Form 1041

[Christian]

A longtime client who owned a small family farm passed away in late March last year. Part of the farm's operation fell into the period after her demise and will be reported on Form 1041. The farm will show a small profit of a few thousand dollars for that time period. I rarely have need to file Form 1041 and am wondering if the estate needs to pay self employment tax just as if the client were still alive. My thinking is no SE tax is due but will appreciate any input.  

[kcjenkins]

No SE tax on earnings after death.

[Abby Normal]

24 minutes ago, kcjenkins said:

No SE tax on earnings after death.

What if the beneficiary of the trust is actually working on the farm? I see there is no place on the 1041 K1 to enter SE income, but at the 1040 level, shouldn't the beneficiary calculate SE tax if they actively worked?

[jklcpa]

23 minutes ago, Abby Normal said:

What if the beneficiary of the trust is actually working on the farm? I see there is no place on the 1041 K1 to enter SE income, but at the 1040 level, shouldn't the beneficiary calculate SE tax if they actively worked?

Good question, but doesn't the character of income passed through to the beneficiary retain the character it has while in the estate?  If that is the case, prior to final settling of the estate while the farm is still in the estate, I think that income would not be subject to the SE tax. Once the farm is transferred to the beneficiary, then the income becomes subject to the SE tax again.

[Bart]

54 minutes ago, Abby Normal said:

What if the beneficiary of the trust is actually working on the farm? I see there is no place on the 1041 K1 to enter SE income, but at the 1040 level, shouldn't the beneficiary calculate SE tax if they actively worked?

The beneficiary is not being paid because he is working.  He is being paid because he is a beneficiary.

[Abby Normal]

 

57 minutes ago, Bart said:

The beneficiary is not being paid because he is working.  He is being paid because he is a beneficiary.

You miss my point. Assume the beneficiary of the trust that holds the business operation, also works for that business. It's like the difference between a partner who does no work in an LLC and partner who does work in the LLC.

[kcjenkins]

If you think he should be paid wages from the estate or trust, then that's what you do.  

[Abby Normal]

55 minutes ago, kcjenkins said:

If you think he should be paid wages from the estate or trust, then that's what you do.  

Setting up payroll seems too complicated. Treat it like a partnership.

I had a business in a trust, but the owner was retired so it was just an income stream (insurance biz). The trust included a Sch C, but there's no SE tax on the 1041. I never worried about SE tax on the 1040 because no work was currently being done.

It's a good question.

[DANRVAN]

Income distributed from a trust is not

17 hours ago, Abby Normal said:

What if the beneficiary of the trust is actually working on the farm? I see there is no place on the 1041 K1 to enter SE income, but at the 1040 level, shouldn't the beneficiary calculate SE tax if they actively worked?

That question was addressed in PLR 200305001 where the wife received distributions of farm income through a QTIP and CREDIT BYPASS trust.  It was determined that distributions related to services provided to the trade or business of the farm were subject to SE tax.

Generally, distributions from a trust or an estate are not subject to SE tax per section 1402. Many tax court cases have been lost by those who have established trust to avoid SE tax.

In regards to the original post, it depends on the facts and circumstances.

[Abby Normal]

2 hours ago, DANRVAN said:

It was determined that distributions related to services provided to the trade or business of the farm were subject to SE tax.

That, right there, was my entire point!