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Posted by curiousgeorge408 on December 27, 2007, 4:41 pm
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We are between CPAs at the moment, and I have a "burning"
question about how our previous CPA handled 1041 taxable
income for both the Decedent's Trust and Survivor's Trust, the
result of an AB Estate Planning Trust after my father died.
On the 1041 for both trusts, the CPA showed all of the
adjusted total income being distributed to my mother.
Consequently, the trusts themselves paid no tax. The tax
was paid, in effect, on my mother's personal tax return.
The CPA had explained that this is customary. Is that right?
Looking at the 2007 tax rate schedules, that appears to be a
tax benefit because the break points for the marginal rates
are so much higher for 1040 taxable income than for 1041
taxable income.
However, the fact is: the income in the Decedent's Trust was
never distributed to my mother, even though the trust document
does permit it (but does not require it). All of the income
remained in the trust assets.
So was the taxable income for the Decedent's Trust handled
correctly?
For the Survivor's Trust, one could argue that the trust income
is "distributed" insofar as that is what she relies on for income
to cover her expenses.
However, the fact is: the records that I keep for her show that
she is spending less than her trust income in some years.
Consequently, some of the trust income remains in the trust
assets.
Nonetheless, the Survivor's Trust is a revocable trust that
contains just my mother's assets. As such, I believe the trust
qualifies as a grantor type trust.
Therefore, if I understand the 1041 instructions correctly, I
believe the handling of its taxable income is correct insofar as
it is a pass-through entity for tax purposes.
Unless someone says otherwise, I am comfortable with the
handling of the Survivor's Trust income.
But I am not comfortable with the handling of the Decedent's
Trust income.
Bottom line: Is it truly customary to "distribute" (on paper) the
estate trust income for both trusts and pay tax on it on the
personal tax return? Or is that unusual and might be construed
as an abusive practice?
Thanks for your inputs.
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