1041

[DTS]

I need some clarification on a 1041. A few of the facts are:

Client’s Grandmother died 5/02 (no trust was ever established) and a return was filed for her, but no 1041 was filed on the earnings for the rest of that year or since. Soon after, the court ordered my client to distribute her Grandmother’s assets to the beneficiaries and she did (holding back $75,000 for potential taxes). They took these assets, paid all taxes owed on interest earned prior to distribution.

My questions are:
1. Should I classify this 1041 as a “Decedent or Simple trust”? The earnings on the money held back for taxes have not been distributed to the beneficiaries since 2002.
2. When would you classify a trust as “Decedent trust”?
3. Since stocks were sold and proceeds put into this holding account to pay taxes, would stepped-up basis come into play here?
4. Should I even issue K-1s for the beneficiaries in this case until the final year due to the earnings on the money held back for taxes not being distributed?

Thank you for your help.

[Roland Slugg]

My set of replies

Dear DTS

#1: Treat it as an estate, not a trust. An estate’s status as a separate taxpayer generally continues to exist until the final distribution of the assets of the estate is made to the heirs and other beneficiaries. However, the IRS can consider the estate terminated for tax purposes after a reasonable period if it believes the estate’s administration is being unduly prolonged. Based on the facts in your post, I would speculate that your client’s estate may be viewed in this way. Nevertheless, I would advise the client to file F-1041 as an estate, and if the IRS wants to reclassify it to a trust for the last two or three years, that's up to it. My own guess is that it will not, since the only real difference is the exemption amount ... $600 vs $300.

#2: For filing F-1041 there is no such thing as a "decedent's trust." Do you mean "testamentary trust." In any case you said that no trust was established.

#3: Yes, the stocks received a stepped up (or stepped down) basis to their FMV as of the DOD.

#4: K-1s only need to be filed when there are items of income, deductions or credits flowing through to beneficiaries. If the estate did not distribute any such items, no K-1s are required. In the final year the income and deductions are passed through to the benes, so K-1s will be necessary for that year.

I'm sure it's rather obvious, but I'd push to get the returns prepared and filed ASAP. From your description it sounds like a relatively simple and straightforward estate, and it's already in its fifth year.

[DTS]

Roland

Thank you so much for your answers. I do appreciate the help.

I do agree with you about the length of time this has remained opened. My client found out, due to some questions from me, that the attorney she contacted originally in '02, was just letting everything sit idle and she thought he was still working on this for her! I really don't know the particulars of this engagement, but I suspect a humongous misunderstanding on both parts???

Also, I agree with you that this is very straighforward and just needs to be filed ASAP so it can be closed out.

Again, thank you.
Dennis