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Grantor or Simple Trust Form 1041


Christian

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I thought I had this trust matter concluded but on filling in the Form 1041 I am left unsure which box to check for the trust description. We used the decedent's social security number and filed trust income on her personal return through the year of death. Now that she is gone the trust will need to report income for two years 2020 and 2021 and will be disolved thereafter. The income after deductions is distributed to her two children each year. All of this is no problem my concern is that this looks to be a simple trust whereas a grantor trust has a more complicated filing structure which I simply am not going to tackle.

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After a bit more reading I came upon this "Grantor trusts automatically convert to non-grantor trusts upon the death of the grantor because the grantor is no longer alive to file a tax return. Any distributions made by the trust at that time would be taxable to the beneficiaries who receive them". I rather think this is the answer I am searching for and I check the Simple Trust box and wrap this up. What do you think?

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You are right that the trust is now an irrevocable nongrantor trust.  Whether it is a simple or complex trust depends on what it distributes. A simple trust distributes all income but no corpus and no charitable distributions.  A complex trust is one that isn't a simple trust (that's the real definition!).  A trust can be simple one year and complex the next depending on the character of the distributions.  If yours is only distributing income this year, it is a simple trust.  When it dissolves and distributes both income and corpus, it will be complex that year.

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That clarifies that. The trust will be disolved this year. All that was left for the year 2020 was the sale of two issues of stocks amounting to about $4,000. Is the basis for these securities the date of the mother's death or the date they were taken into the trust. Either way there will be a loss on both sales. Lastly is this loss allocable to each heir for reporting on their indiviodual returns for 2020 or is it simply lost in which case there would be no need to file a trust return for 2020 as there would be no income received in excess of $600 or more ? 

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From what Christian provided, the trust has gross proceeds but there is no "gross income" because the stocks were sold at a loss.  The general definition of gross income in the tax code would include NET gains from sales of stocks, not the gross proceeds.  Trusts and estates use the same definition of gross income as for individual returns, and the general definition at IRC sec 61(a)(3) says "gains derived from dealings in property" and more specifically for trusts and estates at sec 1.641(a)-2 that says this:

Quote

The gross income of an estate or trust is determined in the same manner as that of an individual. Thus, the gross income of an estate or trust consists of all items of gross income received during the taxable year, including:

  • (a) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests;
  • (b) Income accumulated or held for future distribution under the terms of the will or trust;
  • (c) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;
  • (d) Income received by estates of deceased persons during the period of administration or settlement of the estate; and
  • (e) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. The several classes of income enumerated in this section do not exclude others which also may come within the general purposes of section 641.

As an example, a person whose only income is $15,000 in social security benefits of which none is includable in AGI, that person's gross income for tax purposes using the general definition is zero. If that same person sold stock for $6,000 with basis of $4,000, the person's gross income for tax purposes would be $2,000, not $6,000.

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I believe this info provides the answer. A beneficiary succeeding to the property of a trust or estate is allowed any Unused Capital Loss Carryover(s), that remain upon termination of a trust or estate. The amount of the capital loss carryover that can be reported to beneficiaries is still subject to the trust or estate's reporting on the Final Return (Form 1041) of any amount of the current year's capital loss (or capital loss carryover) that is permitted in that tax year. If the trust or estate's capital losses including any carryover capital losses exceed their capital gains on the final tax return, the excess capital loss up to the annual limit of $3000 is deducted on the Final Tax Return (Form 1041). As 2020 is the final year for the trust the loss can be passed on. Some time back I had the same scenario with a client mother's final filing in which the loss incurred was allocated between the two heirs and is used $3000 per year by each until used up. I suspect I can use either her dod or the date the trust acquired the shares.

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Basis is  DOD value.  You will have to look at the broker statements to see if basis is or is not reported to IRS.  If it's not, the IRS assumes the gross sales price is all gain so you will have to file a return to show basis.  If the stocks will be sold at a loss, you want to file anyway so the beneficiaries can use it.

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