Beneficary Taxable Income

[geekgirldany]

I have a client that is administrator of his father's estate. Estate was established last year. Money in deceased bank account. Income producing property is a rental house and the only expenses has been repairs and maintenance. No distributions have been made to any of the beneficiaries, three children of the deceased.

Now I have told him to go to a local CPA in town to get the estate return completed for 2012 tax year as I do not prepare those types of returns or really familiar with the tax laws regarding such.

Client is wanting to distribute income to the beneficaries. He is asking me how much of it would be taxable.

I would appreciate any help with this. Please double check that I am right in my thinking.

Distributions to the beneficiaries are not taxable as the money will come from bank account which was in corpus. The net income (rental income) from the estate would be taxable to beneficiaries and reported on a Schedule K-1.

Is the above correct?

Thank you

[FEDUKE404]

Look for K-1

I likewise "farm out" preparation of any estate tax returns.

That having been said, is it not a reasonable conclusion that a Schedule K-1 should be coming from the estate? You are correct that "distributed income" in and or itself may not be taxable, but since you specifically mentioned rental property as being active that would be indicative of the need for a Schedule E type process (income/expenses/depreciation) for the estate to be using. I don't think "net income" is a tax issue here.

Your own client would just enter the resulting numbers from the K-1 (likely to Schedules E and B) on his/her own tax return.

This assumes, of course, that the underlying property is now owned by the estate and has not been transferred to the heirs.

FE

[Y2KEA]

First you need to determine if this is a 1041 (probate) estate return of a 1041 trust return. Did the deceased have only a will (or no will) or was a living trust involved? This is your starting point.

[Roland Slugg]

Dear GGD: You are wise to refer this job to someone who is competent to handle it. Make sure you refer your client to a qualified person or firm who is experienced in estate and trust taxation. A couple of the things you wrote in the OP are not correct, and I don't believe this forum is a good place to try to become educated on fiduciary returns.

Have you (or the client) selected a fiscal year yet? Estates (but not trusts) can have a fiscal year, and it is often wise to select one other than December 31st. A fiscal year is elected via the timely filing of of F-1041. This is something that a qualified tax adviser would want to consider early-on. If you wish to disclose the DOD, I can tell you what fiscal year options remain, if any.

[geekgirldany]

Thank you all for your posts. It is clear that I do not know much at all about estates.
I talked to the client again, before I saw the posts, and told him what I put in the OP but that I was not sure if it was correct or not. I told him not do anything until he hears back from me.

Again I appreciate the posts, I will tell him to go straight to a CPA for consultation. I really thought he had been since I said to do it during last tax season.

[Snaggletooth]

No Need to go Anywhere

Dany, although it's probably not advisable to try and file these returns on a trial/error basis and using this forum to help, you might consider
NOT sending him anywhere else. You can tell him you have access to nationwide assistance, and there may be people here willing to gather
the facts and do the work, if distance is not a problem.

No question that among the members that post here, the talent abounds. Finding someone willing to work with you is a different issue, but there
should still be some among us willing to do so for a fee. Hate to see you send a client off to someone else that you don't know.

[taxea]

My question is, if you don't do this type of return, why are you sending the client to a CPA and not an EA? Generally CPA's charge more and EA's are better qualified to do taxes.

[geekgirldany]

The CPAs I am sending him to prepares estate return for one of my clients and has helped other clients with C-Corps and Partnerships. The CPA firm has a very good reputation. If I had information on an EA in my local area that I know can handle a estate return I would send him there. Thus far I do not.

[Burke]

Roland was correct in bringing up the fiscal year issue. You said estate was established "last year." An estate year usually runs from DOD to end of month 11 months later. Ex: DOD 5/10/12. Fiscal year of estate is 5/11/12 to 4/30/2013. If this is elected, any taxable distributions will be reported in the benes' calendar tax year ending 12/31/2013. And the estate tax return will not be due until 3 and 1/2 months after the end of the estate tax year. Taxable income in an estate is generally the same as any individual reports; ie., dividends, interest, capital gains on sale of property, NET rental income, IRA/401K proceeds that pass through the estate, to the extent he/she has received distributions. Otherwise the estate pays the income tax.

[Roland Slugg]

An estate year usually runs from DOD to end of month 11 months later. Ex: DOD 5/10/12. Fiscal year of estate is 5/11/12 to 4/30/2013.

Well, a fiduciary return for the estate of someone who died on 5/10/12 could cover the above dates, but its initial year could just as easily end at the end of any month before that, starting with the end of May 2012. It is often a good strategy to select a fiscal year that's just a few months long for the initial return. A fiscal year for an estate's F-1041 is elected simply by filing a timely return ... not including extensions. So if the decedent in the OP died in 2011, as is stated, then most fiscal year options have already lapsed. Only if the decedent died in October, November or December 2011 are there any fiscal year options available, and even then they are very limited. The estate of any decedent who died in 2011 in September or before is now locked into using only a calendar year for its 1041 returns, and if none has yet been filed, that means its first return is already late. Its initial return must now cover the period starting the day after the DOD and ending on December 31, 2011. That return was due NLT 4/15/2012 ... more than eight months ago.

Since GGD was invited to post here the DOD but has not done so, I'm sure it is safe to assume her client is now in the hands of that CPA he was referred to, and any CPA who's experienced in estate tax matters will certainly be well aware of the fiscal year issue.