Select fiscal year for trust and estate
When someone dies, a new taxpayer is created: the trust and estate of that person.
The new taxpayer is to file Form 1041, U.S. Income Tax Return for estates and trusts. There are several elections that can be made on Form 1041.
Instead of using a calendar year end, a fiscal year end can be chosen. For example if the individual died June 17, 2011, the tax return fiscal year end can be June 17, 2011 through May 31, 2012. (It can’t be longer than 12 months).
That allows relatively small or less complicated estates and trusts to file only one return instead of two calendar year-end returns. That saves tax preparation fees. It also means the Schedules K-1 (information returns) for each beneficiary will show the pass through of income, deductions and credits, etc., on the individual beneficiary’s 2012 U.S. Individual Income Tax Return.
That fiscal year election is made by filing Form 8855 with Form 1041. It is known as a Section 645 election. That election can be done even if there are no income-producing probate assets in the estate. The election lasts two years beyond the individual’s death and can be effective for trusts or trusts and estate.
The income tax return, Form 1041, starts the high income tax rate of 35 percent at only $11,650 of taxable income. That is usually avoided by distributing assets (and related income passes out first) to beneficiaries. There is even a provision that allows the fiduciary (trustee and/or executor) to count distributions made within 65 days after the end of the fiscal year.
Those distributions can avoid having the trust or estate pay high income taxes and may be a tax-saving benefit if the beneficiaries are in lower tax brackets (as is usually the case). Capital gains on the final return are usually passed through to the beneficiaries as capital gains for low tax rates (if any) on the beneficiaries’ individual returns.
By electing the fiscal year, Form 1041 might be a “first and final” tax return. That simplifies the filing.
Sometimes we suggest that the fiduciary plan the distributions for the best results. We also suggest some amount be withheld to cover any last-minute bills and expenses. If the withheld amounts are invested in a municipal tax-exempt account, there is no need to file further Forms 1041 after the final return is filed (no taxable income to report).
There are other special elections that can be made, such as choosing the accrual basis of reporting instead of the cash basis.
Did you hear, “A true procrastinator is one who puts off until tomorrow what has already been put off until today.”
• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.