1041 Fiduciary Trust Estate Tax Returns

How to Avoid Mistakes choosing the right CPA and critical tax issues you need to be aware of PART 1

By Jeffrey Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC, a Professional CPA and CFP Firm jeff@jbrookswa.com 602-292-2009 Please consult with your professional tax CPA regarding your specific circumstances! Unfortunately, we cannot give free advice because this would be unfair to our clients!

A. CHOOSING THE RIGHT CPA

You may want to Google “ Phoenix CPA” and search under Google reviews to find a CPA in Arizona who prepares 1041 Fiduciary trust and estate tax returns.

There are thousands of pages of tax rules for 1041 fiduciary tax returns so you will need to find an experienced and knowledgeable CPA to prepare your 1041 fiduciary tax returns! 1041 fiduciary tax returns can be quite complex. Most CPAs either do Not prepare these tax returns because of the complexity or they prepare them and make serious mistakes.  Unfortunately… we had to amend these incorrectly prepared 1041 fiduciary tax returns after IRS sends back a rejection letter.

Another reason the CPA firms do Not prepare these tax returns is that they do Not get easier reoccurring revenues from the preparation of business and individual tax returns. And try to call when CPAs are accepting new clients. For our CPA firm it is between late April (after tax season) and early February (before tax season).

It is a very stressful time after you lose a loved one!
There are steps that must be taken in a TIMELY MANNER to avoid wasting tax deductions and getting the estate and or trust closed in the least amount of time. So make sure that you ask questions from this article to see if CPA really understands 1041 Fiduciary Trust and Estate Tax preparation.  Also, get an agreement on responsiveness. CPA fees increase significantly when the preparer “stops and starts”

B. Fiduciary 1041 estate and trust tax issues Today I am focusing on the 1041 Fiduciary estate and trust returns of your loved one. (Not the irrevocable trust or Family Partnership)

1. Stock or other investments have been sold after your loved one’s date of death. The broker fails to take the correct step of failing to get the “date of death “step-up” in basis fair market value” which could cost you thousands of dollars.
2. Failure to the correct Cutoff of income and deductions between the date of loved one’s death and the remaining month’s assets continued to earn income and incur deductions. There needs to be an allocation between before and after the date of death.
3. Maybe there is an IRA from your deceased loved one….dad, mom, brother, sister that needs to be distributed and you don’t know what to do. Many times this is where we see mistakes.

Regarding IRAs….The SECURE Tax Act changed the rules for how and when IRAs need to be distributed.

These are just a few of the many 1041 trust and estate tax issues that we frequently see. The first valuable tax deduction are legal and CPA fees and Maintenance of the residence that can be wasted when there is a failure to close out the estate or trust in the correct year and have too many deductions in year 1 and to few in year 2. Many times the income is high on the first tax returns and lower on the second tax returns. And then in year two, the income is low but the expenses from closing out the estate are very high. This results on the first tax returns in paying unnecessary taxes at the trust or estate level on Form 1041 Fiduciary trust and estate returns and then in year two wasting deductions because of the lack of high income.  The second unfortunate mistake to avoid is to properly allocate losses from final filing of your loved one’s final tax returns to the 1041 tax returns. The only time you would not have to do this is your loved one dies on December 31. Another important decision is which year-end should you use.

If your loved one’s estate and or trust can be settled within 12 months then only one return will be required. The assets that remain after your loved one’s life will continue to earn income that has to be included on the Form 1041 returns until the estate and or trust assets are distributed to you and other beneficiaries detailed in a Will or Living Trust. Using a fiscal year-end can be a powerful tool to defer tax on that income and allow you and your beneficiaries time to plan for its inclusion on your personal returns.

Any of the 12 month-end dates that follow the decedent’s death can be the fiscal year-end date, but the year cannot exceed 12 months.
But the disadvantage of fiscal year-end date is there are more opportunities for mistakes because the brokerage 1099 statement does Not come out until the following tax year AFTER you have already filed your 1041 Fiduciary trust and or estate tax returns.

Example of a fiscal year being different than a calendar year:

Your loved one passes on December 12 2021 and all the assets are sold or liquidated by November 6, 2022. You have two choices.
1. File a calendar year return for 2021 and 2022 and pay two 1041 tax returns fees or
2. File a time period (called fiscal year end) of up to 12 months. December 12, 2021 to November 6, 2022
If there are assets that are titled in the living trust established by or for your loved one and some assets are Not titled in the Living Trust….then there is a requirement to file TWO separate tax returns…one under a Federal Identification Number for the former living trust that died when your loved one passes and Now is Irrevocable AND one under the estate (assets NOT titled in the living trust) that requires a second Federal Identification Number.

The way to fix this problem requires the CPA 1041 trust estate tax preparer to make a SPECIAL ELECTION on the first filed tax return. Then only one return is required, and a fiscal year can be used. Assets titled in the living trust that generates income require a Calendar year. Assets Not titled in the living trust have a choice of fiscal or calendar year.

A calendar year is easier for a 1041 tax preparer because there will usually be a requirement that the final personal 1040 tax returns will require ….
That is the year of death….income and deductions have to be allocated between Tax Forms 1040 and 1041 and between state 140 and 141.

Only the income and deductions received during your loved ones life (before death) should be on your loved one’s final tax returns.

Many times deductions are wasted by filing two years of 1041 tax returns.

One return has too many deductions and the other return has too few deductions.

The result is income is taxed at the very high 1041 tax rates!

What we are seeing more of…. Are 1041 fiduciary tax situation with a charity.
Several recent client’s deceased loved one had percentages % of the total estate to be distributed to charities.
I recommended that living children change their trust to avoid using percentages % for their living children who will be their beneficiaries. Instead, just use FLAT dollar amounts which will simplify the Trustee or Executor work. Unfortunately, there might have had to be a complete accounting to the charities involved! This delayed the closing of the estate and trust resulting in unnecessary wasted time, stress, and taxes.

I hope you found value from my article.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

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Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com