Mel7777
Level 2

Hello!   I have a client who died 10/31/2023 who had a house and two investment accounts in a revocable trust.  There have been several legal issues so the first return has not yet been filed.  When the executor is ready to file...

1. What are some considerations to consider to select the reporting year, whether to elect the first year as a short filing period, 10/31-12/31/2023 or to use a fiscal year, 10/31/2023-10/30/2024?  The house was distributed in 2024.

2.  How do we represent the distribution of the home on the K-1 given that it is a distribution of principal? with the change in FMV as a gain (loss) based on the difference of the FMV on the date of distribution and the date of death.

3.  The house was actually in the original trust to go to three people evenly.  One person did not want it so the other two people paid the third person out in cash 7 months after date of death. Is there any representation necessary on the tax return? Should a K-1 go to the person who received the cash as a distribution of principal and gain/loss if there was any?

Thank you!

 

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sjrcpa
Level 15

Trusts can only have Calendar Years.

But if you make a 645 election to treat the estate and trust as one, then the estate can have a fiscal year. This election is only good for 2 years from date of death.

When distributing property you can make an election to recognize gain at the trust/estate level but I have rarely seen it done.

Show as other distributions and it will carry out income earned on Beneficiary K-1s


The more I know the more I don’t know.
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Mel7777
Level 2

SJRCPA -

Thank you for responding!

The house that passes from the trust to the beneficiaries would be considered a distribution of principal and not taxed as income, right? only the gain/loss (based on the change in FMV) would have a tax effect?

I may be missing something - I was likening this to an inheritance, outside of a trust, and you're given the FMV on the date of death, that value isn't taxed to you. You pay tax on the gain when it's sold.  I have not before worked with a real property going into a trust and then being distributed. Have been reading IRS docs and trying to figure out how to represent in ProSeries.  I appreciate your thoughts on the taxation of this. 

In ProSeries I see the worksheet, Amounts to Allocate to Schedules K-1, but do not see how to handle the distribution of principal.  I humbly appreciate your guidance.

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sjrcpa
Level 15

Show the distribution of property as Other Amounts Distributed. I think you use the carrying cost (dod value plus any additions). The way the income distribution calculation works, the distribution will be deemed to carry out current year net income. The net income amounts will appear on the K-1s.


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BobKamman
Level 15

Election of a fiscal year must be made on a timely-filed return.  You're too late for that. 

If the trust directed the house to be distributed in kind, then it may not be a K-1 item.  The three beneficiaries instructed the trustee to sell it?  The trustee has authority to do that, but not to file tax returns?  Has the house been sold yet?  

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sjrcpa
Level 15

"Election of a fiscal year must be made on a timely-filed return"

@BobKamman The election is made on the first return filed. It does not have to be timely filed.


The more I know the more I don’t know.
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BobKamman
Level 15

From the Form 8855 instructions, which apply to this case because they want the trust to be taxed as part of the estate:

When To File
File the election by the due date (including extensions, if any) of the Form 1041 (or Form 1040-NR, if applicable) for the first tax year of the related estate (or the filing trust). This applies even if the combined related estate and electing trust(s) don't have sufficient income to be required to file Form 1041.

* * *

And as I read it, the election applies only to the first two years of the estate, starting from date of death. So, in this case, the end of this month. Might not be helpful if nothing has been sold yet.

 

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sjrcpa
Level 15

@BobKamman You are correct there. But if not making that election, the estate can elect a fiscal year on its first return. A trust would be stuck with calendar year.

So many elections.


The more I know the more I don’t know.
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BobKamman
Level 15

The problem, of course, is that there are apparently no assets in the estate.  The question involves the trust's assets and income. 

As I frequently have said, 90% of the people with living trusts don't need one (and create tax problems like this one for beneficiaries), while 90% of the people who might benefit from a living trust don't have one.  Two years after death, and the trust still is bogged down in administrative problems?  Ironically, in my state these cases end up in probate court -- just what the decedent was told would be avoided.  

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