A trust (except a grantor type trust) is a separate legal entity for federal tax purposes. A trust may be created during an individual's life (inter vivos) or at the time of his or her death under a will (testamentary). A trust figures its gross income in much the same manner as an individual. Most deductions and credits allowed to individuals are also allowed to trusts. However, there is one major distinction. A trust is allowed an income distribution deduction for distributions to beneficiaries. To figure this deduction, the fiduciary must complete Schedule B. The income distribution deduction determines the amount of any distributions taxed to the beneficiaries.
For this reason, a trust sometimes is referred to as a “pass-through” entity. The beneficiary, and not the trust, pays income tax on his or her distributive share of income. Schedule K-1 (Form 1041) is used to notify the beneficiaries of the amounts to be included on their income tax returns.
Before preparing Form 1041, the fiduciary must figure the accounting income of the estate under the will and applicable local law to determine the amount, if any, of income that is required to be distributed, because the income distribution deduction is based, in part, on that amount.
Form 1041 Simple Trusts - General Information
- The trust instrument requires that all income must be distributed currently, but this may be defined as Trust Accounting Income, not Distributable Net Income
- The trust instrument does not provide that any amounts are to be paid, permanently set aside, or used for charitable purposes, and
- The trust does not distribute amounts allocated to the corpus of the trust.
Who Must File
Form 1041 - U.S. Income Tax Return for Estates and Trusts
- Any taxable income, OR
- Gross Income of $600 or more, OR
- A nonresident alien beneficiary
When to File
- 15th day of the 4th month after the end of the tax year
- If an extension is needed, file Form 7004 to apply for an automatic 5-month extension.
- There is no second extension.
Generally follows individual rules:
- If you expect to owe, after subtracting any withholding and credits, at least $1,000 in tax
- Safe Harbors of: 90% of current year's tax, OR 100/110% of last year's tax.
Section 643(g) Election
- The trust can elect under Section 643(g) to allocate part of their estimated payments to beneficiaries.
- Section 645 Election - Decedent's Estate rules regarding estimates apply and no estimates are due for the first two years
- Check the Amended Return box on the front of Form 1041
- The trust is terminated when all assets have been distributed
- Trusts must have predetermined lives due to the rule of perpetuities. This limits a trust's life to the life of the beneficiaries plus 21 years
- All capital losses are released in the final year of the return
- May have an amount on Line 12a of the K-1 "Excess Deductions on Termination" - These should be reported on the Individual Beneficiary's Schedule A
- Check the Final Return box on the front of Form 1041
- A simple trust will be complex in its final year since any corpus remaining in the trust will be distributed in the trust's final year.
Simple Trusts will not compute Trust Accounting Income (Schedule B, line 8).
- $300 exemption
- Passive Activity Loss Limitations are imposed at the Fiduciary level
- If a trust distributes an interest in a passive activity, the basis of the property immediately before the distribution is increased by the passive activity losses allocable to the interest. Such losses cannot be deducted