Thanks for using JustAnswer.com! I will do my best to provide you with a clear and concise answer to your tax question based on the information that you have provided.Since the 401K and all estate income appears to be required to be distributed to beneficiaries, the money would be reported as income on the 2012 1041 and deducted as part of the income distribution deduction. There would need to be a 2012 K-1 for form 1041 to each individual beneficiary reporting each individuals portion of the 401k. From my understanding of fiduciary returns, the timing of the actual distribution is not the issue for determining income on the K-1 and taxable income on the form 1041, the only factor that determines the income distribution deduction is whether the distributions are required by the trust document or the estate.If there are additional questions or concerns, please reply to this answer so that I may assist you further. If this answers your question, please rate my performance between OK and Excellent so that I may receive credit for my work.
I am struggling with the notion that each individual beneficiary will have income in 2012 even though the distribution does not take place until 2013. There are estate expenses in 2013 that will reduce the amount of funds available to be disbursed.
Does the estate have to claim the income distribution deduction?
Is this really considered income in 2012 to beneficiary or am I missing how this is represented on the k-1 to the beneficiary?
That was very helpful. I have a follow-on question, but here is some additional information that may have a bearing on your reply
The decedents estate does not have a will, nor a trust document. Under VA law the beneciaries are the "next closest relatives" and they receive equal shares of the estate.
The decedent also owned one other significant asset that is now part of the estate - a presonal residence that is in the process of being sold in 2013.
In summary, I am working on the assumption that decedents estate will pay income tax on the amounts received from the 401K in 2012 less any deductible estate expenses. These funds, when distributed to the heirs in 2013 will not be taxable to the heirs on their K1's. Can you tell me where on the K1 this distribution will appear. What line?
As for the house, will the decendent estate will assume a "stepped up basis" for the capital gain calculcation? If there is a gain, can the decendent estate elect to pay the income tax? Would this also result in a tax free distribution to the beneficiaries?