HOW to do a decedent's trust, please help

[D Eckerman]

Hello all,

I have procrastinated long enough on this...

Uncle passed away, no 1040 due as very little taxable income -set up asd revocable trust.

Looked like very little in estate.. except 23.000 of bonds surfaced with 107,000 in interest!

When I put this into the 1041 - it shows about 36,000 in tax due.

Is this correct?

Thx D

ps = please reply asap as they want to know how much money they get to spend.

pss - there is a will and an executor

[kcjenkins]

First you need to determine whether he reported the income as earned. If so, it might not have been taxable, or only a small part of it taxable. But if it has never been recognized then yes, it's all taxable now. If you can not determine whether he reported it as it was earned, you have to assume the worst, and report it all now. Better than having it come back to bite them later.

KC

[iratax]

Were distributions to the Beneficiaries made? If so the tax would be due on their individual returns usually at a lower rate. An Estate may elect a fiscal year so that there is still time to make the distributions in the same year as the income. The income would then be taxable to the Beneficiaries in 2007 at a lower rate then the estate would pay.

[RoseK]

All I found on the subject is that bonds after death still have to pay taxes on the interest. I would assume that the same rules for some interest not being taxable because the bond is invested in fed obligations. That may help a little. The only other way to lower the intest is to find out if the Uncle had reported and paid tax on any the bond intest sometime before death. Other than those two ways out.

The ref book I am looking at says that unless the decedent made the election to pay any of the interest before he died, it is all taxable to the estate, is considered IRD and is taxable. It is taxed the year redeemed. If the trust redeems them before distributed it all is taxed on the estate/trust return. If the bonds are distributed before redeemed the recipients would include the interest on their own personal returns. This could lower the tax if the recipient times the year he redeems any of them. He could hold them and only redeem the number that would not affect his tax rate. A thought.

That is what I found, Good Luck!

RoseK

[lavelgiad]

You must first read the trust. Look especially for the clause that discusses payment of income or principal after the death of the last surviving trustor.

If this section says that the successor trustee "shall", "must", or other words to REQUIRE payment of income to the beneficiary(ies), it is a SIMPLE TRUST. With a Simple trust, the beneficiaries are deemed to receive the income during the year of the return (in this case, 2006) even though they may have received it in 2007. Even though the income may not have been paid at this late date, several estate attorneys have stated that as long as payment is made in a reasonable time after the close of the year, it is still considered a 2006 payment. [in a Charitable Remainder Trust, the IRS even states this reasonable time might be as long as the extended due date - Oct 15th!]

In this instance of a Simple Trust, all income would be deemed distributed and a K-1 issued to each beneficiary for their share of the "net accounting income". This would essentially mean that the trust itself may pay no income tax; unless it has capital gains which generally do not get passed out [unless it is the termination year of the trust].

If the successor trustee has "discretion" to pay income, or if principal is distributed, it is a COMPLEX TRUST. Complex trusts may elect to treat distributions made in the first 65 days of the following year as made in the reporting tax year. Thus, for a complex trust one could make a distribution by about March 6, 2007 and treat it as if it were made in 2006. In the case of a complex trust (i.e., trustee has discretion to pay out income), the trust could end up paying a sizeable tax liability if no distributions were made in 2006 or by 3/6/07.

If it is a Qualified Revocable Trust, the Trustee and Executor (if there is one) may ELECT to treat the trust as an estate under IRC 645. If this is elected (by fililng Form 8855 with the initial filed return), the trust may use a fiscal year. Also, on Form 1041, the "Estate" box should be checked not one of the Trust boxes. The fiscal year end cannot be more than 12 months and must end at the end of a month.

One caveat if using the 645 election: it can only be used for two years. At the end of 24 months, a new TIN must be obtained for the trust and a calender year end used. This will usually result in a short year for the Trust. If the Trust will distribute all assets within the two years [and is not an ongoing trust] then the 645 may be useful.

Good Luck.

[kcjenkins]

Thank you for an excellent contribution to the board. This is the sort of post that makes us proud of our members. That you took the time to give such a detailed and useful answer is exactly the reason we wanted to keep this 'Community' going.

KC