Estate Return

[DaveinTexas]

Clint's mother has a small estate that was probated fairly quickly. Mother passed in March 2012 and all assets were distributed by May 2012. If I mark the return Initial and Final, is the default year end for the estate December 31?

Thanks in advance!

[John of PA]

I assume your talking about a 1041. Yes Dec 31 is default. You may want to pick Feb 28th is it would allow taxable income to be pushed into 2014, if there would be nothing to push into 2014, then the way you described it makes sense.

[DaveinTexas]

Sorry

I assume your talking about a 1041. Yes Dec 31 is default. You may want to pick Feb 28th is it would allow taxable income to be pushed into 2014, if there would be nothing to push into 2014, then the way you described it makes sense.

Yes, to be clear, it is a form 1041 I am preparing. No further income expected, the beneficiaries will have to amend their returns because they have already filed but it is worth it to them to do so to get this knocked out and not drag it on. Plus, the beneficiaries don't get along, fun times!

Thank you for the confirmation sir.

[Burke]

The estate year ends when all assets are distributed and the bank accounts are closed. If that was done by May 2012, then you have a first and final short year return, which ends on the date those things were accomplished. You cannot artificially extend it into 2014 to put taxable income into another calendar year.

[DaveinTexas]

Thank you for the clarification

The estate year ends when all assets are distributed and the bank accounts are closed. If that was done by May 2012, then you have a first and final short year return, which ends on the date those things were accomplished. You cannot artificially extend it into 2014 to put taxable income into another calendar year.

That is an important note, I can see how the convenience to delay the return until next year can cloud vision. Thank you for that comment.

[John of PA]

You absolutely can choose any fiscal year you wish for an estate and depending on the circumstance, it can push income into the following year that otherwise would not be in that year on a calander year basis. I fundamentally disagree with the post. I'm not suggesting this be done in this instance, I agree wrapping up the estate makes sense in this case.

[mactoolsix]

You absolutely can choose any fiscal year you wish for an estate and depending on the circumstance, it can push income into the following year that otherwise would not be in that year on a calander year basis. I fundamentally disagree with the post. I'm not suggesting this be done in this instance, I agree wrapping up the estate makes sense in this case.

From instructions Form 1041: http://www.irs.gov/instructions/i1041/ch01.html#d0e1431

Accounting Periods

For a decedent's estate, the moment of death determines the end of the decedent's tax year and the beginning of the estate's tax year. As executor or administrator, you choose the estate's tax period when you file its first income tax return. The estate's first tax year may be any period of 12 months or less that ends on the last day of a month. If you select the last day of any month other than December, you are adopting a fiscal tax year.

To change the accounting period of an estate, use Form 1128, Application To Adopt, Change, or Retain a Tax Year.

Generally, a trust must adopt a calendar year. The following trusts are exempt from this requirement:

A trust that is exempt from tax under section 501(a);

A charitable trust described in section 4947(a)(1); and

A trust that is treated as wholly owned by a grantor under the rules of sections 671 through 679.

Mike

[Burke]

You absolutely can choose any fiscal year you wish for an estate and depending on the circumstance, it can push income into the following year that otherwise would not be in that year on a calander year basis. I fundamentally disagree with the post. I'm not suggesting this be done in this instance, I agree wrapping up the estate makes sense in this case.

What you say here and the info posted by mactoolsix is certainly true for estates which exist for one year or longer, or when an estate is still open with assets undistributed and it bridges two calendar years. However, please see Pub. 559, page 15: "(the estate) exists until the final distribution of its assets to the the heirs & other beneficiaries." When it ceases to exist, the tax year ends. This is the situation the OP indicated actually occurred. I stand by my answer.

[John of PA]

Your raise an interesting question Burke. Say it's like this: Does an estate's fiscal year end the month the assets are totally distributed, even if that is not the fiscal year end month chosen? You may be right.

[New York Enrolled Agent]

What you say here and the info posted by mactoolsix is certainly true for estates which exist for one year or longer. However, please see Pub.
559, page 15: "(the estate) exists until the final distribution of its assets to the the heirs & other beneficiaries." When it ceases to exist, the tax year ends. This is the situation the OP indicated actually occurred. I stand by my answer.

The Tax Court often intones: "Taxpayers who rely on IRS publications do so at their own peril". IRS publications are not authority.

The income tax regulations are authority. Reg §1.441-1 in part contains:
(c) Adoption of taxable year

(1) In general.
Except as provided in paragraph (c)(2) of this section, a new taxpayer may adopt any taxable year that satisfies the requirements of section 441 and the regulations thereunder without the approval of the Commissioner. A taxable year of a new taxpayer is adopted by filing its first Federal income tax return using that taxable year

I think the publication is saying that you can't close out the estate and file a final return if the estate still holds assets. In any case, the regulation controls the situation and I see no reason why the executor can't use a fiscal year to his/her liking.

[DaveinTexas]

Great cite

The Tax Court often intones: "Taxpayers who rely on IRS publications do so at their own peril". IRS publications are not authority.

The income tax regulations are authority. Reg §1.441-1 in part contains:
(c) Adoption of taxable year

(1) In general.
Except as provided in paragraph (c)(2) of this section, a new taxpayer may adopt any taxable year that satisfies the requirements of section 441 and the regulations thereunder without the approval of the Commissioner. A taxable year of a new taxpayer is adopted by filing its first Federal income tax return using that taxable year

I think the publication is saying that you can't close out the estate and file a final return if the estate still holds assets. In any case, the regulation controls the situation and I see no reason why the executor can't use a fiscal year to his/her liking.

I hate to prolong this post any longer but you mentioned "if the estate still holds assets". Would an IRS refund (say there was tax withheld from an IRA distribution to the estate) be an asset to the estate? If so, this may be a valid reason not to close the estate at 12/31 but to choose a fiscal year end.

Thanks; I appreciate everyone's advice!

[Burke]

I think the publication is saying that you can't close out the estate and file a final return if the estate still holds assets. In any case, the regulation controls the situation and I see no reason why the executor can't use a fiscal year to his/her liking.

No, you would not file a final return if the estate still holds assets as a general rule. (See exceptions at end of this paragraph.) However, if all income has been received, all expenses have been paid, assets distributed and the bank accounts closed, then the estate is closed and its tax year ends on that date. I see nothing in 1.441-1 that contradicts that. Should one wish to elect a fiscal tax year when the return is filed which puts it into the following calendar year, then the fiduciary would have to retain certain funds in order to keep it open. There may be a valid reason to do this; i.e, to determine if unknown beneficiaries may surface, or lawsuits/liens, etc which might arise. (You solve that problem with a Debts & Demand notice or hearing.) Looking at it from the opposite side, there is a limited exception whereby an estate can be considered terminated where only a small amount of money remains to pay a bill which has not yet been received. And there is, of course, the 65-day rule whereby distributions can be made after the end of the estate tax year, and it may be elected to treat those distributions as if they were distributed within that previous estate tax year.

See Title 26, Chapter 1, Part 1, Sect 1.641(b)-3: Termination of Estates and Trusts: "...the administration of an estate cannot be unduly prolonged. If the adminstration of an estate is unreasonably prolonged, the estate is considered terminated for Federal income tax purposes..." Also, "...an estate will be considered as terminated when all the assets have been distributed except for a reasonable amount which is set aside in good faith for the payment of unascertained or contingent liabilities and expenses....."

[Burke]

I hate to prolong this post any longer but you mentioned "if the estate still holds assets". Would an IRS refund (say there was tax withheld from an IRA distribution to the estate) be an asset to the estate? If so, this may be a valid reason not to close the estate at 12/31 but to choose a fiscal year end. Thanks; I appreciate everyone's advice!

It is an estate asset. The refund would be payable to the estate, so the fiduciary needs to keep the bank account open so that it can be deposited. Once those funds are distributed, its over. And the bene would have to report as taxable the entire gross amount of the IRA received including the portion withheld for income tax. (See previous post about unduly prolonging the estate.)

[S T]

there is a limited exception whereby an estate can be considered terminated where only a small amount of money remains to pay a bill which has not yet been received. And there is, of course, the 65-day rule whereby distributions can be made after the end of the estate tax year, and it may be elected to treat those distributions as if they were distributed within that previous estate tax year.

This brings up an interesting item I was informed of tonight, that I was not aware of.

A trust is closing using election of fiscal year 6/30/2013 close date, Trustee issued all of the beneficiary checks tonight (6/27/2013) with all of the appropriate acknowledgements, etc.

What the Trustee did was obtain "Cashier's Checks" to pass to the beneficiaries, one of the beneficiaries plans on not immediately depositing the "her Beneficiary Cashier's Check" but placing in a Safe Deposit Box, for safe keeping. Bank that issued the Cashier's Check says it will be good for up to 5 years.

My immediate reaction - was NO - that leaves the Bank Account open and subject to future Trust Reportings. Trustee was advised that when a Cashier's Check is issued, the funds are immediately transferred out of the account.

So what - funds go into a Bank's holding account - until cashier's check is presented???

Guess I will find out more next week, when Trustee closes the account, we are just waiting for a deposit to clear and one last check to clear.

Anyone know how funds are transferred out of Client's account or when they are transferred with a Cashier's check??

Does the Trustee or myself have anything to be concerned about a $60K cashiers check placed in a Safe Deposit Box and not cashed?

Thanks,

Sandy

A few hours after I posted the above and after googling for a while, I did find that Cashier's Checks are like Cash and immediately taken out of the Client's Bank Account - so then Bank is responsible for cashing the CC check. Not sure about stale date on the Cashier's Check, but that is the beneficiaries issue, not my client the Trustee.

Guess all is good - just want to close this Trust out and relieve the Trustee of any responsibilities.