Form 1041

[NotEasy]

The only source of income of an estate is dividend/interest from an investment account. Does the estate pay tax on the annual dividend/interest in the Form 1041? Or the dividend/interest should be passed through to the beneficiary through a Form K-1 and the beneficiary pays tax on it?

[WhiteOleander]

You need to ask the executor/trix this question. They have to make that decision, not you.

[NotEasy]

You need to ask the executor/trix this question. They have to make that decision, not you.

First of all, thank you for your reply.

Can I take what you said to mean that the executor has the choice to decide where the income would be taxed? Does the executor have to file any form for the election?

Thank you.

[abby]

distributions

For an estate (as opposed to a trust where the terms of the trust would provide the initial guidance in most cases) it's important to determine if distributions were made to beneficiaries. As a general rule, distributions, whether of taxable income or not, will 'drag' out income to the beneficiaries. No distributions may mean that the estate pays the tax. I did an estate return recently where most of the income went on the K1s with a small amount being taxed to the estate.

There are fine points, however, that may arise as to how the income would be allocated. I agree that confering with the executor is required, although many excecutors are family members or friends and will need our guidance and advice as to their options.

[WhiteOleander]

No election has to be filed. Just file the 1041 with either the estate paying the tax or show the income moved out to the bene's on a K-1.


The executor doesn't have a "choice". He/She is supposed to go by the will or perhaps under direction of a court.

[NotEasy]

No election has to be filed. Just file the 1041 with either the estate paying the tax or show the income moved out to the bene's on a K-1.


The executor doesn't have a "choice". He/She is supposed to go by the will or perhaps under direction of a court.

Thank you.

What about if there is no will because the deceased person died in an accident?

[WhiteOleander]

Thank you.

What about if there is no will because the deceased person died in an accident?

Again, there will be either an administrator, or court appointed representative, or court control over the assets. You need to be certain you are not making these choices. If there is no will, who decided where the assets would go? People can't just decide on their own who gets what because they may not be following the State law on how an estate is divided.


You need to give your client good service and advice, but be sure you protect yourself. If things go sour later, then your client might point to you and say you said to do whatever....
Then you might be on the hook.

[newbie]

Again, there will be either an administrator, or court appointed representative, or court control over the assets. You need to be certain you are not making these choices. If there is no will, who decided where the assets would go? People can't just decide on their own who gets what because they may not be following the State law on how an estate is divided.

For an estate (as opposed to a trust where the terms of the trust would provide the initial guidance in most cases) it's important to determine if distributions were made to beneficiaries. As a general rule, distributions, whether of taxable income or not, will 'drag' out income to the beneficiaries. No distributions may mean that the estate pays the tax. I did an estate return recently where most of the income went on the K1s with a small amount being taxed to the estate.

There are fine points, however, that may arise as to how the income would be allocated. I agree that confering with the executor is required, although many excecutors are family members or friends and will need our guidance and advice as to their options.

As Abby pointed out often family members or friends are the executor/administrator, and although they shouldn't, they do decide who gets what and do just that bringing the mess to you after the fact.

No election has to be filed. Just file the 1041 with either the estate paying the tax or show the income moved out to the bene's on a K-1.


The executor doesn't have a "choice". He/She is supposed to go by the will or perhaps under direction of a court.

If the income is moved out to the bene's on a K-1 does the income actually need to be distributed? If so and the executor was suppose to distribute funds but did not do so before year end does the estate need to pay the tax?

[abby]

a point of confusion

One point of confusion between an estate and a trust is that a trust will often provide direction whether income must be distributed annually (usually a simple trust). If this is an estate and not an estate that has created a trust, then there is likely nothing in the will about when income needs to be distributed.

In either case, the distributions themselves can take a form other than the income - the executor may distribute personal property while not touching, say, the investment income but these distributions of property will still drag out the investment income to the beneficiaries.

I'm sorry if it seemed I suggested that the executor can decide who gets what - the will or state law should decide those issues (although we certainly do see plenty of small estates where this doesn't happen) but when I mention fine points - the estate might have tax exempt and taxable income. It might have ordinary and capital gain income. There may be business income. All types of income might go out prorata or there may be another basis to decide how to allocate the income to the beneficiaries. Say there are three beneficiaries who are designated in the will to receive all the business property. Allocating the income of this business to them might be reasonable choice - but this is based on the type of income, not the amount - the amount would normally be determined by the distributions.

Then there are what's called separate share rules. Oh dear, don't get me started. I am, I must say, far from an expert on these issues, having done just enough of this type of work to know just enough to get myself into trouble, so anyone who wants to refine or correct my statements is welcome to do so!

Still, it is difficult to give a definitive answer without having all the particulars of the situation, but I hope we've provided some insight to the process.

[WhiteOleander]

TTB 21-9 or SB 10-9 says that "Estates are generally not required to make distributions of income until the end of administration."

[Burke]

While this is true, estates do often make preliminary distributions to beneficiaries prior to termination especially if there are plenty of excess funds not needed to pay expenses. When such distributions are made, then any net taxable income for the estate tax year is passed thru to those beneficiaries on the K-1's proportionally allocated to interest, dividends, cap gains, other, etc. Personal property is usually corpus, not income, and if there is no will, state law determines the heirs, and in some cases, in what proportion they may share. If no distributions are made to the benes during the estate tax year (which can be fiscal or calendar), then the estate pays any income taxes. It sounds as though the OP may not be familiar enough with estates and trusts to be doing these type of returns. If the proper form instructions are followed, the distribution deduction will be calculated on page 2 of the 1041, and the proper amts passed thru on the K-1's. Note that any distributions to the bene's must be from taxable income first (including IRA's that pass thru the estate), then principal. Tax exempt income can also complicate the process, but if you have proper sophisticated software, this should be done correctly.

[Davc]

Note also that income is only passed to residual beneficiaries.

[TAX4US]

What if a first and final is being done for the estate and the distribution is made in heir's calander year 2011 but the estate closes in the fiscal year of 2012. When is that distribution of taxable income reported by the heir. I can't see it being on the heirs 2011 return even though they got it in 2011. I believe correct reporting should be on heirs 2012 return. Do you agree?