Discussion:1040-1041 split-messy

My client died on 5/1/07; for a couple of years prior she was ill and in 2005 her brother began to help with financial matters, among other things. Client had set up a revocable living trust in 1997 with her spouse (deceased in 2000) but that trust agreement was not located until much later; it did name the brother as the successor trustee. There was also a durable power of attorney dated 1997 naming the brother (after the husband) as POA; the brother used the POA to act on my client's behalf, that's all I had in my file until mid-2007.

No trust returns have been filed, all income has been reported on form 1040 through 2006. A trust id# was obtained in 2007 after the client died. I was going to do the usual split on the 2007 return-1040 up until DOD and 1041 for the rest of the year. However, I have now received an accounting from the attorney who is working with the brother to close out the estate. The accounting for the trust goes back to 2005 when the brother first started taking care of my client's finances, and is labeled "ClientXX Revocable Living trust, BrotherYY Successor Trustee".

I am now thinking that I should have been doing trust returns since 2005 but since medical expenses far exceeded the income, there would have been no tax due and everything was reported on the 1040, so I don't think it's necessary to amend. However, for 2007 I'm unsure if I should split the income or put it all on the trust. Of course, 1099s are not correct as some have the ss# and some the tin# of the trust. Any thoughts?

the income from her own trust is taxable to her while she is alive

I think the fact that the attorney is doing an accounting going back to 2005 is a legal formality; for tax purposes I believe the rev trust isn't considered a separate legal entity until the surviving spouse dies, but the fact that the brother took on the role of successor trustee in 2005 made me pause (at least that's the wording the attorney is using). One of the reasons for a rev trust is to name a successor in the case of incompetency, which given my clients dementia and other illnesses was probably the case. But there again, that seems to be a legal issue rather than a tax issue. Does that make sense?

Here's my understanding- Even though my client was not longer trustee, the trust was still a rev grantor trust up until the DOD, at which point it becomes an irrevocable trust. If a 1041 is filed for the entire year, then the income from 1/1-4/30/07 should be reported on my clients 1040 via Grantor Letter; the income for the balance of the year should be included on the 1041. If this is the correct treatment, I think the chance of IRS notices for reporting that does not agree with 1099s is very likely. Would it be wrong just to do the split based on SS# reporting as WesR suggested since it is the same end result?

Yes, I understand pre-death is on 1040, post on 1041 and I did read Wes post correctly, that is what I normally do in the year a taxpayer dies as the 1099s are never completely correct.

What I was suggesting is to eliminate the 1041 for the pre-death portion and just report it on 1040 since that's where it will end up anyway. I was looking ahead to the actual tax return and visioning a single 1041 with grantor info and irrevocable trust info; not quite sure how I can get the software to do that. But I think I will just prepare two separate 1041 forms-one from 1/1-dod which includes a grantor letter and the second which reports the post-death portion (nothing has been distributed to the beneficiaries). Does that sound reasonable/correct?

Thanks, RML (aka Michelle)

Maybe Dennis or Wes or Riley will know, but without researching further, I would think the correct handling would be 2 K-1s: one pre-death to grantor; one post-death to whomever received income, or none for post-death income if no distributions were made.

How can I check both boxes on a single 1041?

It's different than a 1065/1120s because the entity classification doesn't change in the year of death, the K1 just goes to the individual for the portion through dod and the estate or trust post-death.

It is good to have feedback, so thanks Wes & Kevin!