Life Insurance Proceeds & Trust

[tpnl]

Taxpayer transferred his life insurance policy to his trust in 1993. Taxpayer died in 2014 and life insurance company required the trust EIN to pay out proceeds.

Trust filing requirements are: Any taxable income during the year or gross income of $600 or more (whether taxable or non taxable).

Life insurance proceeds were over $5,000 and interest income on the life insurance was $59. This life insurance is the only asset in the trust. Taxpayer needs a 1041 Trust return, right? It meets both thresh holds: ANY taxable income, yes $59; and gross income, yes $5,000+

In this particular case, the life insurance proceeds are not taxable and I know the interest income can be offset with the attorney fees that were paid in 2014. It just seems a waste to have to file a Trust return, but I think that is what the IRS requires in this situation.

Thanks, Kerrie

[Grace]

items specifically excluded from gross income

Certain Death Benefits (IRC Sec. 101(a). Proceeds of life insurance contracts payable by reason of death.

However, you'll have to look at the exceptions to the general rule(i.e. transfer for value, modified endowment contracts, employer owned) to see if any apply.

Not a trust expert, but I would think you would still file the 1041 in order to pass the life insurance proceeds out to the beneficiaries of the trust. It would be considered tax-exempt INCOME. Don't forget to check the box on page 2 of 1041 pertaining to the tax exempt income question. Also, many expenses will be limited due to tax exempt income.

Also, what kind of trust was this: grantor, revocable, irrevocable? If it was revocable, it becomes an irrevocable one due to death of grantor. Would need a new tax id #.

If there is an "Estate" involved, you could make an election to combine the trust and estate (I think it's IRC Sec. 645).

Perhaps others more knowledgeable in trusts will provide input.

Grace

[tpnl]

No Tax ID prior to Death

There was no tax ID # applied for when the trust was set up, but the life insurance company was notified the proceeds were to be paid to the trust upon death when the trust was established. SO when the taxpayer died, the life insurance company wanted the trust ID #. The family obtained an attorney, who applied for the trust ID # and dealt with the life insurance company to get the funds released. The attorney told the family they needed a trust return but they didn't do them.

There was interest paid since the life insurance proceeds took longer to pay out than usual. I just wasn't sure if life insurance proceeds were to be figured in the gross income test, however, my question was moot because TTB on page 21-10 states trusts with any taxable income or gross income of $600 or more must file. So, I say "Yes" there needs to be a return.

Thanks for your input! I appreciate it.

Kerrie