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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4046
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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Hello, I previously asked and accepted an answer to the below

Resolved Question:

Hello, I previously asked and accepted an answer to the below question and have a new question related to it.

Original Question
''I'm administering a Trust as the appointed Trustee by the Trust document. My CPA contends he can't file the final 1041 for me until all distributions to the beneficiaries are made and all accounts closed. So for 2011, the 1041 was filed without the income (mostly capital gains) passing through on K-1's to the beneficiaries. Do you agree that this was the right way to file form 1041. I think K-1's should have been used in conjunction with the 1041 form of course.

In 2012, the house that was in Trust was sold and funds are soon to be distributed.

However, they are still some undistributed funds and, if distributed prior to the August 31, 2012 deadline, there would be no funds to pay the CPA without prepaying him first. Also, as Trustee I wanted to wait until September 30, 2012 to distribute all funds as a precaution against unknown liability popping up. I would appreciate your thoughts on this matter.''

New related question

For 2011, should k-1's have been used or just
reported as trust income and taxes being paid by the trust? The latter is how it was handled. Is the CPA correct in stating the final 1041 with k-1's for the beneficiaries
isn't filed until all trust funds are distributed ( essentially the fund is closed).?
Submitted: 2 years ago.
Category: Tax
Expert:  Stephen G. replied 2 years ago.

Stephen E. Grizey :

Hi & thanks for using our service. I'll do my best to give you a complete & accurate answer. Please ask me to clarify anything you don't understand.

Stephen E. Grizey :

The K-1s for the trust are used to pass the trust income to the beneficiaries when there are cash distributions from the trust to the beneficiaries; in other words the K-1s support the income distribution deduction taken on the 1041 (Schedule B); if there are no distributions, there is no distribution deduction and therefore no K-1s.

Stephen E. Grizey :

What deadline are you talking about as far as August 31, 2012? If you will be required to file a tax return for the trust for 2012 it wouldn't be due until 4/15/2013 as all trusts are required to use a calendar year; estates may use a fiscal year, but you are saying you are a trustee; probably of a revocable living trust which is now irrevocable;

Stephen E. Grizey :

Basically all of the business of the trust should be completed before the final trust tax return is prepared & filed. However, there's nothing wrong with keeping a small fund in a checking account to pay the last few expense of the trust, accounting & tax preparation fees, miscellaneous expenses and/or any legal or trustee fees. You would simply estimate the breakdown of these expenses and treat them as if they were paid in the last tax return and then disburse them as soon as possible with any unused funds being distributed to the beneficiaries.

Stephen E. Grizey :

Usually this really isn't necessary as there is plenty of time between winding up the activity of the trust and when the final trust return is due. You can simply hold onto sufficient funds to pay your CPA after he completes his work.

Stephen E. Grizey :

Please remember to click on the green "ACCEPT", or the "smiley face" as appropriate; that is the only way we get credit for our work, even if you are on a subscription plan. Feedback, if you have time and bonuses, where you think they are warranted, are always most appreciated. Before or after you ACCEPT, I will be happy to answer any additional follow-up questions you may have. Thanks again for using our service.

If you'd like to contact me again, in the future, just ask for "Steve G" at the beginning of your question.

Customer:

Dear XXXXX G,

Stephen E. Grizey :

What is your follow-up question?

Customer:

Hi Steve. Let me send it again. Looks like a glitch with JustAnswer.

Customer:
The CPA didn't file a K-1 in/for 2011 because all Trust assets had not been distributed in a large part because the house in Trust had not been sold. The CPA elected to treat the Trust as part of an Estate. The decedent passed in September of 2010. No Federal Estate taxes applied. The 1040 for 2010 for the decedent was filed.


The CPA said he needed all expenses and income records of the Trust through 8/31/2011. The 1041 for the Estate/Trust was filed for December 31, 2011 in December. Income was taxed at the Estate level with no pass-through K-1s. (I as a beneficiary could have offset some of the Trust income with Capital Gain losses I had if K-1 had been used). Instead the Trust incurred taxes.


Do you agree that unless the final 1041 is being filed K-1s are not used? (I would have used K-1s with the 1041 filing for 2011 noting not all Trust assests have been sold and distributed and subsequent 1041 forms and K-1s will be issued.) Obviously the CPA didn't agree. There were substantial distributions of monies in 2011. How would you have handled the situation?
Stephen E. Grizey :

You stated that "The 1041 for the Estate/Trust was filed for December 31, 2011 in December." Not sure what you mean by that as if the Estate/Trust return was filed using a fiscal year of 8/31, the return would be due by 12/15, but it would have nothing to do with December 31, 2011.

Stephen E. Grizey :

As I said previously, if there were distributions during the period from the date of death in 9/2010 to 8/31/2011 (the end of the first fiscal year of the Estate/Trust), then there should have been a distribution deduction on that 1041 supported by K-1s and the income should have been passed through to the beneficiaries.

Stephen E. Grizey :

As far as the FINAL 1041 is concerned, your CPA is correct in that the final return can't be filed until all the assets are distributed, but that doesn't mean that you wouldn't have income passed through to the beneficiaries in earlier returns as long as there were distributions to the beneficiaries in the earlier years.

Stephen E. Grizey :

However, note that in the case of a trust, capital gains generally remain in the trust and are only distributed in the final year of the trust, so that may be where the confusion lies, as the capital gains would normally be taxed at the trust level and remain there as they would be classified as part of corpus not income.

Stephen E. Grizey :

As with many things, it is difficult to know all of the facts in a particular set of circumstances & for example your comment that the income was (mostly capital gains) was disclosed parenthetically & if one doesn't pick up on that right away, you could get a completely different answer.

Stephen E. Grizey :

Please remember to click on the green "ACCEPT", or the "smiley face" as appropriate; that is the only way we get credit for our work, even if you are on a subscription plan. Feedback, if you have time and bonuses, where you think they are warranted, are always most appreciated. Before or after you ACCEPT, I will be happy to answer any additional follow-up questions you may have. Thanks again for using our service.

If you'd like to contact me again, in the future, just ask for "Steve G" at the beginning of your question.

Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 4046
Experience: Extensive Experience with Tax, Financial & Estate Issues
Stephen G. and 3 other Tax Specialists are ready to help you

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