It’s Tax Time
IMPORTANT FILINGS REQUIRED FOR EXECUTORS OF ESTATES & GRANTORS/TRUSTEES OF TRUSTS
By Ronald A. Fatoullah, Esq. and Stacey Meshnick, Esq.
During tax season, clients who have engaged in estate planning must be aware of tax documents that have to be filed as a result of creating trusts or being an Executor of an estate.
There are two kinds of taxes owed by an estate: one on the transfer of assets from the decedent to his or her beneficiaries and heirs (the estate tax), and another on income generated by assets of the decedent’s estate (the income tax).
When an individual dies, his or her assets become the property of the estate. Any income those assets generate is also part of the estate and may trigger the requirement to file an estate income tax return. Examples of assets that would generate income to the decedent’s estate include savings accounts, CDs, stocks, bonds, mutual funds and rental property. If the gross income for the estate or trust was $600 or greater, the executor/trustee must file a federal income tax return.
Typically, the estate calendar year starts on the day of the estate owner’s death and ends on December 31 of the same year. The executor, however, can file an election to choose a fiscal year, which means the tax year ends on the last day of the month before the one year anniversary of death. The 1041 is due by the 15th day of the fourth month after the tax year end. If you file in December, the estate has a calendar tax year. If you file in any other month, the estate has a fiscal tax year.
The tax year for trusts is based on a calendar year (unless the executor and trustee make an election to treat the estate and trust as one for tax purposes). Income that accumulates in a trust rather than being distributed is taxed at a higher rate than the individual rate.
Taxation of a trust is dependent upon the type of trust.
There are simple trusts and complex trusts. All income of a simple trust must be distributed to a beneficiary. As such, the beneficiary pays tax on his or her portion of the trust income, whether received or not.
The income of a complex trust can accumulate, and the trust takes a deduction for any income required to be distributed, if the trust terms require the trustee to distribute income in the tax year. Also allowed is a deduction for any other amounts properly paid or credited or required to be distributed other than current income, including income or principal payments made in the trustee’s discretion, annuity payments from principal, amounts used to discharge a beneficiary’s legal obligation and amounts paid pursuant to a court order.
Grantor Trusts vs. Non-Grantor Trusts
A grantor trust gives the grantor (creator) right to the trust’s assets and/or income and are treated as the owners of the trust assets. On the other hand, a non-grantor trust is a separate entity from the creator. As a result, it is treated as a separate taxpayer. As stated below, the separate treatment allows deductions on an estate tax return. However, for the same reason, it will pay its own tax on any income that is not distributed to beneficiaries.
On the IRS Form 1041, estates and non-grantor trusts can take deductions for distributions to beneficiaries, executor’s fees, attorney and accountant fees, etc.
Whether an individual has been given the responsibility to act as an Administrator or Executor of an Estate, or has established a trust with regard to personal estate planning, it is wise to consult with a tax advisor as well as an elder law attorney who is knowledgeable in the law, planning and tax compliance.
Ronald A. Fatoullah, Esq. is the founder of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Stacey Meshnick Esq. is an elder law attorney with the firm. The law firm can be reached at 718-261-1700 or 516-466-4422.
This summary is not legal advice and does not create any attorney-client relationship. Before the firm can provide legal advice, the specific facts at issue must be reviewed by the firm and the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation.