When a taxpayer dies, his property isn't always distributed directly to his heirs; the process also may take a long time as these undistributed assets are held in a trust on behalf of the beneficiaries. The IRS requires the trust administrator to file Form 1041 in order to report the estate or trust income, deductions, employment taxes, and capital gains and losses, and to pay any tax liability owed directly by the estate or trust.
Fiduciary is a technical name for a financial representative who manages the estate’s assets until they are distributed or sold. An attorney, financial institution, administrator, executor or other legally named representative in possession of the decedent’s property may function as a fiduciary. Some trusts are designed to continue long after a person’s death and never distribute the assets. As long as the assets remain in trust, the fiduciary must file Form 1041.
Requirements for Filing
If the estate or trust earned more than $600 for the tax year, Form 1041 must be filed. If there is any tax liability, Form 1041 is required, even if the estate’s income was less than $600. Additionally, if any beneficiary of the trust is a non-resident alien, the form is required, regardless of income or tax liability. If a deceased individual did not report all income on his final personal tax return, it must be included on the estate’s return.
When to File
For calendar-year estates and trusts, the form and any tax liability is due by April 15, just like an individual’s tax return. Fiscal-year estates and trusts must file by the 15th day of the fourth month after the fiscal year ends, for example, Oct. 15 for a fiscal year ending June 30. The IRS will assess penalties for late returns and late payments, but you can file Form 7004 for an extension of six months.
For trusts that pay a distribution of earnings to beneficiaries, no tax is due on those distributions. Instead, the income is passed through to the beneficiaries, who report the distribution as income on their personal tax returns. The trust issues Schedule K-1 to each beneficiary to use in preparing his return. Such tax treatment of estates and trusts is why they are called “pass-through” entities.
States may have additional filing requirements and taxes on the income of estates and trusts. Check with your individual state’s tax agency to determine which forms are required. Local taxes may affect the final distribution amounts, and thus the tax liability of the estate.
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