1041 Estate Income Distribution Deduction

[Gretel]

Is this mandatory? The 1041 instruction seem to indicate that it is allowed but not mandatory.

I have the unique situation that after expenses the taxable amount is just under $600, which will be offset by the exemption for the trust. However, the legal document required upfront distributions. The result is taxable income to the benis.

[Kram BergGold]

I Say Mandatory

If I enter a distribution into my software, K-1 forms are generated even though the taxable income is below $600.

[Burke]

What do you mean by "upfront distributions?" Did the trust document specify exact amounts to the benes on an ongoing basis? Is this the last and final return or are there remaining assets? Was this an RLT treated as an estate? Because if it was not, the trust exemption is not $600. A trust which requires all current income to be distributed has an exemption of $300; all other trusts have a $100 exemption. And if any monies were distributed, or required to be distributed, to the heirs, there is a DNI calculation and K-1's will flow through to the recipients.

[Gretel]

What do you mean by "upfront distributions?" Did the trust document specify exact amounts to the benes on an ongoing basis? Is this the last and final return or are there remaining assets? Was this an RLT treated as an estate? Because if it was not, the trust exemption is not $600. A trust which requires all current income to be distributed has an exemption of $300; all other trusts have a $100 exemption. And if any monies were distributed, or required to be distributed, to the heirs, there is a DNI calculation and K-1's will flow through to the recipients.

1. Upon death certain one-time distributions were required to four heirs (hence I used the word "upfront" before anything else happened.
2. First and final 1041 - RLT treated as an estate.
3. I am aware of the DNI calculation (and in most cases this is what heirs would want) but after reading the 1041 instructions I doubt that they are mandatory.

[Burke]

If specified amounts were designated to any named beneficiaries before finalizing the estate, they are called "bequests" and are not distributions. They are generally not taxable income to the bene's. On the matter of DNI, it is not discretionary. If distributions are made to the heirs, then taxable net income of the estate flows through on K-1 and is taxable to them on a pro-rated basis. The "bequests" are not a deductible item from net income. I have never seen this done before, and not sure of the purpose the deceased was trying to accomplish. Are you treating the estate as paying the income tax? Generally, it is much cheaper to have it pass through to the heirs, in your case, by dividing it 4 ways.

[Gretel]

If specified amounts were designated to any named beneficiaries before finalizing the estate, they are called "bequests" and are not distributions. They are generally not taxable income to the bene's. On the matter of DNI, it is not discretionary. If distributions are made to the heirs, then taxable net income of the estate flows through on K-1 and is taxable to them on a pro-rated basis. The "bequests" are not a deductible item from net income. I have never seen this done before, and not sure of the purpose the deceased was trying to accomplish. Are you treating the estate as paying the income tax? Generally, it is much cheaper to have it pass through to the heirs, in your case, by dividing it 4 ways.

Thanks for the clarification, Burke and an additional clarification, please. As I said this is

First and final 1041 - RLT treated as an estate.

As an estate - bequests are not deductible as income distribution no matter if paid as a one time payment or if, in the end, there will be a final distribution.

As a trust - there are no bequests whatsoever since a trust entity cannot die?

RLT treated as an estate follows estate tax rules on all issues?

[Burke]

Thanks for the clarification, Burke and an additional clarification, please. As I said this is

First and final 1041 - RLT treated as an estate.
As an estate - bequests are not deductible as income distribution no matter if paid as a one time payment or if, in the end, there will be a final distribution.
As a trust - there are no bequests whatsoever since a trust entity cannot die?
RLT treated as an estate follows estate tax rules on all issues?

A distribution of assets remaining after income is received and expenses are deducted on the 1041, is calculated using the DNI calculation on Page 2. This determines the amount that flows through to the heirs on their K-1's, (if there is net taxable income.) It also carries to Page 1 as a deduction on the 1041. Capital gains/losses are shown on Sched D - 1041.

A trust may dictate how income is to be distributed to heirs; often these are used to perpetuate an estate for some time in the future. An RLT treated as an estate follows estate tax rules on all issues, including a fiscal year, etc. etc. Excess administrative expenses and capital losses can be passed through on the final K-1's.

[Gretel]

Thanks for your patience Burke. It's amazing how one can know all the rules and still not be able to get it together. In the process I realized that I had a misconception about bequests. I thought that applies only to heirs that are not part of final estate distributions. I know, I know, this is actually pretty clear in the law.