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Phillip B, EA
Phillip B, EA , Enrolled Agent
Category: Tax
Satisfied Customers: 703
Experience:  Practicing since 2004. Expert in 1040, small business, represent vs. IRS, & int'l tax mattters.
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I need help preparing a 2012 CY 1041 return. The individual

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I need help preparing a 2012 CY 1041 return. The individual died in March 2012 and the administrator created an estate with an EIN #. The deceased's 401K plan administrator paid out the balance of the 401k to the estate in 2012 and 1099R's were sent. The estate has 8 heirs but no distributions were made in 2012. Although, the administrator expect to make final payments in 2013.

How is the 401K disbursement handled on the 1041 for 2012 and what impact will this have on the heirs for 2012.
Submitted: 3 years ago.
Category: Tax
Expert:  Phillip B, EA replied 3 years ago.

Thanks for using! 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.

Customer: replied 3 years ago.

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?

Expert:  Phillip B, EA replied 3 years ago.
Sorry it took so long to reply.

First, the deductible estate expenses would be deducted from the distributable amount that each individual beneficiary would be taxed on. For example, assuming the 401K was 100k and there are 25k in deductible estate expenses, there would be 75K that would be taxed between the beneficiaries.

The estate doesn't have to take the income distribution deduction, and, depending on the language in the trust indenture or the 401K beneficiary designation in the will, the estate possibly is not entitled to take the deduction. If the estate doesn't claim the distribution deduction, the trust will pay 2012 income tax on the income at likely a higher rate than the individual beneficiaries. However, if this is what is done, the beneficiaries would not be taxed on the money they receive from the estate in 2013.

Let me know if this helps.
Customer: replied 3 years ago.

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?


Thank you



Expert:  Phillip B, EA replied 3 years ago.
If the estate pays the tax on the 401K funds under the form 1041, the distribution will not be reported on a schedule K-1.

The estate will assume the stepped up basis. Keep in mind that if the home was the decedent's primary residence for 2 of the last 5 years, up to 250,000 dollars of gain would be non-taxable to the estate or the beneficiaries under section 121. If the home was not a primary residence and there is gain (something I doubt will happen to any significant degree) the estate could pay the tax on that gain as well if the estate doesn't distribute the gain to the heirs. If an actual distribution of the gain occurs in the year of sale, the gain would be reported on a pro-rated basis to each heir using the K-1.

Let me know if there is anything else.
Phillip B, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 703
Experience: Practicing since 2004. Expert in 1040, small business, represent vs. IRS, & int'l tax mattters.
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