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Old 03-02-2014, 12:40 PM
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Decedant's final tax return

Decedent died in Sept. 2013. All assets were held in a grantor revocable trust that becomes 2 irrevocable trusts for the benefit of 2 beneficiaries. The assets are still titled in the name of the revocable trust using the decedent's social security number as the tax id number. I am applying for new tax id numbers for the trusts this week so that I can place the assets in the separate trusts at a bank and brokerage account. There will be no estate tax due. My understanding is that a 1040 needs to be filed for income generated up to the date of death and a 1041 needs to be filed for income from generated from date of death until end of 2013. Is that correct? Are the tax rates the same when filing under 1041 or should I as the trustee distribute income to the beneficiaries using the 65 day rule so that the income is not taxed at the trust's higher rate? Do I elect section 645 to file the 1041? Thanks



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Old 03-02-2014, 02:11 PM
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Originally Posted by FBN2014 View Post

#1; My understanding is that a 1040 needs to be filed for income generated up to the date of death and a 1041 needs to be filed for income from generated from date of death until end of 2013. Is that correct?



#2;Are the tax rates the same when filing under 1041 or should I as the trustee distribute income to the beneficiaries using the 65 day rule so that the income is not taxed at the trust's higher rate? Do I elect section 645 to file the 1041? Thanks
#1;correct;you are responsible for filing a tax return for the decedent's taxable earnings,i.e.,, self-employment income, stakes in corporations, dividends or taxable interest, or etc In most situations, the personal representative may take the same deductions for the decedent that the deceased would have taken if he were still living, including the eitc or etc. If the decedent is owed a tax refund, you may need to fill out IRS Form 1310 to receive the money.As you can see, 1041 is not a tax form many people have to deal with on their own; you must fill out Form 1041 completely, reporting income paid to the estate as well as the estate’s expenses and liabilities. Income received after death is taxable on Form 1041, not the final 1040. So, as you ssaid, income earned by the estate/trust prior to distribution or income that was owed to the decedent incurs federal income tax; you must report this income on the 1041 form and pay any taxes owed when filing. This is essentially income that would have been taxed if the decedent had been alive to receive it.forexamplr,iterest income, dividend income, and cg distributions from mutual funds are often credited at the end of the month. Investment income deposited after death is reported on Form 1041 not Form 1040.


#2; Upon the death of the grantor, the trust will become irrevocable. Accordingly, it will have a calendar tax year, which will be a short year beginning from the grantor's date of death through Dec 31st. The trust will likely be considered a complex trust since the trustee will not typically be required to make immediate distributions.so, so, there is the potential for the income earned by the trust to be taxed at an extraordinarily high income tax bracket unless you are able to do post-mortem planning in order to make distributions to beneficiaries, which will cause the trust's income to be taxable to them. While this is a possible solution to the tax dilemma that a continuing trust might face, it may not be a perfect solution since it could possibly result in the beneficiaries reporting substantially more income than they anticipated and, as a result, inadvertently trigger underpayment penalties for them aslongas they did not pay quareterly estimated taxes I guess. Accordingly, even though the continuing trust is intended to be used as an estate administration substitute, without additional planning, it does not offer the same post-mortem income tax planning opportunities that are available to a decedent's estate. tax law allows, for decedents dying after Aug 5, 1997, trustees of a funded revocable trust can duplicate the post-mortem tax planning opportunities available to decedent's estates. A revocable trust will be entitled to these tax advantages if, upon the grantor's death, the645 election is properly made. If you make the election under the 645 election, the trust will be treated for income tax purposes as a part of the decedent's estate for all tax years of the estate ending after the decedent's date of death and before the applicable date that is two years after decedent's date of death. the645 election, once made, is irrevocable. 645 election is effective only if made with respect to a qualified revocable trust which is any trust owned for income tax purposes by the decedent under Code 676 because of a power held by the decedent, which treats a grantor as holding any power or interest held by his or her spouse. the 65-day rule is a provision, which directs the operations of complex trusts. the rule applies to the amount of cash distributed from a complex trust for the purposes of determining the Income Distribution Deduction. Remember that fiduciaries pay the highest tax rate , 35% ,on all taxable income over $11.2k in 2010 you can check it for 2013 rate. It may be advisable to make distributions to beneficiaries in a lower tax bracket for overall tax savings.



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Old 03-03-2014, 10:23 AM
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So just to clarify, are you saying that if I make a 645 election on the 1041 then all income and capital gains produced by the trust after the decedent's death is taxable at the individual tax rate for up to 2 years? Do I need a new tax id number to do this or can I use the decedent's social security number to file the 1041?



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Old 03-03-2014, 10:34 PM
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Originally Posted by FBN2014 View Post


#1;So just to clarify, are you saying that if I make a 645 election on the 1041 then all income and capital gains produced by the trust after the decedent's death is taxable at the individual tax rate for up to 2 years?


#2; Do I need a new tax id number to do this or can I use the decedent's social security number to file the 1041?
#1;no;as said, for decedents dying after August 5, 1997, Congress created an opportunity for trustees of a funded revocable trust to duplicate the post-mortem tax planning opportunities available to decedent's estates. A revocable trust will be entitled to these tax advantages if, upon the grantor's death, a Code 645 election is properly made. Should the executor (if any) of a decedent's estate and the trustee of a "qualified revocable trust" make the election under Code 645, the trust will be treated for income tax purposes as a part of the decedent's estate for all tax years of the estate ending after the decedent's date of death and before the "applicable date."


#2;correct your TIN; Aslongas you are a qualified revocable trust and will make the 645 election generally, then you are required to obtain a TINand to file a Form 1041 for the trust’s short taxable year beginning with the decedent’s death and ending December 31 of that year. A trust does not have to file a short-year return if it filed the Form 1041 for the estate's first tax year before the due date for filing a Form 1041 for the trust for the tax year ending after the date of the decedent's death.



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