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How to Calculate Estate or Trust Income Distribution Deductions (Schedule B)
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Form 1041 Questions for a Trust or Estate

If you’re preparing Form 1041, you’re almost done. All that’s left is to answer some questions at the bottom of page 2. Some of these questions are easy and obvious, but questions 3 and 4 concerning foreign accounts and trusts are more complex; you may want to ask for professional advice if you think the decedent, the estate, or the trust qualifies.

  • Place the total tax-exempt income on the line underneath Question 1, and make sure that you check the “Yes” box.

  • When the trust or estate reports earnings of any type that were earned by an individual, check the “Yes” box for Question 2.

  • Question 3 wants to know about cash and securities held in foreign accounts. See whether this estate or trust has any foreign accounts. If your trust or estate falls into this category, check the “Yes” box and enter the name of the foreign country below question 3.

    If you answer “yes” and the combined total of all foreign accounts is greater than $10,000, you may have to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. If the trust or estate has no foreign accounts but owns foreign securities in a U.S.-based account, the answer to this question is “no.”

  • Along the same lines, Question 4 needs to know about distributions from foreign sources, or whether or not your estate or trust funded a foreign trust. Be careful here — you may have to also complete and file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.

  • Question 5 asks whether the estate or trust is the holder of a residential mortgage and receives interest payments on that loan. Look back over your list of assets and make sure that there’s no promissory note or mortgage still generating payments buried at the bottom of the list.

  • If the trust or the estate elects, it may choose to pay the beneficiaries’ income earned in the tax year in question as late as 65 days into the next tax year. If you want to make this election, perhaps because you don’t know until after December 31 how much income you should pass out to the beneficiaries, check the box next to Question 6.

  • If you’re distributing property in kind (you actually passed the shares of stock out to the beneficiary, instead of selling them and giving him or her a check), you can elect to recognize the gain on that transaction at the trust or estate level.

    When you include this transaction on Schedule D to report the gain, and pay the tax, the beneficiary then receives the property with the higher, date-of-distribution basis. Check the box next to Question 7 to make this election (under Code Section 643(e)(3)).

  • Question 8 assumes that most estates run their course within the first two years of the decedent’s date of death. If the estate you’re administering stretches out longer than that, the IRS wants a brief explanation. Check the box and attach a brief statement.

  • Question 9 is looking for information about skip beneficiaries so that the IRS can attempt to collect even more tax under the generation-skipping transfer tax rules. Generally, a skip beneficiary is someone who’s more than one generation below that of the transferor of the property. In the case of unrelated parties, a skip beneficiary is anyone who’s more than 37 1/2 years younger than the transferor.

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