Should information received via a K1 in deceased taxpayer social be allocated similar to 1099-INT?

[Richard1024]

The taxpayer passed away in January of 2021. There was income received prior to death (consisting of SS and retirement income) and income received after death (consisting of interest, dividend, stock sale and income from a separate trusts).

The IRS guidance (Pub 559) appears to recommend allocating the interest & dividend income between the final return and the fiduciary return based on what was received prior to and after death (one month to final 1040 and 11 months to 1041).

Would this also apply to the information received via a form K1 (containing ordinary & qualified dividend, REIT dividends, foreign tax credit, non-div distribution, etc)? Or can this just be placed on either the 1040 or 1041 without the line by line allocation of the K1 information as required for the other standalone forms (1099-int & 1099-div). The K1 contains the taxpayers social number versus the estate.

[Accountant-Man · Accepted solution]

Maybe. If you consider that all k1 income, etc, was distributed as of 12/31, then all skips the 1040 and goes straight to the 1041.

Otherwise the k1 ownership should have been split, 1 mo and 11 mos.

[Richard1024]

Thank you very much for your response. First option sounds more convenient (I consider all of the K-1 income to be distributed as of 12/31). Total amount is just over $2k when considering all of the K-1 components.

[BobKamman]

Who is the trustee of the separate trusts that issued the Schedules K-1? Were they notified that the beneficiary had died? Did anyone tell them the EIN of the estate, or successor beneficiary?

[Richard1024]

Thanks for your inquiry. Trustee is a bank and they were notified. Trust was setup for the benefit of child (whom is now the deceased taxpayer). Once child passes, the trust will provide income to the heirs and their children.

The trust will continue for another few years until it is dissolved with corpus distributed in those future years.

Further analysis of the statement & transactions detail that make up the K-1 for the year ending 12/31/21

1/) $10k earned in dividend income

2) $2k distributed to beneficiary (taxpayer) on 3/1/21 (reflected on the K-1).

3) $1k paid towards Q3 income tax on 9/10/21. (Total distribution of $3k).

As the full dividend earnings of $10k at 12/31/21 was similar to the earning reported on the prior year's (2020) return; my thought is that the portion that was paid as a distribution at 3/1/21 of $2k has already been allocated & represents the amount that goes to the final return (1040). Earnings remaining (undistributed) from the $10k; likely to be allocated to the trust.

[BobKamman]

Doesn't sound like the bank has many beneficiaries who die eariy in the year. How can they put a March distribution on a Schedule K-1 for someone who died in January? If anything, it would come under the 65-day rule and be reported on the 2020 return. Did they know by March 1 that he had died? They surely knew by September 10 that the quarterly payment would not be needed.

Your job is not to clean up their mess. I don't see a reason to report any of the K-1 income on either the 1040 or the 1041 -- or to claim the ES payment, although IRS is likely to send it anyway, and the estate can decide whether to pass it on to the rightful owners, or return it to the bank.

[Richard1024]

Thank you for your response. You are correct with the trustee notification question. As I looked further within the details provided; although the taxpayer passed in January, application for estate EIN was not completed until August 2021. In addition, some additional information provided with trustee annual year ending trust statement (TY21) indicated that updated beneficiary information was not signed until January 2022 (possibly also submitted to the bank/trustee around that time). To revise my previous answer, this appears that the trustee was notified but notified very late as they were wrapping up the 2021 Tax year and issued K-1 based on best estimate of allocation (to social).