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Trusts, Estates and Wills, IRS Form 1041
Many families have a revocable family living trust and this is normally prepared by a lawyer
Typically, the husband and wife are grantors of the trust as well as its trustees. Trustees can treat the property in the trust as if it was their own.
While husband and wife are alive, the tersm of the trust are not triggered
Upon the death of one spouse, the trust becomes irrevocable. At that stage, the survivor should obtain an EIN from the IRS and he or she will need to file a tax return to the IRS - Form 1041
The death of the trustee automatically creates an estate comprising the property of the deceased. One of the intentions of the family trust is to avoid proving the will in court - probate.
The other intention of the family trust is to mitigate the effects of estate tax
Upon a person's death, his or her estate is appraised and taxed at fair market value subject to the exclusion, currently $5.25M. This process is often referred to as a "step up" which resets the basis of the property and assets at that fair market value, in other words, there is no capital gain. The new estate also requires an EIN.
It is recommended that you use either a lawyer or a competent tax preparer to file the tax returns
When the family trust becomes irrevocable, it is like any other trust. We will discuss the main trusts that the IRS lists on Form 1041:
Decedent's Estate
As soon as someone dies, it is generally necessary to determine who will then own their property. This property is termed the Decedent's Estate.
If there is a will, the will needs to be proved in court, a process called Probate.
If there is no will, this is called intestacy and again the beneficiaries of the Decedent's Estatee still need to be proved in court
Even if the decedent had a revocable trust, he or she could own property the title to which is not the trust. The beneficiary to this part of the estate may need to be proved in court
A trust is required to file taxes annually, while an estate is permitted up to two years from the date of death to file. An IRS Form should be filed to merge the family trust into the estate to give the parties more time to file their tax returns.
The trustees of a Decedent's Estate have up to two years from the date of death to file a tax return for the estate.
It is necessary to separate income earned by the estate from that earned prior to the date of death which should be included in the deceased final income tax return
It is recommended that you use the same professional to file both the deceased's final return and the Decedent's Estate return.
Simple Trust and Complex Trust
A simple trust has a calendar year and distributes all its income each year, but no principal. It has no charitable beneficiaries. A simple trust does not distribute principal in the tax year.
Other trusts are complex trusts
A simple trust is actually a pass through trust. All income passes through the trust directly to the beneficiaries. It is reported to the IRS on a K1 in order that the beneficiaries pay income tax on that income on their own 1040.
Complex trusts pay tax on their income
Other Trusts - Qualified Disability, QSST and ESBT, Bankruptcy, Pooled Income Fund, etc
A qualified disability trust is established for a disabled person aged less than 65.
Allocations between principal and income are often governed by State law. For instance, a trusts accounting income may be set as 3-5% of the trusts assets. Trusts are often established to minimize taxes.
QSST and ESBT are trusts relating to Sub Chapter S corporationsis an electing small business trust
You should emply an experienced tax preparer regarding trust tax returns. If a trust is a member of an S Corporation it counts as ONE member even if it has more than one beneficiary
