Estate Distribution Question

[Corduroy Frog]

This is a 1041 Estate Income question, and not a 706 Estate Tax Question.  I also don't know how to frame the question, so I will present with an example.

Mortimer dies on March 15, 2021.  I believe this to mean the Estate has a fiscal year beginning on March 15, 2021 and ending on February 28, 2022.  By February 28, 2022, all the money has been distributed to beneficiaries and the estate can be closed. 

During this time, Mortimer's estate disburses $540,000 in corpus to its beneficiaries, plus another $40,000 in income earned during the duration of the estate.  However, $30,000 in income was distributed in 2021 and the final $10,000 in income distributed in 2022.  I don't believe the corpus distribution in the respective years is relevant.

Which of the following is true?

• The estate issues a K-1 to its beneficiaries for $40,000 in income, with an effective date of 02/28/2022.
• The estate issues a K-1 to its beneficiaries for $30,000 with an effective date of 12/31/2021, and another K-1 for $10,000 with an effective date of 02/28/2022.
• If there is no K-1 for 2021, the beneficiaries are still required to report $30,000 on their personal return(s).
• The beneficiaries are required to report $40,000 on their personal return(s) for 2022, and are not required to report any income for 2021.
• No K-1 is required for 2021, however the estate should issue nominee statements to beneficiaries for 1099-DIV, 1099-B, and 1099-INT.

Obviously, all the above deal with whether or not there is a requirement for the estate to issue information returns to the beneficiaries for 2021.

Thank you for reading thru this.  If you care to provide a link that addresses these requirements, I will read it.

[Randall]

I believe you have the option on the first 1041 return of selecting the year.  Either calendar or fiscal.  So in your case, calendar year of 12/31/2021 and final return (short year ending whatever month) for 2022.  Or selecting fiscal year and the first 1041 return would end 2/28/2022.  I think this would dictate which year the K-1 would be issued.  Reported by beneficiaries on their calendar year 2021  or 2022 depending on which year selected on the 1041.

[DANRVAN]

On 12/21/2021 at 6:34 AM, Corduroy Frog said:

Which of the following is true?

Your post deals with some 1041 / estate issues that would be covered in a basic course, so hope you are asking out of curiosity.

As far as that goes, your K-1 question would also apply to a partnership or S-Corp on a fiscal year.

An estate can elect a fiscal year including an initial short year.  A short year can be  powerful planning tool to defer income or offset with expenses.

So in your example assume the estate elected a full 12 month fiscal year on the initial tax return.  

Since the year started in 2021, you report on a 2021 form 1041.  

The K-1'S will also be reported on 2021 forms, however they will show the year beginning in 2021 and ending in 2022.   The beneficiaries will report their share of income on their 2022 tax returns since the year end of the estate falls in that time frame.

On 12/21/2021 at 6:34 AM, Corduroy Frog said:

a link that addresses these requirements, I will read it.

I am sure you can find your answer in the 1041 instructions.  Also 1065 should have similar instructions in regards to fiscal year K-1's.

[Corduroy Frog]

Thanks for responses.  Apparently there is a choice between ending the year on December 31, or choosing a fiscal year less than 12 months from death.

Not asking out of curiosity, but after the responses, I consulted the instructions for Form 1041 and found these posts to be correct.

The decedent's estate will have a combination of Interest, Dividends, Capital Gains, and I suppose I was pre-occupied with getting the banks, custodians, etc. to cut off properly.  Many decedent's don't have enough income to generate the need for a 1041, but the beneficiaries and I will have quite a session dealing with the cut-off.

[DANRVAN]

15 minutes ago, Corduroy Frog said:

Apparently there is a choice between ending the year on December 31, or choosing a fiscal year less than 12 months from death.

Estate tax preparation 101.  Actually that should read 12 months or less for the initial return.

18 minutes ago, Corduroy Frog said:

but the beneficiaries and I will have quite a session dealing with the cut-off.

And you are preparing the 1041 with out basic knowledge.   To be straight forward, that is an ethical violation.

[Corduroy Frog]

Customers for 20 years - I know more about the decedent and beneficiaries than anyone else.

Danrvan - you are extremely knowledgeable and I appreciate you taking the time to respond.  You are one of the better sources on this forum, and I can deal with your candor.

Asking questions without basic research - probably a bad habit, especially in the situation described above.  The basic research, however, often results in extensive interpretation of code and regs.  Links usually help, if they are succinct and address the topic.  Bringing a topic to this forum can often save half a day in reading and interpreting stilted language.  I believe others who post find this to be true as well.

[DANRVAN]

My intent is not to criticize, but it appears you are not willing to educate yourself before you jump into a specialized area of tax practice.  It is obvious you are unaware of some important issues that you would learn in a basic course, so what else are you missing or going to overlook in this engagement?  Sometimes being the best you can be means you tell your client you are not experienced in a particular area and refer them to someone who is.

 

 

[Abby Normal]

13 hours ago, Corduroy Frog said:

I was pre-occupied with getting the banks, custodians, etc. to cut off properly

The banks and brokers will almost never cut off properly. You have to manually break it down between the decedent and the estate, every time (In my experience).

[Lee B]

Estates and  Trusts  are definitely not my areas of expertise and I have decided to stop doing any work in these areas.