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Distribution deduction on a fiduciary tax return

Technical topics regarding tax preparation.
#1
ode923  
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A fellow accountant asked me a question about a 1041 that he is doing one pro bono for a small estate. His question made me doubt my own understanding about this topic. Here are the facts:

An elderly woman died with a relatively small estate. About $10,000 in principal, and another $200,000 that came in from a pre-tax retirement account that had no beneficiary. Hence why it all came into the estate. The executor distributed it all into an estate bank account.

The deceased woman left a simple will that splits her estate 50/50 between a friend and a church. There are a couple of small complications not worth getting into. The main thing left to do is to file the 1041 and K-1s and pay the beneficiaries.

The client, who is the executor, is convinced the estate will owe taxes on all $200,000 regardless. The accountant says it will all be deducted and pass through to the beneficiaries if the executor actually distributes the $200,000 before the year ends. I agree with the accountant, but I'm fairly certain the 65 day rule would apply here as well.

Is there anyone with more 1041 experience who can chime in? Much gratitude!
 

#2
JAD  
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Does the language of the legal doc create a simple trust or a complex trust? By definition, a simple trust distributes income, and the beneficiaries are taxed. If it is a complex trust, then yes, the 65 day rule can apply. If possible, it seems prudent to make the distribution so the beneficiaries pay the tax. The friend would pay tax on $100,000. I have no idea how the distribute impacts the church's tax position.
 

#3
Anderly  
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Since you stated this is an estate, take a look at the instructions for the Form 1041 Schedule A Line 1. The estate should be eligible for a deduction for amounts paid for a charitable purpose out the estate's gross income.

The timing of the payment to the charity is important in determining if an election is needed to treat contributions as paid in the subsequent year as being made in the current year.
 

#4
Anderly  
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Trust and estate work is not for the faint of heart!
 

#5
Doug M  
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The accountant says it will all be deducted and pass through to the beneficiaries if the executor actually distributes the $200,000 before the year ends. I agree with the accountant, but I'm fairly certain the 65 day rule would apply here as well.


I agree as long as the will does not require the income to be distributed annually (Simple trust.) But most wills are complex trusts as they don't have the income distribution requirement.

If you don't distribute, the taxes will be huge. Is there any reason why this cannot be accomplished by year end?

Did you know date of death? There is always the fiscal year available to you
 

#6
Anderly  
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Sounds to me like the Will does not create a trust but simply an outright distribution to the beneficiaries - so no need to consider "trust" language. Make the distributions to the beneficiaries by end of year (or 65 days after end of year using a 663(b) election and the charitable election) and that should remove the income from being taxed to the estate. You can also consider a fiscal year for the estate.
 


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