Estate Tax Question

[Snaggletooth]

All my career I have avoided estate planning, as I didn't feel professionally equipped to invade the province of attorneys (whom I later find out aren't doing that great a job either, and almost always ignore tax consequences).

I know this comes as a shock to several readers, like Jainen and Sova who have always respected me as an intellect superior to their own and a father-figure in their own careers. But for all readers, the sad truth is I am really quite dumb at 1041s.

I didn't want it, but nevertheless I've got an estate to file. Decedent owned a profitable Sub S and rental property, but his personal residence was mortgaged to the hilt. The estate has a negative cash flow due to debt service, and this will be the case so long as the residence remains unsold.

Income-wise, there is a healthy Schedule E - lets say $6K in income. However, other estate expenses attributable to the residence and other property total some $10K. This means there is a $4K loss prior to the $600 estate tax deduction.

My problem is how to pass this loss to two beneficiaries, even if it is not possible to do this in the current year. The K-1 seems to be tuned in to income only, without regard to the other expenses of the estate. Not only that, but the K-1 may not be a pass-through until there is a distribution -- but if so does not the timing of the distribution distort the character of the income?

Maybe I'm not supposed to pass on the $4K loss to the beneficiaries. Also no accommodation for carry-forwards that I can tell. However, the corpus of the estate is going to be drained for several years, as settling the estate economically is not going to happen any year soon. There is some $100K in cash, which will be drained away at about $9K per year.

How do the beneficiaries EVER get the benefit of the $4K annual reported loss?

(See, I TOLD you I was dumb....)

[veritas]

Not Dumb!

I don't know much either but an estate can only keep the scorp stock for a limited period of time. And secondly I believe the tax attributes follow the trust distributions. This should be very educational.

I pulled this from Kleinrocks, I mean CCH.

"A testamentary trust may hold S corporation stock received pursuant to the terms of a will, or in a transfer or a deemed distribution from an electing QRT, for two years from the date it is received. Code Section 1361(c)(2)(A)(iii). The estate of the testator, rather than the trust or the beneficiaries, is considered to be the shareholder. Code Section 1361(c)(2)(B)(iii). Thus, even if the beneficiaries are not eligible to hold stock in an S corporation, the S election retains its validity because the estate is considered to be the shareholder"

[veritas]

Here's more

PRACTICE TIP: A trust can avoid having to dispose of the stock at the end of the two-year period by making an election to be an electing small business trust (ESBT) at any time during that period, or at any time during the 16-day-and-2-month period beginning on the date after the end of the two year period. Reg. Section 1.1361-1(m)(2)(iv). See Section 301.3(e) for a discussion of ESBTs. The trust can also avoid having to dispose of the stock at the end of the two-year period by electing to be a qualified subchapter S trust (QSST) at any time during that period, or at any time during the 16-day-and-2-month period beginning on the date after the end of the two year period. Reg. Section 1.1361-1(j)(6)(iii). See Section 301.3(d) for a discussion of QSSTs.

[S T]

Form 1041 Estate

Snags,

I believe an estate form 1041 can generate an NOL which can either be carried back 2 prior years, probably would not apply in your case, or forward, then on termination of the estate, any unused NOL allowable would be passed to the beneficiaries, see K-1 instructions.

See form 1041 instructions page 20 http://www.irs.gov/pub/irs-pdf/i1041.pdf. Then see page 21 etc for income distribution,

I had an estate a few years ago that I prepared the returns, the estate had an NOL. The estate paid no tax for a couple of years until closed, and on termination, we passed the NOL and excess deductions to the beneficiaries on the K-1.

Sandy

[Gretel]

Snag, if I understand your post correctly, you ask about expenses, which are created by the 1041 admininstration. I am not clear at you situation and not a profi either.

Tried to help an old lady out and learned a lot along the way. By the way, the lawyer, who set up the trust and charged over $6,000, didn't have a clue and was educated by me.

Coming back to your question: Any business loss can be passed through to the beneficiaries each year. However, a loss created by administrative expenses is lost unless you are in the final year of filing.

[Snaggletooth]

Thanks to all...

I've had a few estates, but mostly farms and stuff that made profit, and had virtually no debt. I'll stagger through this one and [groan] read the instructions...

Are non-business deductions not allowed until the final year??? I'm reading this but really throws me for a loop...

[S T]

Maybe this will help

Snags, If Natiro were on the Board, she would be able to answer your questions, so for now I found my book on 1041 estates and trusts.
So not really sure what your question is, but will try to provide some highlights of an NOL.

1. NOL deduction is availabe to estates and trusts, much the same as it is for individuals.
2. Estate or trust can elect to forego the carryback of the NOL
3. Any unused NOL passes through to the beneificiaries upon the termination of the estate or trust.

I believe the calculation is similar as to the NOL calculation for individuals.

NOL is computed by adding the following items back to the taxable income of the fiduciary.
1. Personal exemption
2. NOL carryover from another year
3. Excess of NONbusiness capital losses over nonbusiness capital gains
4. Excess of NONbusiness deductions over NONbusiness income
a. NON business income includes dividends, interest, annuities, investment income and endowment income.
b. NON business deductions are not attributable to or dervied from, a trust's or estate's trade or business. They include administration fees not allocable to trade or business income.
5. Excess of business capital losses over the total of (a)business capital gains and (b) any nonbusiness capital gains remaining after deducting nonbusiness capital losses and other non business deductions in excess of nonbusiness ordinary income. (Trust or Estate cannot take a deduction for a net capital loss when computing the NOL). Section 1231 losses are not business capital losses. A net Section 1231 loss is treated as an ordinary loss and is included in the NOL.
6. Charitable contribution deductions allowed by IRC Sec 642(c)
7. Distribution deductions allowed by IRC Secs 651 and 661.

NOL requires special election to carryforward.

Any unused NOL carryovers existing upon termination of an estate or trust are passed through to the beneficiaries succeeding to the property of the trust or estate.

Any item of income or deduction used in determining the NOL of the estate or trust for its termination year cannot also be taken into account in determining the excess deductions on termination of the trust or estate.

I just prepared a "dummy" return in my tax program. Entered $6,000 of rental income and $10,000 of deductions (lines 10-14)(Do not include deductions on lines 13, 18 or 20). Equates to a $4,000 loss for 2005. Program asked me to elect the NOL carryover, which I did, and all diagnostics show that I will have $4,000 NOL for 2006. Nothing passed through to the K-1 as my tax program is not marked "final", If I mark the box in my tax program "final" the $4,000 flows through to the K-1 and is noted as final deductions Box 11.

This is purely mechanics of how it works, not saying that your income and deduction figures are correct and not knowing what those are am not sure of the line items numbers for the deductions.

So estate would pay no tax for 2005 and carryover NOL to subsequent year and then calculate again. On termination the remaining NOL should be passed through on the K-1 forms.

If you want I have some "OLD" NOL estate/trust worksheets that I could fax to you. Just need your fax #.

Sandy

[Snaggletooth]

Sandy

Sandy, I wonder where Natiro is myself. She was a great member of the family and quite knowledgeable. You're not a slouch either - and have gone out of your way to help folks like me quite a few times.

Thanks for your help. This finally sheds light on how the beneficiaries will ever benefit from these non-business expenses.

Ron J.

[natiro]

I'm here. . .

Thanks for wondering about me. Due to a death in the family, I've spent most of my summer traveling and dealing with estate settling, etc. I've had limited time in the office and am so far behind on actual work that I haven't had much time to participate. I do lurk almost daily, so I'm not really completely out of touch! So far I've agreed with all the answers in this thread, so didn't feel that hard pressed to chime in. Just wanted to let you know I'm still around and have appreciated that you wondered where I was!

[S T]

Hi

Hi Natiro,
So good to hear from you. Sorry for your family loss and hope that all will quiet down soon for you.

Sandy

[Black Bart]

Snag,

Got it figured out yet?

[Snaggletooth]

Nope

No Bart, I don't have it figured out. Even with reading the instructions and with Sandy spoon-feeding me with strained food, I'm still choking.

Part of the problem might be my low-cost software (TaxSlayer). The concept of a NOL doesn't seem to faze their 1041 program...

[S T]

Can I Help

Snags,
Can I help some way, my software worked based on what you had posted. Can you give me more info and I can input into the "Dummy" return so at least you have line item numbers.



Sandy

[Snaggletoof]

Nol

Sandy, you are much appreciated. You shouldn't have to help a lesser-knowledgeable tax person any more than you already have. As I've said before, you broke the whole situation down into bite-size portions.

Actually, I DO understand you. It's just that I don't see any line item on the 1041 which addresses a NOL, or any worksheet in the software which calculates an NOL for use in the following year. Nor do I see any line item on the 1041 which allows the NOL from prior years to be introduced into current year taxable income.

Admittedly also, I have one of the cheapest software products on the market when you get into entities. The software is not helping - i.e. there is no automatic prompt for an NOL.. But absent the assistance of software, we should still be able to track the line items on the form.

Thanks for your gracious offer, and please know that I don't expect you to spend any more time than you already have. Actually, in your earlier post, you were about as explicit as anyone could ever hope for.

[S T]

See if this will help

Snags, I don't mind helping,
I just did a "dummy" return in 2004. The 2004 return will show a $4,600 loss on line 22, Page 2, Schedule B, line 1 will show a loss of $4,000, and all else -0-. You should have an election form to forego the NOL Carryback. Then my software generates Form 1045, page 2 Schedule A (only) showing (4,000) on line 1 and 24. That is all that makes up the 2004 return. My diagnostics indicate a $4,000 NOL carryover. (This would be for your 2005 return you are completing now.)

Now on to 2005. When I update the client to 2005, then the $4,000 NOL flows through on Line 15a, and I have a detail page indicating that it is a NOL from 2004, then you would complete your income and deductions for the year, and if another NOL page 2 of 1045 NOL, etc . If not final year to pass to the beneficiaries then carryover to the next year. (This would be for 2006).

Hopefully the estate won't stay open for a long period.

Sandy