1041 Issue

[peggysioux]

How would other tax preparers handle:

I am handling taxpayer's returns that received a K-1 for the estate of parent. Parent had a trust and everything was to be disbursed to beneficiaries at death. Another tax preparer handled the 1041 return (there was not enough assets to file the 706 estate tax return) but had some income. The taxpayer gave me a copy of the 1041 along with the K-1. In reviewing the 1041, the taxpayer had deductions for burial expenses and for care of the parent totaling over $15,000. Those expenses carried over to the K-1's as there was not enough income to deduct on 1041. I advised taxpayer that she should double check with the tax preparer who handled the 1041 being burial and medical expenses (care for parent) were not deductible as part of the 1041 return. The tax preparer assured taxpayer that the return was correct because the estate did not exceed the 5.43 million......what should my next step be?? Do I file taxpayer's tax return based on a K-1 that is incorrect?

[peggysioux]

One more note regarding the 1041 - it was marked "Simple Trust" and Box G was NOT checked.

[Burke]

I believe this is the same situation you posted on 3/12/16 and it was answered. The 1041 tax preparer is vastly confused. The $5+ million exemption is for Estate Taxes (form 706) on wealth. It has nothing to do with the 1041 which is an income tax return. Neither burial costs/funeral expenses nor caregiver (medical) expenses can be deducted on the 1041. Funeral expenses could be deducted on the 706, but if one is not required and there is no Estate Tax to be paid, it is a moot point. Medical expenses can also be deducted on the 706, but again not on the 1041. However, medical expenses CAN be deducted on the decedent's final tax return if paid by the estate within one year of death. (As long as they are not also deducted on the 706. No double dipping.) See TTB 21-10 for both of these items. Also TTB 21-32. Also, see IRS Pub. 559, page 6 for the same thing. Neither of these expenses can be passed through from the 1041 to the beneficiaries, as they are not administrative expenses nor capital losses. So, no, you cannot use the K-1 since you know it to be wrong and it gives your client deductions which are not allowed. I would print off both these sources and give it to your client (plus there is plenty from other sources if you want to Google "medical expenses on Form 706" to back it up. If the 1041 has already been filed, the preparer needs to amend it.

[Burke]

One more note regarding the 1041 - it was marked "Simple Trust" and Box G was NOT checked.

From what you are saying, it probably should have been "Decedent's Estate" and Box G checked. I am assuming this was an RLT, and there are no other assets hanging around which were outside the trust for which probate had to be filed? Were the executor and trustee the same person?

[peggysioux]

From what you are saying, it probably should have been "Decedent's Estate" and Box G checked. I am assuming this was an RLT, and there are no other assets hanging around which were outside the trust for which probate had to be filed? Were the executor and trustee the same person?

Yes, this was an RLT and no other assets hanging around outside of trust. Yes, the executor and trustee are one in the same. So, if Box G had been checked than it basically becomes a 706 combined with a 1041 and the burial and medical expenses could be deducted but just against assets, correct? Those same expenses can not be applied against the income the estate/trust earned after death, correct? Thank you for your information.

[peggysioux]

I believe this is the same situation you posted on 3/12/16 and it was answered. The 1041 tax preparer is vastly confused. The $5+ million exemption is for Estate Taxes (form 706) on wealth. It has nothing to do with the 1041 which is an income tax return. Neither burial costs/funeral expenses nor caregiver (medical) expenses can be deducted on the 1041. Funeral expenses could be deducted on the 706, but if one is not required and there is no Estate Tax to be paid, it is a moot point. Medical expenses can also be deducted on the 706, but again not on the 1041. However, medical expenses CAN be deducted on the decedent's final tax return if paid by the estate within one year of death. (As long as they are not also deducted on the 706. No double dipping.) See TTB 21-10 for both of these items. Also TTB 21-32. Also, see IRS Pub. 559, page 6 for the same thing. Neither of these expenses can be passed through from the 1041 to the beneficiaries, as they are not administrative expenses nor capital losses. So, no, you cannot use the K-1 since you know it to be wrong and it gives your client deductions which are not allowed. I would print off both these sources and give it to your client (plus there is plenty from other sources if you want to Google "medical expenses on Form 706" to back it up. If the 1041 has already been filed, the preparer needs to amend it.

I apologize for reposting on the same situation, but my second post was more of a question on how to handle being the other tax preparer is not wanting to correct and taxpayer doesn't know what to do. Thank you again for your input.

[Burke]

Yes, this was an RLT and no other assets hanging around outside of trust. Yes, the executor and trustee are one in the same. So, if Box G had been checked than it basically becomes a 706 combined with a 1041 and the burial and medical expenses could be deducted but just against assets, correct? Those same expenses can not be applied against the income the estate/trust earned after death, correct? Thank you for your information.

Checking Box G for a 645 election only means you are treating the estate and QRT as one entity on the 1041 return. It has nothing to do with Form 706. Form 8855 should have been filed for this election. And yes to the second question. Burial expenses deductible ONLY on 706, not on 1041. Medical expenses CAN be deducted on 706, not on 1041, but it makes more sense to deduct on decedent's final 1040 in this case. If 1040 has been filed, it can be amended by the trustee/executor. If it doesn't make any difference on the 1040, just forget them. The estate usually does not file a 706 if it is not required to unless it is desirable to maintain an unused exemption amount for the spouse, or to establish asset values of property not sold but passed on to the bene's. If it were me, I'd offer to amend the 1041 and see what happens (for a fee, of course.) Then you can deduct that fee from the 1041 income and it passes on to the bene's K-1's. But the former preparer should really offer to amend it for free! The client needs to revisit the 1041 preparer and produce the documentation that it was done incorrectly and demand a do-over. Also if incorrect K-1's have been furnished to the other beneficiaries, they should be notified. If it were me, I would give the client a letter to this effect which she could take with her.

[Roland Slugg]

Trusts don't get sick, so they can't deduct medical expenses. Others ... especially Burke ... have made this abundantly clear above. Also, you seem to be unclear about the differences between an Estate Tax Return and an Estate Income Tax Return.

If you're sure the K-1 is incorrect, you may file F-8082 with the beneficiary's own tax return. See the instructions for that form. If there are multiple beneficiaries, your client may wish to speak with the others about their incorrect K-1s. In any case, the beneficiary(ies) may want to again contact the person or firm that prepared the F-1041 and related K-1s, explaining that he believes they are incorrect and why. He should also let that other person know that he plans to file F-8082, and that might get the other preparer's attention.

[peggysioux]

Trusts don't get sick, so they can't deduct medical expenses. Others ... especially Burke ... have made this abundantly clear above. Also, you seem to be unclear about the differences between an Estate Tax Return and an Estate Income Tax Return.

If you're sure the K-1 is incorrect, you may file F-8082 with the beneficiary's own tax return. See the instructions for that form. If there are multiple beneficiaries, your client may wish to speak with the others about their incorrect K-1s. In any case, the beneficiary(ies) may want to again contact the person or firm that prepared the F-1041 and related K-1s, explaining that he believes they are incorrect and why. He should also let that other person know that he plans to file F-8082, and that might get the other preparer's attention.

Burke and Roland, thank you both for your responses. I am clear regarding the differences between an Estate Tax Return and an Estate Income Tax Return. However, I am not clear or knowledgeable about the election to treat the estate and the trust as one entity and the handling of such, but Burke helped me to understand that aspect so I thank him.

[Burke]

If you're sure the K-1 is incorrect, you may file F-8082 with the beneficiary's own tax return. See the instructions for that form. If there are multiple beneficiaries, your client may wish to speak with the others about their incorrect K-1s. In any case, the beneficiary(ies) may want to again contact the person or firm that prepared the F-1041 and related K-1s, explaining that he believes they are incorrect and why. He should also let that other person know that he plans to file F-8082, and that might get the other preparer's attention.

Good suggestion, Roland. I never have had to use that form on a Trust/Estate, only once on a Limited Partnership and that was AGES ago. I forgot it was still around.

[peggysioux]

I received a response from the other tax preparer who handled the filing of the 1041 and was advised that the care giver expenses were expenses paid for assisting the family with going through personal effects which he states is part of Trust Corpus and thus deductible. Would other tax preparers see that expense as a deductible expense?

Secondly, the tax preparer states that the final disposition costs were not funeral costs, but were a collection of expenses surrounding the memorial event called for in the Trust and Will. The expenses included supplies, consultation services and the like......would you also see these as deductible on the 1041 with the new information?

I still would not think deductible, but am no estate expert, so would appreciate other tax preparers input. He also advised me rather than filing the form 8082 if I still fill uncomfortable with the deductions to just exclude those expenses from the Schedule A 2% expenses on the individual returns.

Appreciate your input.

Peggy Sioux

[peggysioux]

1041 Issue - Additional Details

Bumping up hoping to receive some feedback. Would the IRS deem the expenses surrounding the memorial event as "non" funeral expenses and thus deductible being event was "called for" in the Trust and Will? It seems to me he is splitting hairs - a memorial is part of the funeral expenses and therefore still be non-deductible. He stated his stance was defensible as Trust expenses due to facts and circumstances. I know that I have received direction in previous posts to file form 8202 with individual income tax returns, but just wanted to see if that would still be the recommendation based on the additional info. Also could an alternative handling of the discrepancy be to remove the deduction from the Schedule A of the beneficiaries?

Thanks.

Peggy Sioux

[Burke]

1. He is trying to "reclassify" expenses so that they are deductible; it won't wash. Memorial services, are treated the same as funeral expenses. They are not deductible, no matter what he tries to call them. There may have been a cremation and no "funeral" but it is still the same. It doesn't matter that the will/trust directed that they be paid out of corpus. Lots of things are paid out of corpus, but they are not tax deductible on the 1041. Memorial services are not administrative expenses.

2. Originally the other expenses were called "caregiver expenses." I interpreted that to mean they were medical costs outstanding after death paid to a caregiver. If they paid someone to deal with administrative expenses, then that is another matter, but this is what the executor is supposed to do. One can employ professional help such as an attorney or tax preparer when help is needed with those functions, and those expenses are deductible. This might be an administrative expense at a stretch, but did the executor take a fee? An executor's fee is deductible on the 1041, but it is taxable to the executor. If she paid someone to do things she was supposed to do, then she is supposed to pay them out of that fee which is generally set by state law. And any amount over $600 should have been reported on a 1099MISC by the trust/estate. How much were they?

3. I would do the 8082 and attach it to the return for the bene indicating what adjustments you have made to the deductions listed, since he is apparently not going to amend the 1041. The problem is really that the estate may have had taxable income if you eliminate these "expenses" which are flowing through to the bene's. You say you have a copy of the trust return. Can you tell what the result would have been if the memorial expenses were removed?

[peggysioux]

2. In answer to your questions regarding the "caregiver expenses", I too interpreted the expenses as medical costs outstanding after death paid to a caregiver. He is stating they were expenses paid for assisting the family with going through personal effects. There were no executor fees and the fees paid were $4500.

3. If the questionable expenses are removed from the trust return, the trust no longer has a loss but now has a gain of approximately $5000 and trust shows no distributions paid out. It is marked as first and final return and submitted as a simple trust. In my research, I found that final returns should be marked complex rather than simple as you are distributing corpus as well.

Thank you again Burke for your input; I respect your input immensely.

[Burke]

2. Then a 1099MISC should have been given to the caretaker for "services." Whether it would survive an audit is another question due to the amount. Sounds like they wanted to give her a bonus or something along those lines.

3. There is no way an estate or trust can show no distributions if monies were paid to the beneficiaries. That means there is nothing shown as DNI on Page 2 of the 1041? And it should have been marked "decedents' estate." In your original post you said total expenses that you were questioning were over $15,000, so that means the memorial expenses were $10,500? Does removing just them make the trust/estate have net income? If so, that is a whole different ballgame and that income passes through to the bene's. So it is not just a matter of "not taking the deductions on Sche A if you are uncomfortable with them," as he suggested. It is knowingly taking deductions when there should be taxable income and signing off on the return. A real problem and I would dump it back into the client's lap.

The only way I would be able to do this is to get an agreement from the executor that the 1041 is decidedly wrong and offer to amend it yourself. He/she is the one responsible and makes that decision and signs the return. Then issue the corrected K-1's to all the benes.