QUESTION: Taxpayer died intestate but had her home. Her two daughters received residual money from the home sale. Is a 1041 required?

ANSWER: Depends . . .

If the home was sold while in the estate the sale would be reported on the 1041. Any gain (or loss) would be reported to the beneficiaries on a K-1. If the title of the home was transferred to the beneficiaries before it was sold, the sale would be reported on the beneficiaries’ 1040s and no 1041 would be required, thus no K-1.

QUESTION: My client is the trustee of his mother’s trust. Mother passed away on August 1, 2022. The home was sold on October 20, 2022. There is also interest income that would require a tax return be filed for the year 2022.

Can I file a 645 election, filing Form 8855 and use a fiscal year for the trust instead of a calendar year? This would allow me to file one tax return, the initial and the final tax return. The fiscal year would be 8/1/22 thru 7/31/23.

ANSWER: Yes, you can use the Sec 645 election (see page 3.38.11) to accomplish your goal. The 1041 will also get a higher deduction filing as an estate ($600 instead of $300). You will need to get an EIN for the estate and file Form 8855. The form is signed by the Trustee and Executor which may be the same person.

QUESTION: Mom lived and died in Arizona. Arizona house got sold in the trust. Daughter who is the trustee, lives in Alabama. What states do we have to filein for the trust1041?

ANSWER: Here is a link to a chart that covers the various state laws regarding that issue. But there is no guarantee as to the accuracy of the chart and practitioners should do their own research and arrive at their own conclusions. https://www.actec.org/search-results/?searchQuery=state%2520residency

QUESTION: Estate has a 1041 (no 706). To what extent are legal, probate and executor’s fees deductible on a final 1041?

ANSWER: Attorney fees would be deductible on Deduction line 14. Deduction Line 12 is where to report fiduciary (executor) expenses including the fees paid to the executor, probate court fees and costs, fiduciary bond premiums, legal publication costs of notices to creditors or heirs, the cost of certified copies of the decedent's death certificate, and costs related to fiduciary accounts.

QUESTION: A complex trust has distributed all the trust assets as of 12/31 except a small amount of cash left in the bank account for any unknown contingencies. Can the 1041 be marked final?

ANSWER: Yes, it can be marked “final” provided the small reserve amount is kept in a non-interest-bearing account so as not to earn any interest and create a 1041 filing requirement.

QUESTION: When a final complex trust 1041 return is filed with long-term/short term capital losses, will they be passed through to the beneficiaries on a K-1 providing we have all the SSNs?

ANSWER: When a final return for ANY trust is filed, all income, losses, deductions, credits, carryovers, etc., are passed through to the beneficiaries. There is no tax at the trust level.

QUESTION: I was wondering if you knew if there is a requirement for trusts to issue 1099s (for trustee fees, legal fees, etc.). Our firm has always issued 1099s for these, but a local bookkeeper is telling a trust client that her trust does not need to issue 1099s because the trust is not a “trade or business”. Any insight and/or references would be helpful.

ANSWER: Referring to the instructions for the 1099-MISC and 1099-NEC both include this language: "for each person in the course of your business”. However, be careful, as a 1041 may include a business and there is no harm in filing a 1099 even if not required. Also, based on the 1099-K (2022) instructions, where an individual also receives a 1099-K for the same income, a 1099-NEC is not required because that income is also included in the 1099-K.

QUESTION: I have a client with several Grantor Trusts that paid significant Trustee fees which were passed on through his Grantor Statement. It's my understanding that fiduciary fees are not deductible for Grantor Trusts.

ANSWER: Grantor trusts report their income directly on the grantor’s 1040 and do not file a 1041. Thus, any deductible fees would be an itemized deduction. However, after TCJA, tier 2 miscellaneous deductions are not deductible, and the list of tier 1 deductible expenses is very specific and does not include a deduction for grantor trust trustee fees.

QUESTION:I have a“State A” resident trustee and one non-resident beneficiary (minorchild claimed by parents).The only incomefrom the trust is interest income from an investment account located in “State A”,all of which was distributed to the beneficiary. Is the non-residentbeneficiary taxed in “State A” on the income?

ANSWER: A nonresident beneficiary is treated as the owner of intangibles, so interest from a “State A” bank or investment account held by a “State A” trust is considered to have situs at the nonresident beneficiary's residence and wouldn't be taxable to “State A”.

QUESTION: In the final year of a 1041 the income is passed through to the beneficiaries and there is no tax assessed on the 1041. So, when this occurs how are tax pre-payments dealt with?

ANSWER:

See the 1041 instructions, page 27 for additional details.

QUESTION: In the final year, can a trust choose to pay the tax on the income?

ANSWER: In the final year a trust is required to distribute the income to its beneficiaries. So, the answer is no. Besides the trust tax rates are generally higher than those that would apply at the individual level.

QUESTION: Paid trustee fees over $ 600.00. Does a 1099 need to be filed?

ANSWER: Although they are taxable to the recipient, reporting trustee fees by a trust on a Form 1099 is generally not required.A 1099-NEC or 1099-MISC is for payment of servicesperformed in a trade or businessby people not treated as employees. Trusts and estates are generally not treated as a “trade or business” and nonprofessional trustees are serving in a capacity that does not qualify as a “trade or business” activity for that individual.In addition, nonprofessional trustees are generally not subject to SE tax.

However, according to Rev. Rul. 58-5, in some circumstances, even though the estate or trust assets do not include a trade or business, if the management activities required of the executor for administering the estate or trust are sufficient in scope and duration, these activities could constitute operation of a trade or business and the income be deemed SE income.

QUESTION: When filing a simple trust return, is an accounting income statement required?

ANSWER: Accounting income is not required by the IRS when filing a simple trust or estate. Accounting income is only required for complex trusts. However, probate law in some states requires an accounting to beneficiaries. 

QUESTION: By filing a 1041 and K-1s for a simple trust is there a penalty considering a simple trust has a 100% income distribution requirement and thus no tax liability?

ANSWER: The is no special late filing penalty for simple trust. Follows rules like those that apply to late filing a 1040. 5% of the tax due for each month, or part of a month, for which a return isn't filed up to a maximum of 25% of the tax due (15% for each month, or part of a month, up to a maximum of 75% if the failure to file is fraudulent). If the return is more than 60 days late, the minimum penalty is the smaller of $450 or the tax due.