Discussion:Trust Estimated Tax Payments
From TaxAlmanac
Discussion Forum Index --> Advanced Tax Questions --> Trust Estimated Tax Payments
Discussion Forum Index --> Tax Questions --> Trust Estimated Tax Payments
SGuinn1234 (talk|edits) said: | 6 March 2008 |
| I am filing an intital 2-month short period Form 1041 trust return for the current tax year. How do I compute the minimum "safe harbor" amounts for purposes of making estimated tax payments on Forms 1041-T for next year? | |
| 6 March 2008 | |
| For starters:
1. why 2 month for a trust? what 2 months are they? Are they both in 2008? Will there be taxes generated for the 2 months? Are there distributions for the 2 months? 2. The only safe harbors available to you are to estimate currrent year's tax or to compute installments on the Annualized Income Method. 3. Why are you making estimates when you know you will give them to beneficiaries on 1041T? 4. Are you distibuting income throughout the year, or just at year end? 5. Are you retaining gains in the trust? 6. Did you read the 1041 Instructions? ed | |
SGuinn1234 (talk|edits) said: | 12 March 2008 |
| My father passed away on Nov 1, 2007. All his assets were held in his inter-vivos trust. Upon his death, the trust became irrevocable and a new TIN was assigned to it. Income will be generated for the two months of Nov and Dec 2007 and an initial Form 1041 will be filed by April 15, 2008 for the period from 11/1 - 12/31/07. I want to also pay 2008 estimated taxes for the trust based on 100 (or possibly 110%) of prior year's income, but the "prior year" is a short year. Not sure of the relevance of many of your questions but, in any event, no income was distributed in Nov of Dec of 2007 but all income is required to be distributed currently pursuant to the terms of the trust. Yes, gains occurred in 2007, and gains will occur in 2008 but intent is to distribute all trust assets after the estate tax return is filed, and accepted by the Service - hopefully in 2008. Don't intend to pass the estimated tax burden over to the beneficiaries via Form 1041-T - this was misstated in my original question (my apologies).
I appreciate your interest in possibly shedding some light on this issue, "ed", (possibly saving me a trip to the local law library to research it via RIA, CCH, Pentice Hall, Mertens, Cumulative Bulletins, etc.), but I don't particularly appreciate your rather insulting question, "Did you read the 1041 instructions?" - sure hope you don't treat your clients like this. Stan | |
| 12 March 2008 | |
| Do I treat my clients like that? probably. Sorry, but in this case I neeedd to know how conversant you were with basic trust accounting and taxation in order to answer you on the proper level, because your question really threw me. As it turns out your question isn't really relavant as you do not intend to use a 1041-T. Actually you have a very simple problem and 1041-T is no way to solve it.
You say the trust DID have income in Nov and Dec and then you say it didn't. Under the terms, generally, of a Simple Trust you distributed the 2007 income and paid trust tax on the retained gains. For 2008 you will distribute the income and the gains as you will terminate the trust in 2008, so your 2008 1041 return will have no taxable income, gains, nor tax. There is no need for the trust to pay estimates as its final tax will be under $1,000. The beneficiary may have to pay estimates, but I can't comment on that with no information. In the event the 2008 1041 is NOT the final return your trust tax will be LTCG on any gains not distributed. These will probably come late in the year and you can pay an estimate if you are concerned and then file form 2210 AI but there is no need to if the final tax to the trust is less than $1,000. ed | |
| 12 March 2008 | |
| Stanley, it is unfortunate, but until we've seen you ask and answer various questions, no one knows whether you are a beginner in trust taxation or a veteran. Your profile doesn't say anything about this, and we have all seen attorneys who know nothing about tax law, and, dare I say it, CPAs (OK, I'll be fair, EAs also) who don't concentrate in every area of tax law. We can't read your mind via the internet. | |
| 12 March 2008 | |
| Lord. I am going to give up. Assuming date of death sometime in November 2007 a §645 election will allow an initial/final return to be filed if the entity is closed by 10/31/08. Sheesh. | |
| 12 March 2008 | |
| Sorry Stan, I didn't need all those questions answered, but I didn't know which ones would be pertinent.
Dennis: Wouldn't they have to open a Probated Estate to use the 645? This is ALL in trust. So he makes 2 1041s instead of one and pays no estimates. He should make sure his personal estimates are correct considering the distributions from this trust, however. Kevin: I guess I should add to my pofile that I have been doing 1041s for 40 years and have been the trustee of more than a dozen trusts. Regardless of other expertise if someone has to ask that question with as little information given you know we're starting at ground zero even if he's a CPA. ed | |
| 12 March 2008 | |
| Edosoft: If there is no probabe estate, the trustee alone can file the 8855, by the due date of when the 1041 would have been due, then this would likely extend it long enough to get the whole thing taken care of.
Lot of times there will be a little probabe estate though, depending on how well things were taken care of. wow, ended two sentences with a preposition. | |
| 12 March 2008 | |
| In most cases where all of the assets are in a revocable trust and death in late is the year, failure to file under the §645 provisions will result in the payment of tax for the short year and wasted excess deductions in the following final year. | |
| 12 March 2008 | |
| Dennis: YOu make it sound like they would be losing some tax deductions and paying additional taxes by not filing under 645, and you skip any
inconvenience created by converting this to an estate versus a trust, like a lawyer? court fees? Probate? I don't know as I have never used 645. I have settled many "estates" and trusts triggered by the grantor's death both in Illinois and Texas and the closest thing to a court probate I have ever had to do was for a car in Texas. Sounds like Stan didn't know about 645 or choose to not use it in fvor of doing calander year 1041s. I'd make the same choice unless there is some other dissadvantage. ed | |
| 13 March 2008 | |
| You are not converting it to an estate, you are merely being treated as an estate for filing of the 1041, is my understanding. You would then be able to match income vs. expenses/deductions over the longer period of time in which to file.
You have not lived on the wild side if you have not probated an estate NOT triggered by the grantors death. I won't go into details, but my full name is JD Crowcheesie Bonanno, deceased 1976, for legal purposes. | |
| 13 March 2008 | |
| It's too late tonight form me to figure out your tripple negative, Crow, but the question was what expenses/deductions would be missed, or extra taxes incurred, by filing regular 1041s? Also, as simple trusts,you'd get two $300 exemptions, and any losses would still be distibuted to beneficiaries at closure.
ed | |
| 13 March 2008 | |
| Sorry, Stan. I tried to get you some help, not sarcasm, seams to happen often here.
ed | |
| 13 March 2008 | |
| There is a reason this site comes with a disclaimer and there is a decided difference between sarcasm and a clear statement of fact. Poor Ed has stated he has no idea what the §645 regs provide (most is rather clearly delineated in the Form 1041 instructions) he has stated that he would expect a revocable trust to be a simple trust on death of the grantor. Clueless is being kind. There is always the possibility that something he might say could be correct, but you take your chances. Note that you take your chances with any answers I might give as well. | |
SGuinn1234 (talk|edits) said: | 18 March 2008 |
| Appreciate all of your attempts to help me out but, as of yet, still no resolution. Hopefully to clarify, all of the assets (including personal property) were in the trust as of the date of death, i.e., this is a no probate estate. No Form 1041 will be filed for the estate. Ed, I did not say that income was earned in Nov and Dec, and then say that it was not. I said that income was earned in Nov and Dec but no distributions were made during those months. I do not intend to make a 645 election. I do intend to file a short period initial Form 1041 for 2007. In order to generate the cash to pay estate taxes in 2008, I will have to liquidate several investments thus triggering substantial capital gains inside the trust during 2008. So, I'm concerned about running afoul of underpayment of estimated tax penalties in 2008. I'd like to make safe harbor payments based on 2007, but 2007 will be a short period. Therefore, my question remains: are safe harbor estimated tax payments possible if the prior year is a short period and, if so, how are the safe harbor amounts determined? | |
| 18 March 2008 | |
| Stan: because your 2007 return is a short year you can't use the prior year's tax safe harbor. You can only use 90% of current year tax or the Annualized Income method. You will have virtually no capital gains because you got a step-up in basis on DOD. Actually you will probably incur losses in liquidation and you most probably will want to choose an alternate valuation date for your estate tax making the basis for any liquidation the sales price (hence no gain nor loss). In either case you won't need to make estimates. Particularly if you distribute entirely in 2008 the trust will have no tax.
Also if the trust ordered you to distribute currently your 2007 1041 and K-1 should distribute all the income to beneficiaries, whether paid out or not, and the gains (if any) retained by the trust, If you still feel you must pay installments in 2008 pay 15% of any gains from liquidations in each trust tax quarter (note they are a month short from normal tax quarters on the 2210), and distribute the income so it isn't taxed in the trust. You don't have to include any income that will be distributed to beneficiaries. ed | |
SGuinn1234 (talk|edits) said: | 19 March 2008 |
| Thank you, Ed. Your reply as of today makes some sense to me. (I was afraid there'd be no safe harbor amount based on prior year's tax.) Have already been preparing to re-do FMVs as of alternative valuation date. Non-PTP L/P interest FMVs are a pain! I don't think we really know whether trust will incur net gain or loss on liquidation of trust assets to pay estate tax if liquidation occurs after alt. val. date but before estate T/R due date, but I agree that the amount may not be too large if market is relatively stable over that period of time.
On that note, I'm going to post another, more basic, question related to alternative valuation date reporting on the 706. (Perhaps I'll read a reply from you, Ed.) In any event, to all who replied to my question above, thank you for your imput and for your time. I'm, by no means, any stranger to the Code and Regs, and I'm not a novice when it comes to trust and estate tax reporting. But I'm certainly no expert either, and am not too proud to ask for help. Stan | |
