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Fiduciary Income Tax – Tips and Tricks for Filing Trust and Estate Income Tax Returns Colorado Bar Association, Trusts & Estates Section

January 21, 2016

Klaralee Charlton, an Associate Attorney with Katz, Look & Onorato, P.C., presents an overview

of the fiduciary income tax filing requirements and discusses some of the nuances of reporting

income and deductions related to estate and trust administration. Klaralee also touches on the

tax benefits that can be achieved by making certain elections, allocations, and timing

decisions.

Form 1041 What it is: Form 1041 is an Income tax return for a trust or estate reporting income earned by the

estate’s or trust’s assets. Income earned prior to a decedent’s date of death or prior to the

creation of the trust is not reported on Form 1041. Income earned by assets owned jointly with

rights of survivorship or with pay on death designations are not reported on Form 1041. Also, Form

1041 should not be confused with Form 706 which is the estate tax return.

Difference from Individual Income Tax Return: Individual income tax is calculated by taking

income minus deductions, minus standard deduction = taxable income. Estate or Trust income

tax is calculated by taking income, minus deductions, minus standard deduction, minus

distributions = taxable income.

Obtain an EIN: Income generated after date of death should no longer be attributed to an

individual’s social security number. The estate or previously revocable trust should obtain an EIN

and have all income generated after date of death reported under the EIN. A perfect transition

from SSN to EIN is usually impossible, so examination of monthly statements and 1099s will be

necessary to split out income reportable on the Form 1041.

Coordination with Estate Plan: It is imperative the attorney or CPA preparing the fiduciary income

tax return understand the estate plan, especially in first spouse to die situations.

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Filing Requirements Estates: Gross Income > $600.00 or Nonresident Alien Beneficiary.

Trusts: Any Taxable Income or Gross Income > $600.00 or Nonresident Alien Beneficiary

Simple Trust: Trust agreement requires all income to be distributed currently (i.e. Marital Trust); No

charitable distributions; No distributions of corpus.

Complex Trust: All other trusts that do not qualify as Simple Trusts. Majority of trusts will be

Complex.

Significant Administration Expenses: Consider filing a 1041 even if the estate or trust has no

income in order to pass the administration expenses out to the beneficiaries.

Calendar vs. Fiscal Year Estates: Option to file based on Calendar year starting on the decedent’s date of death through

December 31 (i.e. Date of Death: July 25, 2014, Calendar year is July 25, 2014 – December 31,

2014) or based on Fiscal year starting on the decedent’s date of death through the last day of

the month preceding the month of death (i.e. Date of death: July 25, 2014, Fiscal year is July 25,

2014 – June 30, 2015. Following fiscal year runs July 1, 2015 – June 30, 2016).

Trusts: Calendar Year, unless coupled with an Estate, if applicable, via a § 645 election (see

below).

Benefits of Fiscal Year: Fewer tax returns, delay taxation to beneficiaries, maximize benefit of

deductions (See Examples 1 & 2).

Burdens of Fiscal Year: Cannot rely on 1099, K-1 etc reporting to determine income for the fiscal

year.

Initial Return vs. Final Return Initial Return: First return filed for the entity.

Final Return: Last return filed for the entity.

Return may be both initial and final if estate or trust is fully administered within one tax

year.

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Final return is the only return on which losses may pass out to beneficiaries. This concept

should impact the calendar vs. fiscal year filing decisions and the timing of payment of

expenses (See Example 3).

645 Election IRC § 645, Treas. Reg. § 1.645-1

Making the Election: The 645 Election is made on the first, timely filed Form 1041 using Form 8855

and allows the income and expenses for both a trust and estate to be reported on a single 1041.

Usually, the election is made on the estate’s first fiscal year return. The Trust should file a timely

Form 1041 on the calendar year if it is unknown whether the 645 election will be made. The

election is irrevocable. (See Example 4)

Time Limit: For estates that DO NOT file a Form 706, the election is only effective for 2 years from

date of death. For estates that DO file a Form 706, the election is effective for 6 months after a

final determination is entered.***

Benefits: The 645 Election simplifies income and expense reporting during the estate

administration process, allows the use of the fiscal year for a trust, and provides better income

and expense matching opportunities.

Ending the Election: If both the trust and estate are terminating, then the trust must file a blank

1041 to notify the IRS of its termination. All income and expenses are reported on the combined

return. If the trust is continuing, then the trust will file a short year return reporting income and

expenses earned and incurred after the combined 1041 filing. If the estate is continuing, the

estate files on the same schedule as before.

Income Interest/Dividends

Pre-Date of Death: Report on decedent’s Final 1040

Post-Date of Death: Report on Form 1041

Until an EIN is obtained and accounts are retitled, financial institutions will continue to

report both pre- and post-death income under the decedent’s social security

number. Obtain copies of monthly statements in order to separate pre- and post-

death income.

Allocate post-death income to Form 1041. The tax preparer should include

explanatory remarks on both the Final 1040 and Form 1041 regarding the allocation of

the pre- and post-death income.

Capital Gains

I.R.C. § 1014 - Basis of property owned by a decedent or in a revocable living trust (and in other

entities not described herein) is adjusted to fair market value as of date of death. For the

majority of decedents, this will include the real property and stocks and bonds. It does not

include many retirement accounts such as pensions, IRAs, and annuities, discussed below.

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Sale of Decedent’s Residence

o If owned solely by decedent, adjust basis of entire property to fair market value

as of decedent’s date of death.

o If owned as Joint Tenants or Tenants in Common, adjust the decedent’s interest in

the property (typically 50%) to fair market value as of decedent’s date of death.

Surviving owner retains original basis.

o If community property, then the entire basis is adjusted to the fair market value as

of decedent’s date of death.

Sale by Estate or Trust

o Report the sale on Schedule D and calculate the gain or loss. Since the basis is

adjusted, little gain or loss should be reported if sold shortly after the decedent’s

death.

o Example: House owned solely by decedent. Purchased in 2000 for $300,000. Date

of death value $450,000. Sell shortly after date of death for $450,000. Basis is

$450,000 under I.R.C. § 1014. Proceeds $450,000. No gain.

o Losses are only permitted if the property has been converted to an income

producing property or is being held for investment purposes. I.R.C. § 165(c)

I.R.S Publication 559: If the estate is the legal owner of a decedent's

residence and the personal representative sells it in the course of

administration, the tax treatment of gain or loss depends on how the

estate holds or uses the former residence. For example, if, as the personal

representative, you intend to realize the value of the house through sale,

the residence is a capital asset held for investment and gain or loss is

capital gain or loss (which may be deductible). This is the case even

though it was the decedent's personal residence and even if you did not

rent it out. If, however, the house is not held for business or investment use

(for example, if you intend to permit a beneficiary to live in the residence

rent-free and then distribute it to the beneficiary to live in), and you later

decide to sell the residence without first converting it to business or

investment use, any gain is capital gain, but a loss is not deductible.

Sale by surviving spouse owner

o If sold within 2 years of decedent’s date of death, surviving spouse may exclude

$500,000 of gain under I.R.C. § 121 if the 2 out of 5 year rule for use and ownership

was met as of decedent’s date of death.

o Example: House owned as JT. Purchased in 1985 for $150,000. Used as primary

residence until decedent’s death. Date of death value $700,000. Sold for

$800,000. Total Basis ($350,000 + $75,000 = $425,000), Gain ($800,000 - $425,000 =

$375,000). Exclude up to $500,000 of gain if sold within 2 years of decedent’s date

of death. If sold after, then only exclude $250,000 of gain, pay tax on $125,000 of

gain.

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Stocks and Bonds

o Adjust basis to the fair market value as of date of death in accordance with

Treas. Reg. § 20.2031-2. For stocks and bonds, the fair market value is the average

of the day’s high and low selling price. If only closing prices are available, then

use the average of the date of death closing price and the closing price on the

trading day before the date of death.

Weekend deaths require more work to calculate the date of death value.

Calculate the average of the high and low selling price on the first trading

day before the date of death and the first trading day after the date of

death (i.e. Friday and Monday). Then prorate the difference between the

two days and add or subtract the prorated difference to the nearest

trading day to find the date of death value.

Mutual Funds do not use the Friday/Monday calculation for weekend

deaths. Instead, mutual funds use only public redemption price on the

trading day prior to the date of death (i.e. Friday).

The brokerage company should provide a summary of the date of death

values; however, these are frequently calculated incorrectly. Advisable to

spot check the calculations, especially when preparing a Form 706. If the

number of stocks are significant, request these valuations as soon as

possible to avoid delays during the tax season.

Joint Assets and Joint Trusts – Special Considerations

o Joint assets will not receive a full basis adjustment. Jointly held investment

accounts should have one-half of all assets adjusted to fair market value by the

financial institution. Even if the financial institution says they’ve adjusted them, the

taxpayer should still spot check the Form 1099 to ensure accurate adjustment.

o Assets held in joint trusts (trusts with two settlors) must be analyzed to determine

whether the asset is wholly one settlors or wholly another or partially both.

Sometimes the terms of the trust will control, but oftentimes, the trust agreement

will not delineate which assets are allocated to each settlor.

ABC Stock XYZ Stock

Date of Death High: $11.00 Trading Day Before Date of Death Close:

$9.00

Date of Death Low: $10.00 Date of Death Close: $11.00

Fair Market Value: ($11 + $10) / 2 = $10.50 Fair Market Value: ($9 + $11) / 2 = $10.00

ABC Stock – Friday Date of Death – Sunday ABC Stock – Monday

High: $12.00 # Days Between Trading: 3 High: $12.00

Low: $10.00 Difference Between Averages: $0.75 Low: $11.50

Average: $11.00 Prorated Difference: $0.25 Average: $11.75

Date of Death Value: $11.50

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o Joint property purchased prior to 1977: If the deceased spouse was the primary

contributor to the acquisition of the property, the entire value of the asset may be

included in the decedent’s estate and a full step up in basis obtained. See

Gallenstein v. United States, 975 F.2d 286 (6th Cir. 1992).

Schedule E Depreciation Issues

Rental Real Estate

o The basis of rental real estate will be adjusted to fair market value under I.R.C.

§ 1014. The estate, trust, or beneficiary receiving the asset will begin to

re-depreciate the property as of the decedent’s date of death. Coordination

with the decedent’s final 1040 will be necessary.

o If the asset is jointly owned, the property will have two depreciation schedules.

The surviving owner will continue to depreciate their percentage of the property

but the decedent’s interest will be depreciated using the new date of death

value.

o Example: Rental property owned as joint tenants with rights of survivorship by

husband and wife. Purchased 10 years ago for $200,000. Husband dies on July 1,

2014. Date of death value $300,000. On the surviving spouse’s and decedent’s

income tax return, the ownership of both halves of the property will continue to

be depreciated for half the year based on the original depreciation schedule.

Then, one-half of the property will continue to be depreciated for the remaining

one-half of the year based on the original depreciation schedule. The other one-

half will begin depreciation over again based on the adjusted basis.

Ordinary Income (IRAs, Annuities)

o Income in Respect of a Decedent aka IRD is any asset of a decedent that would

have been considered income to him if he received it prior to death. The most

common examples are a decedent’s final paycheck, retirement accounts such

as IRAs, and annuities. If the estate or trust is named as the beneficiary of the

asset, distributions therefrom are includable as ordinary income in the year

received. If not timed properly, this income could be taxed at the estate or trust

level and create a significant tax burden.

Life Insurance

o I.R.C. § 101 – Excludes from gross income life insurance proceeds. However,

oftentimes interest will be paid on the life insurance proceeds in addition to the

policy payout. If the policy is payable to an estate or trust, the interest portion

must be reported on Form 1041.

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Deductions Nearly every expenditure by an estate or trust is deductible on Form 1041. The primary

expenditures that are not deductible on Form 1041 include:

Any expense already deducted on Form 706

o If filing Form 706 solely for portability, avoid taking any deductions that could be

used by the estate, trust, or surviving spouse on the annual income tax returns.

Funeral Expenses

o These may only be taken on Form 706, if filing.

Medical expenses incurred by the decedent prior to death but paid by the estate or trust

after the date of death

o Medical expenses may be deducted on Form 706 under I.R.C. § 2053, if filing, or

on the decedent’s final individual income tax return under I.R.C. § 213(c).

Taxes Line 11 Tax Deduction

State and Local Income Tax OR State and Local Sales Tax, not both

Real and Personal Property Taxes

GST Tax paid on income distributions

Foreign Income Tax if the foreign tax credit is not claimed

Do Not Deduct The Following:

Federal Income Tax

Estate or Gift Tax (See Line 19 for the Estate Tax Deduction)

Federal Duties and Excise Taxes

Fiduciary Fees Line 12 Fiduciary Fee Deduction

Personal Representative Fees or Trustee Fees are fully deductible in the year paid.

Consideration should be made as to the timing of these payments so the deduction can

either offset income or be carried out to the beneficiaries on the final 1041.

Unless the Personal Representative or Trustee is assisting the estate or trust with an active

trade or business, then the estate or trust should not issue the fiduciary a 1099-Misc. The

fiduciary still must report the income on line 21 of their individual income tax return, Form

1040. The fiduciary will not be subject to self-employment tax on these payments.

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Charitable Deduction I.R.C. § 642(c)

Requirements to Be Eligible for Deduction:

Charitable contribution must be provided for under the terms of the will or trust

Payment must be from gross income

Payments made after the end of the tax year may be claimed as being paid during the

tax year (more lenient than 65 day rule discussed below). I.R.C. § 642(c)(1).

Payment must be for a purpose defined in I.R.C. § 170(c) (i.e. 501(c)(3) charity or gov’t

entity)

Do not issue a Schedule K-1 to the charity for the charitable contribution deduction.

Examples of Non-Deductible Charitable Contributions:

Heirs donate tangible personal property that was left to them in the Will or Trust to

Goodwill. No 1041 deduction. Heirs should deduct proportionate share of donations on

individual 1040.

Specific monetary amount or specific asset devised to a charity.

Assigning IRAs to Charities: Consider assigning an IRA or annuity to a charitable beneficiary in

satisfaction of its share of an estate or trust. This will prevent the income in respect of a decedent

from being taxed to the trust or estate. See I.R.C. § 691(a); Treas. Reg. § 1.691(a)-4(b); I.R.S. Priv.

Ltr. Rul. 139836-12 (Mar. 5, 2013).

Attorney, Accountant Fees IRC § 67(e); Treas. Reg. § 1.67-4(c) – Deduction of Attorney and Accountant fees fall within the

same guidelines as the miscellaneous deductions subject and not subject to the 2% deduction.

The taxpayer cannot take a blanket deduction for an attorney’s bill if items that would be

subject to the 2% floor are included in the time billed (i.e. investment advice, final 709

preparation). Out-of-pocket expenses paid on the estate or trust’s behalf by the attorney must

also be deducted (or not deducted) based on the character of the billed item (i.e. funeral

expenses, property insurance).

Deductions Subject to 2% Exclusion IRC § 67(e) – Calculate miscellaneous itemized deductions in the same manner as an individual

except those expenses that would not have been incurred if the property were not held in a

trust or estate.

Historically, a “but for” test was applied requiring practitioners to decide whether an expense

was unique to a trust in order to escape the 2% floor. In 2007, Treas. Reg. § 1.67-4 set forth a

“unique to a trust” standard for determining whether an expense should be subject to the 2%

floor. Final regulations were finally adopted in 2014 which provided concrete examples of

expenses subject to the 2% floor or not.

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Income Distribution Deduction Overview: The income distribution deduction is the most complex concept of fiduciary income

tax. Proper calculation of the income distribution deduction is beyond the scope of this CLE

presentation. In the simplest terms, if a personal representative or trustee makes distributions to

beneficiaries during the tax year, the income earned by the estate or trust can be distributed to

the beneficiaries on a Schedule K-1 to claim on their personal income tax returns to the extent of

the distribution made to the beneficiary.

Ex. 1 Ex. 2 Ex. 3

Trust Income

Interest Income: $100

Dividend Income: $200

Total Income: $300

Distribution to A: $100

Trust Net Income: $200 ($66.66

Interest, $133.33 Dividends)

A’s K-1 Income: $100 ($33.33

Interest, $66.66 Dividends)

Trust Income

Interest Income: $100

Dividend Income: $200

Total Income: $300

Distribution to A: $300

Trust Net Income: $0

A’s K-1 Income: $300 ($100

Interest, $200 Dividends)

Trust Income

Interest Income: $100

Dividend Income: $200

Total Income: $300

Distribution to A: $500

Trust Net Income: $0

A’s K-1 Income: $300 ($100

Interest, $200 Dividends)

65 Day Rule (663(b) Election): Personal Representatives or Trustees may make an election under

I.R.C. § 663(b), commonly referred to as the 65 day Rule, to treat distributions made to

beneficiaries during the first 65 days following the end of the tax year as being made in the prior

year for purposes of the income distribution deduction. A primary benefit of the 65 Day Rule is

that it allows fiduciaries to evaluate the total income after receiving the various 1099s to

determine if tax savings can be achieved by making distributions to beneficiaries.

Not Subject to the 2% Floor

Subject to the 2% Floor

Tax Preparation Costs (706, 1041, Final 1040)

Tax Preparation Costs (Final 709, FBAR)

Tax Planning Advice (Decisions unique to a

trust i.e. 65 day rule, § 645 elections)

Tax Planning Advice (Decisions not unique to

a trust)

Appraisal Fees (Date of death valuations,

distribution values)

Appraisal Fees (insurance purposes)

Fiduciary Expenses (court filings, bond fees,

legal notices, accountings)

Ownership Costs (HOA fees, insurance,

maintenance, lawn care, auto registration)

Investment Fees (only those incremental costs

associated with being a trust i.e. if a trust is

subject to a higher management fee than an

individual)

Investment Fees (normal brokerage costs)

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Tax Exempt Income Fees and expenses directly related to tax exempt income are not deductible under I.R.C. § 265.

If fees and expenses are indirectly related to both taxable and tax exempt income, then the

expenses are proportionately allocated to each unless you can demonstrate that the expenses

are directly related to taxable income. Treas. Reg. § 1.265-1.

If significant tax exempt income is anticipated, segregating expenses to plainly show they are or

are not directly related to tax exempt income will preserve deductions that could otherwise be

lost. Tax programs will typically automatically allocate expenses proportionately which is a

defensible position when you have no backup evidence of a different allocation. In estate and

trust administration, most administrative expenses are not related to tax exempt income, so a

proportionate allocation results in lost deductions.

Specific Bequests I.R.C. §§ 102(a) & 663(a)

Recipients of specific bequests and devises cannot be allocated income from the estate or trust

if the following requirements are met:

The amount must be property paid or credited as a bequest;

The bequest must be specific i.e. sum of money or specific asset;

Under the terms of the instrument, the bequest must be payable all at once or in not

more than three installments;

Under the terms of the instrument, the bequest must not be payable only from income.

Tax Rates Trusts and Estates: The top tax rate of 39.6% is reached at $12,300 of taxable income. The

income tax rates for trusts and estates are illustrated below with the solid line.

o Total federal income tax due on $20,000 of ordinary income is $6,228 plus the net

investment income tax of 3.8%, if applicable.

Individuals: The top tax rate of 39.6% is reached at $413,201 of taxable income. The tax

rates are illustrated below with the dotted line.

o If individual has $50,000 of outside taxable income and the $20,000 of trust

income is distributed to them, the individual will owe an additional $5,000 of tax

on the distributed income – a savings of $1,228 of income tax over retaining the

income in the trust and paying the tax at the trust level.

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$9,225

$37,450

$90,750 $189,300

$411,500

$413,200

$413,201

$2,500

$5,900

$9,050

$12,300

$12,301

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

$- $100,000 $200,000 $300,000 $400,000 $500,000 $600,000

Individual vs. Trust/Estate Income Tax Rates

Individual Trust/Estate

Form 1041 Department of the Treasury—Internal Revenue Service

U.S. Income Tax Return for Estates and Trusts 2014 OMB No. 1545-0092

For calendar year 2014 or fiscal year beginning , 2014, and ending , 20 Name of estate or trust (If a grantor type trust, see the instructions.)

Name and title of fiduciary

Number, street, and room or suite no. (If a P.O. box, see the instructions.)

City or town, state or province, country, and ZIP or foreign postal code

Information about Form 1041 and its separate instructions is at www.irs.gov/form1041.A Check all that apply:

Decedent’s estate

Simple trust

Complex trust

Qualified disability trust

ESBT (S portion only)

Grantor type trust

Bankruptcy estate-Ch. 7

Bankruptcy estate-Ch. 11

Pooled income fundB Number of Schedules K-1

attached (see instructions)

C Employer identification number

D Date entity created

E Nonexempt charitable and split- interest trusts, check applicable box(es), see instructions.

Described in sec. 4947(a)(1). Check here

if not a private foundation . . .

Described in sec. 4947(a)(2)

F Check applicable boxes:

Initial return Final return Amended return Net operating loss carryback

Change in trust's name Change in fiduciary Change in fiduciary's name Change in fiduciary's address

G Check here if the estate or filing trust made a section 645 election . . . . . .

Inc

om

e

1 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2a Total ordinary dividends . . . . . . . . . . . . . . . . . . . . . . . . 2a

b Qualified dividends allocable to: (1) Beneficiaries (2) Estate or trust

3 Business income or (loss). Attach Schedule C or C-EZ (Form 1040) . . . . . . . . . 3

4 Capital gain or (loss). Attach Schedule D (Form 1041) . . . . . . . . . . . . . . 4

5 Rents, royalties, partnerships, other estates and trusts, etc. Attach Schedule E (Form 1040) . 5

6 Farm income or (loss). Attach Schedule F (Form 1040) . . . . . . . . . . . . . . 6

7 Ordinary gain or (loss). Attach Form 4797 . . . . . . . . . . . . . . . . . . 7

8 Other income. List type and amount 8

9 Total income. Combine lines 1, 2a, and 3 through 8 . . . . . . . . . . . . . 9

De

du

cti

on

s

10 Interest. Check if Form 4952 is attached . . . . . . . . . . . . . . . 10

11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

12 Fiduciary fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

13 Charitable deduction (from Schedule A, line 7) . . . . . . . . . . . . . . . . 13

14 Attorney, accountant, and return preparer fees . . . . . . . . . . . . . . . . 14

15 a Other deductions not subject to the 2% floor (attach schedule) . . . . . . . . . . . 15a

b Net operating loss deduction (see instructions) . . . . . . . . . . . . . . . . 15b

c Allowable miscellaneous itemized deductions subject to the 2% floor . . . . . . . . . 15c

16 Add lines 10 through 15c . . . . . . . . . . . . . . . . . . . . . . 16

17 Adjusted total income or (loss). Subtract line 16 from line 9 . . . 17

18 Income distribution deduction (from Schedule B, line 15). Attach Schedules K-1 (Form 1041) 18

19 Estate tax deduction including certain generation-skipping taxes (attach computation) . . . 19

20 Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

21 Add lines 18 through 20 . . . . . . . . . . . . . . . . . . . . . . . 21

Ta

x a

nd

Pa

ym

en

ts

22 Taxable income. Subtract line 21 from line 17. If a loss, see instructions . . . . . . . . 22

23 Total tax (from Schedule G, line 7) . . . . . . . . . . . . . . . . . . . . 23

24 Payments: a 2014 estimated tax payments and amount applied from 2013 return . . . . 24a

b Estimated tax payments allocated to beneficiaries (from Form 1041-T) . . . . . . . . 24b

c Subtract line 24b from line 24a . . . . . . . . . . . . . . . . . . . . . 24c

d Tax paid with Form 7004 (see instructions) . . . . . . . . . . . . . . . . . 24d

e Federal income tax withheld. If any is from Form(s) 1099, check . . . . . . . . 24e

Other payments: f Form 2439 ; g Form 4136 ; Total 24h

25 Total payments. Add lines 24c through 24e, and 24h . . . . . . . . . . . . . 25

26 Estimated tax penalty (see instructions) . . . . . . . . . . . . . . . . . . . 26

27 Tax due. If line 25 is smaller than the total of lines 23 and 26, enter amount owed . . . . . 27

28 Overpayment. If line 25 is larger than the total of lines 23 and 26, enter amount overpaid . . 28

29 Amount of line 28 to be: a Credited to 2015 estimated tax ; b Refunded 29

Sign

Here

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

Signature of fiduciary or officer representing fiduciary Date EIN of fiduciary if a financial institution

May the IRS discuss this return with the preparer shown below (see instr.)? Yes No

Paid Preparer Use Only

Print/Type preparer's name Preparer's signature DateCheck if self-employed

PTIN

Firm's name

Firm's address

Firm's EIN

Phone no.

For Paperwork Reduction Act Notice, see the separate instructions. Cat. No. 11370H Form 1041 (2014)

Trust TIN

Form 1041 (2014) Page 2

Schedule A Charitable Deduction. Do not complete for a simple trust or a pooled income fund. 1 Amounts paid or permanently set aside for charitable purposes from gross income (see instructions) . 1

2 Tax-exempt income allocable to charitable contributions (see instructions) . . . . . . . . 2

3 Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . . . . . . 3

4 Capital gains for the tax year allocated to corpus and paid or permanently set aside for charitable purposes 4

5 Add lines 3 and 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

6 Section 1202 exclusion allocable to capital gains paid or permanently set aside for charitable purposes (see instructions) . 6

7 Charitable deduction. Subtract line 6 from line 5. Enter here and on page 1, line 13 . . . . . 7

Schedule B Income Distribution Deduction

1 Adjusted total income (see instructions) . . . . . . . . . . . . . . . . . . . . 1

2 Adjusted tax-exempt interest . . . . . . . . . . . . . . . . . . . . . . . 2

3 Total net gain from Schedule D (Form 1041), line 19, column (1) (see instructions) . . . . . . 3

4 Enter amount from Schedule A, line 4 (minus any allocable section 1202 exclusion) . . . . . 4

5 Capital gains for the tax year included on Schedule A, line 1 (see instructions) . . . . . . . 5

6 Enter any gain from page 1, line 4, as a negative number. If page 1, line 4, is a loss, enter the loss as a positive number . 6

7 Distributable net income. Combine lines 1 through 6. If zero or less, enter -0- . . . . . . . 7

8 If a complex trust, enter accounting income for the tax year as determined under the governing instrument and applicable local law . 8

9 Income required to be distributed currently . . . . . . . . . . . . . . . . . . . 9

10 Other amounts paid, credited, or otherwise required to be distributed . . . . . . . . . . 10

11 Total distributions. Add lines 9 and 10. If greater than line 8, see instructions . . . . . . . 11

12 Enter the amount of tax-exempt income included on line 11 . . . . . . . . . . . . . 12

13 Tentative income distribution deduction. Subtract line 12 from line 11 . . . . . . . . . . 13

14 Tentative income distribution deduction. Subtract line 2 from line 7. If zero or less, enter -0- . . 14

15 Income distribution deduction. Enter the smaller of line 13 or line 14 here and on page 1, line 18 15

Schedule G Tax Computation (see instructions) 1 Tax: a Tax on taxable income (see instructions) . . . . . . . 1a

b Tax on lump-sum distributions. Attach Form 4972 . . . . 1b

c Alternative minimum tax (from Schedule I (Form 1041), line 56) 1c

d Total. Add lines 1a through 1c . . . . . . . . . . . . . . . . . . . 1d

2a Foreign tax credit. Attach Form 1116 . . . . . . . . . . . . 2a

b General business credit. Attach Form 3800 . . . . . . . . . . 2b

c Credit for prior year minimum tax. Attach Form 8801 . . . . . . 2c

d Bond credits. Attach Form 8912 . . . . . . . . . . . . . 2d

3 Subtract line 2e from line 1d. If zero or less, enter -0- . . . . . . . . . . . . . . . 3

e Total credits. Add lines 2a through 2d . . . . . . . . . . . . . . . . . . . 2e

4 4 Net investment income tax from Form 8960, line 21 . . . . . . . . . . . . . . . .5 Recapture taxes. Check if from: Form 4255 Form 8611 . . . . . . . . . . . 5

6 Household employment taxes. Attach Schedule H (Form 1040) . . . . . . . . . . . . 6

7 Total tax. Add lines 3 through 6. Enter here and on page 1, line 23 . . . . . . . . . . 7

Other Information Yes No

1 Did the estate or trust receive tax-exempt income? If “Yes,” attach a computation of the allocation of expenses. Enter the amount of tax-exempt interest income and exempt-interest dividends $

2 Did the estate or trust receive all or any part of the earnings (salary, wages, and other compensation) of any individual by reason of a contract assignment or similar arrangement? . . . . . . . . . . . . . . .

3 At any time during calendar year 2014, did the estate or trust have an interest in or a signature or other authority over a bank, securities, or other financial account in a foreign country? . . . . . . . . . . . . . .See the instructions for exceptions and filing requirements for FinCEN Form 114. If “Yes,” enter the name of the foreign country

4 During the tax year, did the estate or trust receive a distribution from, or was it the grantor of, or transferor to, a foreign trust? If “Yes,” the estate or trust may have to file Form 3520. See instructions . . . . . . . . .

5 Did the estate or trust receive, or pay, any qualified residence interest on seller-provided financing? If “Yes,” see the instructions for required attachment . . . . . . . . . . . . . . . . . . . . . . . . .

6 If this is an estate or a complex trust making the section 663(b) election, check here (see instructions) . .7 To make a section 643(e)(3) election, attach Schedule D (Form 1041), and check here (see instructions) . .8 If the decedent’s estate has been open for more than 2 years, attach an explanation for the delay in closing the estate, and check here 9 Are any present or future trust beneficiaries skip persons? See instructions . . . . . . . . . . . . .

Form 1041 (2014)

Calendar Year Fiscal Year

Return #1 July 25-December 31

Income: $1,000

Deductions: $8,000

Taxable Income: $0

Carryover Deductions: $0

Return #2 January 1 – May 31

Income: $15,000

Deductions: $2,500

Taxable Income: $12,500

Carryover Deductions: $0

Return #1 July 25-May 31

Income: $16,000

Deductions: $10,500

Taxable Income: $5,500

Carryover Deductions: $0

Calendar Year Fiscal Year

Return July 25-December 31

Income: $11,000

Deductions: $4,000

Taxable Income to Beneficiaries on 2015 Return:

$7,000

Return July 25- Any Date After January 1

Income: $11,000

Deductions: $4,000

Taxable Income to Beneficiaries on 2016 Return:

$7,000

Calendar Year Fiscal Year

Return #1 July 25-December 31

Deductions: $7,000

Taxable Income: $0

Carryover / Carryout Deductions: $0

Return #2 January 1 – May 31

Loss: $5,000

Deductions: $0

Carryout Loss: $5,000

Return July 25- Any Date After Stock Sale

Deductions: $7,000

Loss: $5,000

Carryout Deductions (Schedule A): $7,000

Carryout Loss: $5,000

645 Election Illustration Ex. 4

DATE OF DEATH

END OF CALENDAR

YEAR - FILE TRUST'S 1041 IF UNSURE

END OF FISCAL YEAR

1 - MAKE ELECTION, REPORT ALL TRUST

AND ESTATE INCOME/EXPENSES

IF BOTH TRUST AND

ESTATE ARE TERMINATING, TRUST

FILES FINAL BLANK 1041

END OF FISCAL YEAR

2 - ISSUE K-1 TO TRUST

TRUST FILES INITIAL

SY RETURN -CONTINUES ON

CALENDAR BASIS

ESTATE CONTINUES

ON FISCAL YEAR AND FILES 1041