Diane B. Rohde CPA PLLC


Tax Preparation for Estates and Trusts

There are many challenges in filing tax returns for estates and trusts. Estates may be required to file a form 706 and or a form 1041. It all depends on the size of the estate and whether it earned any income. Income can be from many different sources including interest, dividends, or rental income.

A trust must file a form 1041 for any year in which it has over $600 in income. Trusts can either be revocable or irrevocable. This can determine whether the trust or someone else pays tax on the income brought in.

If you face the task of tax filing for an estate or trust, contact us for a complimentary consultation. We will take the time to sit down with you and discuss your options going forward. Below are some details about estate and trust taxation.


Estates (Forms 1040, 1041 and 706)

The first tax form that is filed when someone passes is their final personal tax return, a form 1040. This wraps up all activity for the period while the deceased was still alive. The filing due date is April 15th, much the way it would have been had the person lived. All activities for the deceased, up to the date of death, are included on this return. Items received, earned, after the date of death become part of the estate.

The next form, which may or may not need to be filed, is form 706. United States Estate (and Generation-Skipping Transfer) Tax Return. This return is filed for estates that are worth over a specified amount. This amount changes form year to year and is currently at $11,580,000. As you can imagine, most estates will not file form 706.

The last form is 1041, U.S. Income Tax Return for Estates and Trusts. This form is filed for estates with income over $600 for the year. The 1041 is generally filed for a year or two, until the estate distributes its assets to the heirs. The tax rate for estates can get quite steep, so often it is better to distribute as quickly as possible. The reason is that the heirs may have a lower tax rate to contend with.

Trust (Types and Requirements)

Trusts come in many different versions. Too many for the discussion of all of them in depth here. However, some of the basics can be presented. Revocable and irrevocable trusts. In essence a revocable trust is one where the grantor can revoke its standing. In these, the trust is disregarded for tax purposes and the grantor pays tax on income.

Irrevocable trusts are not revocable by the grantor once created; they are a separate entity. As a separate entity it needs an EIN and pays tax on its earnings. There are however ways that the trust can pass taxation to the beneficiaries depending on how it was set up.

There are two types of trust formats depending upon income and asset distribution. If the trust is required to distribute all of its income but none of the assets, the corpus, it is a simple trust. A complex trust is one that is not defined as a simple trust, it can distribute the assets, corpus, of the trust. There are other aspects that go into determining a simple or complex trust, this is the basic concept.

As you can see, the tax filing for an estate or trust is quite involved based on the concepts surrounding them. It is always better to enlist a CPA to prepare and file your estate and trust taxes. Contact us today if you need help in this difficult area of taxation.

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