INTEREST INCOME REPORTED TO A DECEDENTS ESTATE

[kirkavery]

The taxpayer passed away 08/15/19.  I am preparing a 1040 and 1041 for the year 2019.  Form 1099-INT was received for $80,000 with the taxpayer ID for the Estate.   Should the interest income be reported all to the Estate or be split between the 1040 and 1041?   If split, do we need to request new Form 1099-INT's be issued?

[IRonMaN]

When was it earned?   If was earned evenly during the year, split it based on the number of days being reported for each return.  As a side note, you won't have any luck getting a new 1099 issued.  To make myself feel better, I have always attached a note to both returns showing how the interest was split between years.  I don't know if was ever read by anyone at the IRS, but I never had to respond to any notices either so it at least worked as a good luck charm.

[sjrcpa]

Chances are it was earned by the estate since 1099-INT issued to estate.

When the 1099 is issued to the decedent, that's when I typically have to look to see what was earned by decedent and what was earned after death.

[IRonMaN]

I didn’t notice it was created for the estate.  Good thing you came out of the bullpen for that one 🤓

[kirkavery]

The interest is paid quarterly.   For the first three quarters it was paid to the decedent's checking account.  For the last quarter is was paid to the Estate's account.   I am thinking about reporting it on a "cash bais" to the decedent and Estate.   Therefore the decedents final 1040 will show $60,000 interest income and the Estate will show $20,000 even though the 1099-INT shows the full $80,000 to the Estate's tax ID number.   And add a preparer note as you suggested.  Does that sound O.K.?

The other option would be to split based on the date of death, 08/15/19.  

Recording it all to the Estate does not feel right to me.

[sjrcpa]

Your approach sounds correct.

[BobKamman]

@sjrcpa "Chances are it was earned by the estate since 1099-INT issued to estate."

And chances are, for that amount, it was cashed Savings Bonds.  

How many beneficiaries?  Did they receive distributions in 2019?  Have they already filed their returns because they want to make sure they receive $1,200?  You might be able to use a fiscal year so the income is not taxed to them until 2020.  

[sjrcpa]

"And chances are, for that amount, it was cashed Savings Bonds."

That was my thought, too but OP said it was paid quarterly.

[kirkavery]

All good points.  My thought is this a complex trust, not simple, because there is no agreement to distribute earnings.  They did distribute cash in 2019 totaling $20,000 equally to four beneficiaries, all children of the deceased taxpayer.   I believe the distributions were from cash on hand which was a combination of the deceased taxpayers cash accounts and sale of personal assets, autos, etc. 

The Estate's personal representative and beneficiaries have agreed to have the Estate pay any taxes due for 2019, not to have income pass through to the beneficiaries via the K-1.    I believe that meets the definition of a complex trust.

The interest income is from bonds and loans held with private companies in the business of management and financial services.   I believe in the future the income will have to be distributed and at that time will be passed through to the beneficiaries.  

If my thinking is not correct I would appreciate any guidance.  

Thank you.

[BobKamman]

@kirkavery   "The Estate's personal representative and beneficiaries have agreed to have the Estate pay any taxes due for 2019, not to have income pass through to the beneficiaries via the K-1. "

And, has the Commissioner of Internal Revenue signed off on that?  Maybe there's some loophole in state law that allows you to ignore Code Section 643 and invent your own distributable net income. Just to make sure you should get it in writing from the probate lawyer.  Do the beneficiaries understand what tax bracket the trust will be in, compared to the tax bracket they would be in?  All four of them might agree to letting the estate pay higher taxes now, but don't be surprised if a remorseful one comes back later and asks you to pay for your mistake.  

[kirkavery]

Maybe I am missing something but I believe what you described are the tax rules for a Simple Trust.   My understanding is if the Trust does not meet the rules of a Simple Trust it is deemed a Complex Trust.   A Complex trust is one which retains income and does not distribute it to the beneficiaries but can distribute some of it's principal to beneficiaries.  The Trust Agreement for my client specifically states the income of the trust can be retained and reinvested.  My research found the following guideline for taxation of trusts:

 If a trust permits accumulation of income and the trust does not distribute it, the trust pays tax on the income.

Also I found where a Trust can be Simple and converted to Complex or vice versa. 

I would be interested to know if you believe a Complex trust that retains income and does not distribute income, would still require the beneficiaries to pay tax on the income rather than the trust.

[sjrcpa]

You started out with interest income reported in the estate's EIN. Now you are talking about a trust. What do you have?

A complex trust may distribute income, too. It is just not required to.

[kirkavery]

The decedent executed a Trust Agreement before he died that transferred all his assets and income to the Trust upon his death.   So I am filing a Form 1041 Income Tax Return for Estates and Trusts for the period of his death, 08/15/19 to 12/31/19.   I am being guided by the provisions in the trust agreement which gives the Trustee, the decedent's son, the power to administer the Trust

Does that answer your question?

[rbynaker]

The facts seem to be a moving target (unfortunately that's the new normal for the 21st century).  You might want to restart this thread with your updated facts about the trust.  Folks are answering based on the incorrect information you provided in your earlier posts, it wasn't until last night that this estate suddenly turned into a trust.  What other facts are misrepresented?  Did the trust receive the 1099-INT?  Earlier you stated it was in the Estate's EIN.  Now you're saying all of the assets were put into a trust.  The executor is responsible for the estate (which now sounds like it has no assets).  A trustee is responsible for the trust.  They are not the same thing, although the same person can be appointed to both positions.

[kirkavery]

I apologize if my initial question was misleading.  In my mind the Estate is the Trust and the Trust is the Estate since all assets and income for the Estate went into a Trust upon his death.    When I said the interest income was reported to the Estate, the tax ID is the one that was created for the Trust.   

I don't think that changes my original question which is how to split the interest income between the 1040 and 1041.

Some of the discussion after that lead to questions about the how the income for the Estate/Trust was being handled which obviously is bit more complicated.   But I appreciate any guidance on that as well.

[BobKamman]

@sjrcpa "A complex trust may distribute income, too. It is just not required to."

And when it does, the income flows through to the beneficiaries.  You and I both know that, but someone really wants to pretend that it's taxable to the trust/estate at a higher rate.  

1041's are obscenely easy to prepare.  People are just scared away because "fiduciary" sounds so foreign, like "corona."  The difficult part is helping clients with post-mortem tax planning.  When to make distributions?  What fiscal year to choose?  It doesn't take much time to learn, but it requires a willing student.