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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2925
Experience:  Over 20 Years experience
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Hello: My question is rather complex so I will summarize as

Resolved Question:

Hello: My question is rather complex so I will summarize as succinctly as I can.

1.My husband acted as the sole Trustee for his mothers Trust. The original Trust was an AB living trust and upon his fathers death in 2004 was split into a by-pass trust and a survivors trust.
2.His mother died 10/14/2012.
3.My husband inherits the remainder after distributing and setting up a trust for each of two grandchildren. Each child inherits 10% of the value of the estate after estate tax payments and debts are paid.
4.Since 2004 I have prepared a Fed-1040 and Cal- 540 tax return for the by-pass trust and the survivors trust. All income from the by-pass was transferred to the survivors by reporting on a 1099-misc.The survivors rust paid all taxes due and estimated taxes each year.
5.I will prepare and file a final 1040 and 540 return for the trust.
My question is: Do I report income up to 10/14/2012 on the by pass and survivors trust or is it reported up to 12/31/12. Income consists of dividends, interest and capital gains and losses. If it is reported only up to 10/14/12 is all income between 10/15/12-12/31/12 reported on our joint tax return?
Submitted: 1 year ago.
Category: Tax
Expert:  R. Klein, EA replied 1 year ago.

Randalltax :

Hello and thansks for asking about your trust today.

Randalltax :

My first question is to verify that you have been using Form 1040 and CA-540 for the trust's income.

Randalltax :

Normally, one uses the 1041 series (Estates and Trusts), not the 1040 series.

Randalltax :

In addition, the income for the beneficiaries is reported on K-1s from the 1041, not on 1099-MISC statements.

Randalltax :

So, to answer your basic question, NOTHING is reported on a 1040 for the trust.

Randalltax :

If you do the 1041, the end date is the date the trust is closed, even if it results in a partial year. The K-1s are year-specific and not dated for a specific date within the year.

Customer:

You are absolutely right. The by-pass was reported on form Fed-1041 and state 541. The wife's tax return was a 1040 and 540 until her death. The IRS never questioned. Now I assume I file a 1041 for both the by-pass and the survivors portion up to 10/14/12. The by pass income was reported on a K-1 and transferred to the wifes tax return.. I should have verified my records before asking. What I find confusing is the trusts are still in existence. Now do I report the income after 10/14/12 from both the survivors and by pass on a k-1 for our tax return? The trusts will not be closed until the estate is settled.

Randalltax :

As long as the trust(s) have more than $600 of income in a year OR it is a complex trust (meaning not all the income is currently distributed), a trust return is required.

Randalltax :

A trust's tax year is always the calendar year unless the IRS approved some other year. So the final year of a trust that ended 10/12/12 has its reporting year as 1/1/12 to 10/12/12. The K-1 goes out after 12/31 to the beneficiaries to report on their 1040 personal returns.

Randalltax :

Since the Mother in this question passed away in 2012, a final 1040 is needed for her. She is considered to have lived the entire year, so her final 1040 is for the calendar year, but income she received only counts on this return while she was alive.

Randalltax :

Income earned ber her after her death is the estate's income (or trust).

Customer:

The income is 20k-30k for the by pass and more on the survivors. I will file a 1041 for her as of 10/14/12. I will prepare a k-1 for income form 1/1/12-10/14/12 from the by pass.Does that go on her 1040? I assume all income after that date is considered my husbands. Are there any special reporting requirements?

Randalltax :

OK, I'm a little confused as to who the players are here....

Randalltax :

But deceased person who was receiving income from a trust reports the income on her final 1040 until her date of death, even though the return covers the entire calendar year. Assuming this is the same trust that existed before and after her death, then the trust simply has no distribution for the remaining part of the year and the trust pays the income tax on the income.

Randalltax :

That's the income from the day after death until the end of the year.

Customer:

So her 1040 shows distribution up to 10/14/12 and the 1041 shows all all income and no distributions after 10/14?

Randalltax :

Yes

Randalltax :

Make sure the K-1 reflects this split.

Customer:

Okay. What about 2013? My husband will be receiving the income and he will have capital gains and losses etc. Do we do a 1041 for 2013 up until the trust is closed?

Randalltax :

Assuming this is an irrevocable trust and the income initially comes in the name of the trust or under the trust's tax ID, then yes, the trust returns continue.

Customer:

I am reading the AB living trust documents. It says the AB living trust could be revoked or amended by grantors. My husbands parents who are now deceased.

Randalltax :

That makes it irrevocable now.

Customer:

So until the trust is closed I will do a 1041. Randall since it was a by pass and survivors before mom's death does one 1041 suffice in 2013 or do I prepare a 1041 for the by pass and a 1041 for the survivors? I find this quite confusing and I am actually thinking a tax professional should handle this. I am a retired CPA but I was an auditor.

Randalltax :

One trust; one EIN, one return.

Randalltax :

It can have any number of K-1s

Customer:

Thanks I will give it a shot. If I have further questions may I contact you via this site?

Customer:

Also, you helped me when the IRS questioned my husbands status and wanted him to pay self employment taxes for payment received managing the trust. I wrote a letter using arguments and IRS code you provided and we won. Thanks

Randalltax :

Great to hear!

Customer:

Thanks again and I will probably be in touch again.

R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2925
Experience: Over 20 Years experience
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R. Klein, EA
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