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Old 01-16-2014, 02:03 PM
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Return for an Estate

My mother died on Oct 2. I am the Personal Representative for taking care of her final estate. I have some questions about completing the Form 1041.

Most of her assets were mutual funds in a revocable living trust. There are 3 heirs. With one major mutual fund company there were holdings in 4 different funds. Those were handled by establishing a new account for each of the 3 heirs, then transferring 1/3 of the holdings of each fund to the new accounts. But these questions: The basis value of the holdings of each fund stepped up to the value as of October 2. When the new accounts were established on Nov 5, there were gains in each of the funds that need to be accounted for. Can this be done by calculating the $$ gains and reporting it on Schedule D of the Form 1041 for the trust/estate? As this is a grantor trust, does paying the capital gains taxes in this way remove the requirement for a Form K-1 for each of the beneficiaries? And assuming that this takes care of the taxes due, does not the basis for the holdings of each of the heirs become the value of the shares in each fund as of November 5?

Second issue: There were more holding with another major mutual fund company. Those were handled by liquidating the assets (turning it all into cash), then depositing that cash in a new checking account to be distributed. It took awhile to meet the mutual fund's liquidation requirements, i.e. medallion signature guarantees, copies of trust, so the liquidation was not done until January 6, 2014. The holdings all received dividends and capital gains distributions at the end of 2013, which need to be accounted for in the trust/estate tax 1041 for 2013. Same sort of question as above: Does including the dividends and gains for 2013 in the Schedule B & D, Form 1041 take care of the tax responsibility such that there is no requirement for a Form K-1 to the IRS and each of the heirs? Because the final transaction was completed on January 6, there will be a requirement to account for any gains/losses for the first few days of 2014 on next year's return for the estate?

Finally, the estate's holdings include some real estate: three city lots, 2 of them with houses. One of the houses was my mother's home which has been vacant since she moved to assisted living facilities 5 years ago. While it remained her home, though vacant, various upkeep expenses remained her responsibility and except for yearly property taxes as itemized deductions, nothing was deductible for tax purposes. But now this real estate is no longer a home. It has been cleaned out/cleared out.....and is simply an asset that is on the market. Question: Since this property is now an asset for sale rather than a residence/home, are property upkeep expenses deductible?--i.e. such things as water bills, electric bills, yard maintenance expenses, property taxes? If so, is there an IRS publication that covers the details?



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Old 01-16-2014, 06:00 PM
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Originally Posted by Reno98 View Post

#1;Most of her assets were mutual funds in a revocable living trust. There are 3 heirs. With one major mutual fund company there were holdings in 4 different funds. Those were handled by establishing a new account for each of the 3 heirs, then transferring 1/3 of the holdings of each fund to the new accounts. But these questions: The basis value of the holdings of each fund stepped up to the value as of October 2. When the new accounts were established on Nov 5, there were gains in each of the funds that need to be accounted for. Can this be done by calculating the $$ gains and reporting it on Schedule D of the Form 1041 for the trust/estate?


#2;As this is a grantor trust, does paying the capital gains taxes in this way remove the requirement for a Form K-1 for each of the beneficiaries?


#3;And assuming that this takes care of the taxes due, does not the basis for the holdings of each of the heirs become the value of the shares in each fund as of November 5?

#4;Second issue: There were more holding with another major mutual fund company. Those were handled by liquidating the assets (turning it all into cash), then depositing that cash in a new checking account to be distributed. It took awhile to meet the mutual fund's liquidation requirements, i.e. medallion signature guarantees, copies of trust, so the liquidation was not done until January 6, 2014.



#5;The holdings all received dividends and capital gains distributions at the end of 2013, which need to be accounted for in the trust/estate tax 1041 for 2013. Same sort of question as above: Does including the dividends and gains for 2013 in the Schedule B & D, Form 1041 take care of the tax responsibility such that there is no requirement for a Form K-1 to the IRS and each of the heirs?



#6; Because the final transaction was completed on January 6, there will be a requirement to account for any gains/losses for the first few days of 2014 on next year's return for the estate?




#7;Finally, the estate's holdings include some real estate: three city lots, 2 of them with houses. One of the houses was my mother's home which has been vacant since she moved to assisted living facilities 5 years ago. While it remained her home, though vacant, various upkeep expenses remained her responsibility and except for yearly property taxes as itemized deductions, nothing was deductible for tax purposes. But now this real estate is no longer a home. It has been cleaned out/cleared out.....and is simply an asset that is on the market. Question: Since this property is now an asset for sale rather than a residence/home, are property upkeep expenses deductible?--i.e. such things as water bills, electric bills, yard maintenance expenses, property taxes? If so, is there an IRS publication that covers the details?
#1;Basically, you inherit a mutual fund once it is transferred to you after a benefactor dies. The value of the shares on the day they are transferred to you stand as your cost basis. The cost basis is a figure you need for tax purposes to calculate the capital gain or loss, which you report on your tax returns in the year you sell. There are two primary ways to pass money and assets onto heirs: directly or through a trust. Inherited assets become the full property of the heirs as soon as they are distributed. As the asset is an investment vehicle, a mutual fund, any realized gain or loss becomes part of the heir's income for the year. If assets pass into a trust, the trust becomes the owner and is responsible for paying tax on any income. Beneficiaries have the right to withdraw assets for specific reasons but are not responsible for the amounts left inside the trust; trust taxes work much like individual taxes: trusts pay income tax on any income they receive and can write off expenses and losses as deductions. Trust income and the associated income tax is reduced by any income distributions to beneficiaries and by any business or investment losses. Any tax owed for income at the end of the year is paid by the trust as a distinct taxable entity. Trustees use IRS Form 1041 to calculate trust income tax. When she places assets in a trust, the cost basis of those assets is adjusted at the time of death. This means that any gain realized on the later sale of those assets is calculated based on the value of the assets on the date of death, not when the original owner purchased them. In general, this means that capital gains are lower, along with the associated income tax. This also means that any loss is likely to be lower as well. In either case, if you sell a trust-held mutual fund during the year, you must calculate the gain or loss of the sale based on the share price of the fund on the date the original owner died. You must report gains and losses of assets held in trusts on form 8949/Sch D of IRS Form 1041. This form should be used for trust assets only .Distributions from the trust are recorded on Sch K-1 of the 1041 form and will be used to reduce taxable income in the trust and increase taxable income for individual beneficiaries.


Note;if the grantor reserved certain powers to herself, the trust may still have been a grantor trust. However, if it does not qualify as a grantor trust, then there is no step-up in basis available at the grantor's death.this type of trust results in more strict income tax rules, because a revocable living trust requires a trustee to use a calendar year for tax purposes. In addition, trustees must make estimated income tax payments on all taxable distributions to beneficiaries, a rule that does not apply for willed estates for the first two years. The assets of a grantor trust are not subject to probate because they are not considered the grantor's property. For federal tax purposes, however, the assets of a grantor trust are always considered the grantor's property. During the lifetime of the grantor, any realized gains in the value of the trust is taxable on the grantor's individual income tax return. After the grantor's death, the trust assets are considered part of the decedent's gross estate and are counted toward the estate tax.



#2;as mentioned above.

#3;also as mentioned above.

#4;Correct; dividends they receive from your mutual fund are taxable, when dividends are paid out to them, they’ll receive a 1099-DIV at the end of the year that lists their dividend income information; the brokerage also provides this information to the irs, so they need to enter the amount of dividends shown on each 1099-DIV form on Schedule B. the should add up all of their dividends and report that amounts on the 1040 form and need to keep copies of all 1099-DIV forms with the copies of their tax returns and schedules. This will make it easier to answer any questions the IRS might have about your return. They also need to contact the broker, mutual fund family or bank that holds their dividend-paying investment vehicles and ask that taxes be withheld from their dividend income, if they want to avoid filing quarterly returns or being hit with owing taxes at the end of the year.

#5;it depends as mentioned above; Trusts also provide K-1 schedules to any beneficiaries who received distributions; If a trust distributes cash or assets to beneficiaries, it must generate and send IRS Sch K-1 for their tax returns;distributions from the trust are recorded on Sch K-1 of the 1041 form and will be used to reduce taxable income in the trust and increase taxable income for individual beneficiaries .. An estate or trust’s income retains its character, and so beneficiaries must be informed of this character. The Sch K-1 (Form 1041) gives the beneficiary the specific allocation between all items of income, allowing easy transfer from the K-1 to the beneficiary’s Form 1040.as there are multiple beneficiaries, you’re required to prepare a separate K-1 for each, with the total divided among the beneficiaries on their K-1s in the same proportion as the distributions were made. Sch K-1 allows your beneficiary to separate his or her income distribution into all the sorts of income received by the trust or estate. Because it is an attachment to Form 1041, you must distribute a copy of it to the income beneficiaries no later than the due date for Form 1041, as extended. Remember, the beneficiaries can’t prepare their 1040s until they receive their K-1s from you.you also need form 8949; Form 8949 applies to all sales of stocks, bonds, mutual funds, and other securities in/from 2011.

Note; distributions from the trust to a beneficiary create a new set of potential tax liability issues. Federal income tax laws and state income tax laws in those states that actually collect an income tax do not consider trust distributions to be income for the beneficiary. Therefore, trust distributions do not create income tax liability for the beneficiary. Guess this is no your beneficiaries’ situations,However, several states impose an inheritance tax on trust beneficiaries. The inheritance taxes generally have a minimum threshold, which means if the trust distribution is small enough, then you will not need to worry about the inheritance tax. If your distribution from the trust exceeds the minimum threshold in your state, then you as the beneficiary may have to pay some inheritance tax to your state government. Some states have a state version of Form 1041. State eligibility requirements vary; the state of Ohio exempts some types of trusts, such as grantor trusts, retirement trusts and qualified funeral trusts, from the state filing requirement. The fiduciary who must file the federal Form 1041 is also responsible for filing any state Form 1041.

#6; correct. Like individual tax returns,trusts must file taxes by April 15th for the prior calendar year; you can begin your accounting year on the first day of the month of the grantor's death, 2013.





#7; Basically, you can include all sorts of selling expenses in the cost basis of the house, thereby increasing your adjusted cost basis and decreasing your capital gain. Any reasonable and customary expenses to get your house sold. This would include all those fees you pay at closing, plus any improvements that prolong the useful life of the house. In Publication 523, the IRS explains that the following improvements will increase your cost basis in the house: Additions and other improvements that have a useful life of more than 1 year;Special assessments for local improvements, and Amounts you spent after a casualty to restore damaged property.As long as you itemize dedcutions on Sch A of 1040, you can deduct pty taxes/mort int exp, however, you can’t deduct water/power bills as they are personal exepnses.

After determining your cost basis, you can deduct selling expenses. Selling expenses include title insurance, survey fees, transfer taxes and recording and legal fees. Settlement fees and closing costs are comprised of commissions and fees to the mortgage broker, and are deductible selling expenses. You can also deduct amounts you agreed to pay for the seller when you purchased the home. These include back taxes and interest, sales commissions and any other fees paid for closing.
Please For a complete list of adjustments to cost basis, see the Adjusted Basis section of Pub 523.



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Old 01-17-2014, 11:46 AM
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Thank you, wnhough, for a very thorough and helpful reply.

A couple of follow up questions: With respect to Item 1 of your response-- I gather that upon my mother's death all of the mutual fund assets became property of the trust and remained so until distributed? Hence the gain between the step up basis on date of death (2 Oct) and date of distribution (5 Nov) is attributable to the trust, and accounted for in the Estate Tax Return? And when distributed to the 3 heirs on 5 Nov, since capital gains taxes have been paid by the Estate/Trust, the basis of those distributed shares becomes their value on November 5?

And with respect to Item 4 of your response--Since everything with all of the mutual funds in that other major mutual fund company remained there.....and property of the trust..... until everything was sold out on January 6, the year end dividends and capital gains also should be accounted for and paid on the tax return of the Estate/Trust? As should any gains....should there be any.....between 31 December and Jan 6....on next year's Estate/Trust tax return?

Finally, with respect to the real estate (Item 7 of your response). I am disappointed.....but understand.....that things such as power and water bills remain items of personal expense. What about yard and landscaping service to keep the grass cut and the property presentable while it's on the market? Any legal ways to "get cute" to get around the costs of water, electricity bills.....such as paying a set fee to the realtor to take care of all such related expenses, then being able to deduct that fee?



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Old 01-17-2014, 06:22 PM
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Originally Posted by Reno98 View Post
.

#1;A couple of follow up questions: With respect to Item 1 of your response-- I gather that upon my mother's death all of the mutual fund assets became property of the trust and remained so until distributed? Hence the gain between the step up basis on date of death (2 Oct) and date of distribution (5 Nov) is attributable to the trust, and accounted for in the Estate Tax Return?



#2;And when distributed to the 3 heirs on 5 Nov, since capital gains taxes have been paid by the Estate/Trust, the basis of those distributed shares becomes their value on November 5?




#3;And with respect to Item 4 of your response--Since everything with all of the mutual funds in that other major mutual fund company remained there.....and property of the trust..... until everything was sold out on January 6, the year end dividends and capital gains also should be accounted for and paid on the tax return of the Estate/Trust? As should any gains....should there be any.....between 31 December and Jan 6....on next year's Estate/Trust tax return?




#4;Finally, with respect to the real estate (Item 7 of your response). I am disappointed.....but understand.....that things such as power and water bills remain items of personal expense. What about yard and landscaping service to keep the grass cut and the property presentable while it's on the market? Any legal ways to "get cute" to get around the costs of water, electricity bills.....such as paying a set fee to the realtor to take care of all such related expenses, then being able to deduct that fee?
#1; As the trustee of the estate, you make the final determination of where these items rightfully belong and you have the responsibility of reporting them correctly; Because most taxpayers are cash basis (you don’t report items that you owe or that others owe to you), you should be able to determine pretty easily which tax return an item belongs on. As long as the LTCG is dated after the date of death, it belongs to the estate,on 1041/ 706(if you need to file 706), not on her 1040 even if it’s payable to the decedent; checks dated through the date of death belong to the decedent’s return on 1040/706,NOT on 1041. As of 2013, estates in excess of $5.25 M, I guess(you can check it) were required to file this return, with amounts above that exemption level taxed at estate tax rates. In 2010 the estate tax was temporarily repealed.You mayhave to file your state tax returns, if necessary. Usually, state income tax returns and possibly even state estate tax returns may have to be filed for the decedent. As each state has different requirements, and some do not even collect state income taxes, you should contact your state revenue department for the appropriate procedures.





#2;Correct,those 3 heirs’ basis; FMV on Nov 5 is their basis and thy are not subject to LTCG tax.Hoewever, aslong as more gains are generated from the assets , then they are subject to LTCG tax on those LTCG on their 1040 aslong as their margian tax rate is higher than 15% for 2014 , I guess.so, Taxes on inherited mutual funds generally come into play if the beneficiary sells them. Most beneficiaries will not owe taxes on inherited mutual fund shares. The estate pays any federal or state estate taxes on gains before distributions are made to heirs. ALSO, if the grantor trust was set up so that it paid out a regular income to those beneficiaries, then they may have to pay capital gains taxes or income taxes on that income while she was still alive. For example, if the trust is designed to sell some shares of stock each year and give a payment to the beneficiary of the trust, the beneficiary will then have to pay taxes on that money as it is received if the trust does not pay the taxes first.

please read below.
Note;as you can see, the IRS doesn't require a tax return if income is below a specified level, based on the taxpayer's age, filing status, and the type of income received. This amount changes annually.

HOWEVER, in the case of PA, PA imposes an inheritance tax based on the value on the date of death of a decedent's taxable assets less the amount of allowable deductions. The tax rate is determined by the relationship of the beneficiaries to the decedent and can be 0 percent (spouse); 4.5 percent (lineal heirs - children, grandchildren, etc.); 12 percent (siblings - brother/sister) or 15 percent (collateral heirs - everyone else!).The PA inheritance tax is technically a tax on the beneficiary's right to receive property.So I can say it varies from state to state.

#3; I guess on next year's Estate/Trust tax return .you can check it iwth the IRS. Reporting realized gains from a mutual fund is much the same as reporting capital gains from stocks but involves different tax forms. Your mutual fund company will send you the required forms at the end of the year, and you will have to transfer the information to your federal tax filing.
For cash basis TP, you do not include Div on the final return on 1040 UNLESS paid by the date of death;only Div declared/received before the date of death are included in gross estate even if paid after the date of death.

#4;Correct nondeductible

#4;Nondedcutible costsUNLESS it is for biz/trade ;in tis case landscaping costs can be deductible. The cost of landscaping and maintaining a residential landscape is a tax deduction often overlooked by taxpayers; sole proprietors who meet clients on a regular basis in their home can deduct a portion of landscaping costs, including regular lawn care. This deduction is limited to the percentage of the home used for conducting business. Even certain property is not depreciable, including the land of rental properties. Since, according to the IRS, land does not "wear out, become obsolete, or get used up," a depreciation deduction cannot be taken for the cost of the land of a rental property. The IRS considers clearing, grading, planting and landscaping part of the cost of the land, so landscaping a rental property is not tax deductible


#4;Similarly as mentioned previously, if you run a business from your home, you can claim a portion of your expenses as tax-deductible. Things like your mortgage payment or rent and utilities are deductible expenses for home businesses. However, the general rule is that you can only deduct the portion of your expenses that applies directly to your home business. I should say you can never deduct non-biz/trade related expenses as they are personal expenses;You can contact a CPA/an IRS EA in your local area for more info in detail.



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Old 01-18-2014, 01:19 PM
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Thanks for yet another helpful reply, wnhough. You have been more than generous with your time and information.

With respect to the real estate that I mentioned--3 lots, 2 with houses, which now are vacant and all on the market together seeking a single buyer, I will be hiring a landscaping company to care for the yard(s), cut the grass and generally keep things spruced up and presentable. I have a separate water bill account for each of the houses, and pay about $100 per month for each, though the only water that I now use is from one of the accounts and only for watering/maintaining the lawns. The town's position is that once established, the account is active forever; i.e. no shutting off the water to stop the bill. There is an in-ground, automatic-on-timer watering system that waters the yard. The system is set and maintained by the lawn maintenance company. Would not that part of the water bill be deductible as part of the lawn/yard maintenance costs?



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Old 01-18-2014, 06:09 PM
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Originally Posted by Reno98 View Post
With respect to the real estate that I mentioned--3 lots, 2 with houses, which now are vacant and all on the market together seeking a single buyer, I will be hiring a landscaping company to care for the yard(s), cut the grass and generally keep things spruced up and presentable. I have a separate water bill account for each of the houses, and pay about $100 per month for each, though the only water that I now use is from one of the accounts and only for watering/maintaining the lawns.


#1;The town's position is that once established, the account is active forever; i.e. no shutting off the water to stop the bill. There is an in-ground, automatic-on-timer watering system that waters the yard. The system is set and maintained by the lawn maintenance company.



#2;Would not that part of the water bill be deductible as part of the lawn/yard maintenance costs?
#1;I guess this situation is beyond me or the IRS.The I can’t help you anything on this sort of specific situation.




#2;As mentioned previously, no you can’t; The IRS allows several deductions in connection with home ownership. Real estate taxes paid and mortgage interest paid are the two main deductions that homeowners can deduct on Sch A,as you know, along with other itemized deductions.I mean UNLESS you itemize deductions, you can’t even deduct those expenses on your return either. For example, the IRS does not even allow for the deduction of HOA dues because the HOA is a private legal entity. Only assessments by a state or local government are deductible on your personal federal tax return. If you rent the homes that receive an HOA assessment or , then, you can deduct the dues paid as an expense for maintaining the rental property.As said, they are nondedcutible personal costsUNLESS it is for biz/trade ;as long as the exepsens are for biz/trade, then, landscaping costs can be deductible. The cost of landscaping and maintaining a residential landscape is a tax deduction often overlooked by taxpayers; sole proprietors who meet clients on a regular basis in their home can deduct a portion of landscaping costs, including regular lawn care or biz related water bills. This deduction is limited to the percentage of the home used for conducting business. Even certain property is not depreciable, including the land of rental properties. Since, according to the IRS, land does not "wear out, become obsolete, or get used up," a depreciation deduction cannot be taken for the cost of the land of a rental property. The IRS considers clearing, grading, planting and landscaping part of the cost of the land, so landscaping a rental property is not tax deductible.I guess
NOTE; I am sure if this is for you; however, in general, home improvement expenses for energy conservation, and installation of energy-efficient systems, or roofing, Installing new walkways for a home or etc. are not deductible on your tax return in the year they are incurred. OR When your neighborhood gets new streets or sidewalks, you may have to pay a special tax assessment, which is common. These special tax assessments are deductible when selling your home by increasing your basis, or cost as home improvements do. They are considered capital expenditures and are added to the basis of your home (the price you paid for it plus closing costs and legal fees). When you sell your home, the increased basis decreases your capital gain and your tax liability. There are, however, some expenses related to home improvements that you may deduct.



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