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Estate Form 1041 "Income Required To Be Distributed Currently"?

-- I am the executor of an estate. I am using Turbotax Business 2019 to complete Form 1041 for the estate (discussed in this forum previously).

-- The will lists exactly two beneficiaries: The executor was left all the decedent's furniture. A 501(c)(3) charity was left the residue (over half a million dollars in cash at this point).

-- The will has a section titled "Expenses, Debts and Death Taxes." In the latter section, the will speaks of estate income. The will does not speak of income anywhere else. The "Expenses, Debts and Death Taxes" section first directs the executor to pay all expenses, debts and taxes. Then the section states: "My executor shall make such elections and allocations under the tax laws as my executor deems advisable, without regard to the relative interests of the beneficiaries and without liability to any person. No adjustment shall be made between principal and income or in the relative interests of the beneficiaries to compensate for the effect of elections or allocations under the tax laws made by my executor or by the trustee under the trust agreement hereafter mentioned."

-- The estate has income of $14,000, due to interest earned by the estate account and a 1099-R post-death, final distribution from a traditional IRA. The traditional IRA had no beneficiary listed for it. The custodian and executor dissolved the IRA. The executor put the IRA's cash in the estate bank account.

-- The executor paid off the decedent's car loan ($12,000); funeral expenses ($7,000); decedent's post-death home repair expenses prior to post-death sale ($1,000); property taxes and sales taxes ($2,000); and the executor's fee ($9,000 to date).

-- The various expenses and debts the executor has paid since the decedent's death far exceed the income post-death. Some of the estate's principal was used to pay these expenses and debts.

-- Form 1041 Schedule B Line 7's "distributable net income" is $3000 ( = $14,000 - $2,000 - $9,000)

-- Form 1041 Schedule B Line 9 asks for the "income required to be distributed currently." The instructions for Form 1041 Schedule B say this is income that the will requires to be distributed currently.

-- Form 1041 Schedule B Line 10 has $600,000 on it. This is the approximate amount that the executor will distribute to the charity within the estate's fiscal year.

-- Form 1041 Schedule B Line 15 currently has $3000 on it. This was computed by TurboTax. Though it makes sense to me.

-- Regardless of what number the executor puts on Form 1041 Schedule B line 9, the estate apparently will owe no income tax.

-- Form 1041 and its accompanying Schedule K-1 (thankfully completed by TurboTax) will 'pass through' $3000 of income to the charity.

Questions:

-- Is Form 1041 Schedule B Line 9 asking for "net income required to be distributed currently," where "net income" is the income remaining after expenses are paid? (Or am I overthinking this? Is Line 9 really for much more complicated estates and trusts?)

-- The will appears to give the executor discretion regarding allocations of principal and income for tax purposes. Is it fair to say that the will does not require any income to be distributed (to beneficiaries) currently, especially when the estate's expenses and debts exceed the estate's income? So Form 1041 Schedule B line 9 will have a zero?

Reply to
Elle Honda.Lioness
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The normal rule is that nothing is distributed to beneficiaries until the probate is closed and the court orders distribution. The ability to allocate between principal and income is more for the purpose of doing what you can to keep the tax as low as possible.

Reply to
Stuart O. Bronstein

It's rare that something is simple in tax law, but, if the will does not specify that any income must be distributed, the line item is $0. If there were income specified, it would be modified gross income, rather than net income.

-- Arthur Rubin Brea, CA

Reply to
Arthur Rubin

Stu, thank you for the reply. I suppose my state is an exception to the normal rule. My state's probate code requires that all taxes be paid and all distributions to beneficiaries (a.k.a. "devisees") be completed before the estate can be closed. Right now I find this a bit annoying, since Form 1041 asks for the date the estate was closed. If the estate for which I am executor owed taxes, I would be going around in circles, when it comes to closing the estate and filing the Form 1041. I refuse to sweat it, at least for this seemingly relatively simple estate.

I appreciate the elaboration on that boilerplate paragraph on allocation. I gather that the paragraph was specifically written to ease the burden of completing a Form 1041?

Arthur, great, thank you.

Aside for the archives: To me, the Turbotax software seems a bit peculiar when it comes to which beneficiary gets stuck with estate income on a Schedule K-1. For the estate I describe above (having exactly two beneficiaries), the software asks how much estate income was distributed to each of the two beneficiaries. If I leave the two fields completely blank, the software does not assign any of the estate income to either of the beneficiaries. If I put zeroes in the fields for each beneficiary, then the software "passes through" all the distributable net income to the very last beneficiary listed. (I tested the software on this point, adding first a third beneficiary, and then a fourth beneficiary. If I put in zeroes for all beneficiaries, then each time the very last beneficiary listed got stuck with all the DNI on the beneficiary's Schedule K-1.)

Unless someone wants to finger some misunderstanding I am having with the software and/or tax law, 'just saying for now.'

Reply to
Elle Honda.Lioness

Simply put, the rules for estate income tax are totally different from personal income tax. You (the preparer) need to fully understand the legal requirements of the will governing the estate as well as federal and state law. The software makes very few assumptions because each will is different and the governing instructions are so varied. I would not recommend that any layperson try to prepare a fiduciary return. In fact, despite years of professional tax preparation experience, I have had occasions where I had to refer some fiduciary returns to those with more expertise than mine.

Ira Smilovitz, EA

Reply to
ira smilovitz

It's a general purpose paragraph I've seen in trusts for 40 years. Yes, it gives flexibility on some aspects of the 1041, and also flexibility on distribution to an extent. It basically means, consult an accountant and do what the best thing is for everyone concerned.

Is that because you don't know the income yet?

One approach would be to identify the closing of the estate as the end of the estate's fiscal year. Hopefully by then you will have all the figures you need. If you're wrong about when the estate can close, I would imagine the closing date can be extended if necessary.

Another approach would be to estimate the income and distributions on the 1041, and file an amended return when you have all the actual numbers.

This can be done. It has been done successfully before. So don't sweat it. Do what you think is reasonable and that will very likely be better than what most people do - and they don't get into trouble.

Reply to
Stuart O. Bronstein

On Thursday, December 26, 2019 at 10:44:38 PM UTC-7, Stuart O. Bronstein wrote: Regarding the seeming conundrum of my state's requiring all taxes to be paid before closing the estate with the probate court, while tax Form 2041 asks for the closing date:

The income is accumulating as I write. Specifically: Over half a million dollars is sitting in a money market (estate) account, earning about $30 per day. Per my state's probate code, the last day that creditors can make a claim on the estate passes in about the third week of January. I have completed a drafts of the deceased's final personal income tax returns. I have compared the drafts to 20 years of records of her prior returns and her various financial statements from the last few years. I feel pretty good with my estimate of the taxes owed. The 1099-Ints and 1099-R will further confirm my drafts. I feel confident in the remaining expenses (income taxes and my executor's fee). I plan to distribute all but a few thousand dollars of what the charity is due at the end of January. I am tracking estate income closely. By the end of January, 2020 I will know the estate income within one dollar.

Else as Arthur pointed out (based on the facts I posted), there is no "income required to be distributed currently." I either leave Turbotax's two fields for the two beneficiaries "income required to be distributed currently" completely blank, of I put in zeros. Putting in zeros is what yields K-1s (generated by Turbotax) that make sense to me.

snip

Perfect. Granted the Form 1041 will pass through the few thousand dollars of the estate's taxable income to the charity. So I expect no federal estate income tax to be owed. My state does not tax estates of the size I am handling.

Ira, thank you for your thoughts. Where I am a CPA firm has quoted me "$1500 plus" to complete a Form 1041. In other words the starting price is $1500. The more complicated the Form 1041, the more the firm charges in excess of the $1500.

I believe the firm would earn it. I realize that, at a minimum what is involved is a massive amount of records review.

My records of assets, interest, dates et cetera are meticulous. In coming to my decision not to hire a CPA, I have considered the following:

-- There is only one beneficiary named to receive the cash assets;

-- The estate's taxable income is at most $3000 (yielding a tax of about $360 worst case);

-- The beneficiary is a well-known 501(c)(3) charity;

I believe any mistakes I make will be of little consequence dollar-wise. I could not see expending $1500 on a CPA firm and taking that amount away from the charity. I will undertake the risk of a mistake with the taxes. Said risk being that if for some reason more taxes are owed, and I have distributed all the estate's assets already, I get to pay the extra taxes from my own pocket.

Reply to
Elle Honda.Lioness

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