to hire a CPA Firm that has an estate specialty.

Two, the beneficiaries of the TRUST/estate become liable for its taxes (assuming a Trust and Will were set up) and each will receive a K-1 Form for the respective tax years. K forms may cover past years meaning you may have to amend past years returns.  Your accountant will prepare K forms for the individual beneficiaries.

Third, I made the mistake of filing a return for the estate which is wrong. The beneficiaries receive K forms because for tax purposes they are the estate. 

Four, the estate/trust account can pay expenses of the account which is managed by the Executor. These would include attorneys, accountants, property taxes, appraisals, and so on. Your accountant will advise on allowable expenses. These will impact the value of the estate distributions.

Five, the trust and will may specify different distributions for each beneficiary therefore individual beneficiary tax situation may vary and require separate accountant and attorney advisement.

Finally, the estate may have future tax year distributions which will be determined by the Trust and/or Will. You will receive a K Form for the appropriate tax years. This is why and accountant is important.

Note: I suggest using a large CPA firm that is an IRS Certified Filer. That means the CPA is recognized by the IRS as  a  first tier representative. This means the IRS trust accountant filings at a highly accurate level meaning the chance of an audit is decreased. 

Disclaimer: I am not an accountant or attorney and my comments are based upon the experiences I had with my family trust an as estate executor.  Your trust, will and assets will be different so you MUST obtain CPA and attorney advice. 

[Shabbate]

There would have been no interest on the savings account for Dec 2020 - Feb 2021 except a couple of dollars before everything was moved to the estate. And since the house did not sell until 2021, there was no income on the estate thus no initial return was filed for 2021.

[tagteam]

---

@Shabbate wrote:

And since the house did not sell until 2021, there was no income on the estate thus no initial return was filed for 2021.

---

With respect to the sale of the house, did the estate receive a 1099-S for the 2021 tax year?

Regardless, if the estate sold the house in 2021, a 1041 most likely should have been filed to report the sales price and the basis (the difference between the two would determine any gain or loss). 

EDIT: Disregard the foregoing as I just read your (intermediate) post where you stated that the house was sold in 2022: "No federal tax return was filed for the estate for the 2021 tax year as there were only deposits from checking/savings accounts as the house was not sold until 2022."