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Lev
Lev, Tax Advisor
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This is all taking place in Virginia. I am the trustee of my

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This is all taking place in Virginia. I am the trustee of my fathers trust which consists of about $130K from the sale of his home before he passed which resides in a checking account named "The trust of ______ _____. There is also two checks, from life insurance that total about $100K, that haven't been cashed. And an annuity of about $100K with about $40K taxable. I plan to pay the tax on the annuity next year when I receive the 1099 and disburse the remainder.
Do I deposit the checks into the checking account and write three equal checks to myself and two siblings mentioned in the trust. How do we do all this with out getting into tax issues with the IRS?
Thank you,
Ron

Lev :

Hi Ron and welcome to Just Answer!
If the taxpayer dies - all income received by the taxpayer up to the day he/she passed away is reported on the final tax return of the decedent. The income received before the death will be taxable on the decedent final return on form 1040. Write "DECEASED," the decedent's name, and the date of death across the top of the tax return.
The decedent's income includible on the final return is generally determined as if the person were still alive except that the taxable period is usually shorter because it ends on the date of death. You must attach Form 1310 to all returns and claims for refund - so refund checks will be issued with your name - www.irs.gov/pub/irs-pdf/f1310.pdf

The income received after she died is reported on the trust's income tax return - form 1041 - www.irs.gov/pub/irs-pdf/f1041.pdf

Lev :

What you have to include is an income in respect of a decedent (IRD).
Income in respect of a decedent realized AFTER the death is taxable.. Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return.


Income in respect of a decedent must be included in the income of one of the following.

--The decedent's estate, if the estate receives it.
--The beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it.
--Any person to whom the estate properly distributes the right to receive it.



You will find more details and examples in IRS publication 559 - www.irs.gov/pub/irs-pdf/p559.pdf
The trust will report distributions to beneficiaries on form K-1 - www.irs.gov/pub/irs-pdf/f1041sk1.pdf - that form reports to beneficiaries taxable part of their distribution.

Lev :

I assume that was a living revocable trust which became irrevocable when your father passed away.
The life insurance proceeds are not taxable in your situation and are not reported on form 1041.
Distribution from the annuity is partly taxable. The cost is distributed tax free, but earnings are taxable. When distributed - that amount is reported on form 1099R - which will report amounts of total distribution and taxable amount - AND the amount that was withheld
- from 1099R box 1 - total distribution
- from 1099R box 2a - taxable part of the distribution.
- from 1099R box 4 - that is the amount of tax withheld which is credited toward tax liability.
The sale of the house should be reported. However because the house is inherited - you have a stepped up basis equal to the fair market value at the time your father passed away. Thus if it is sold shortly after that - most likely - there is a small loss because of selling expenses. That loss will reduce other taxable income.
That is up to you how you deposit checks and how the money are distributed between beneficiaries - there is no restrictions.
When K1 forms will be issued to beneficiaries - only taxable part of the distribution will be reported on that form.

Customer:

The home was sold before my father passed and the proceeds is the $130K in the checking account. Does this change your response?

Customer:

With regards XXXXX XXXXX disbursement if I send my sister and brother a check for $65K that will not raise any flags with the bank or the IRS. Do you agree?

Lev :

Yes - if the home was owned by your father - and was sold by your father while he was alive - that is his income.
If the home was his primary residence for long time - and the gain is less than $250,000 - there is no taxable gain - and no need to report the sale transaction.
In this case the house was not inherited - but the money were inherited - which are not taxable and no need to report that amount on the trust's tax return.

Just in case you were not able to use the chat - I am switching to Q&A mode and porting the answer below.
Please feel free to communicate if you need any clarification or have other tax related issues.

 

Yes - if the home was owned by your father - and was sold by your father while he was alive - that is his income.
If the home was his primary residence for long time - and the gain is less than $250,000 - there is no taxable gain - and no need to report the sale transaction.
In this case the house was not inherited - but the money were inherited - which are not taxable and no need to report that amount on the trust's tax return.

 

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