Estate Final K1

[thetaxman2200]

Hello all. I am sure we are all up to our necks in returns.

My question is this, I have a client who has received a final K-1 form there mother estate, there was on 6,635 on Box 5 (other portfolio and Non Business Income) this amount is his portion of the Debt forgiveness from his mother having a loan which was paid off. My understanding that estate should have paid the tax on this amount. Is that correct?

Thanks

Brian

[DMICPA]

K-1 issue

The Trust document would distinguish items of principle and income.

Normally, the Trust K-1 passes through to the beneficiaries any interest income and trust expenses. Any property sales would be taxable to the Trust which is usually at a higher tax rate.

In your case, the "forgiveness of debt" was treated as an income item and since it was the final year, the administrator passed it to the beneficiaries.

Depending on whom the beneficiaries are (siblings etc, related parties) the way the return was prepared may be the most beneficial way to file it.

Otherwise you would have to go back to the administrator and, if they agreed that it was a Trust tax issue, the return would have to be done over and this could be a big expensive deal.

Bob

[taxea]

Why would cancellation of debt to the trust be passed through to the heirs? That doesn't sound right. I, too, would talk to the administrator.

[Burke]

I agree with you. This debt was (if anyone's) a debt of the deceased's estate, and it should have been paid by the estate if there were any funds available to do so and a proper claim were made against the estate by the creditor. If the creditor did this and the executor did not pay it, then he is responsible for obtaining any distributed funds and taking care of it. If the creditor did not file a proper claim against the estate, but discharged the debt to the mother, then the creditor has effectively written off collection. IF the 1099-C was issued to their deceased mother before her death, then it goes on her final tax return. If it was issued to the mother (under her SSN) after her death, then it does not pass through to the heirs, and can be ignored.