Form 1041 Questions for a Trust or Estate
If you’re preparing Form 1041 for an estate or trust, you need to answer some questions at the bottom of page 2 of this form. Questions on Form 1041 ask about tax-exempt income, individual earnings, foreign accounts and sources, residential mortgages, elections to pay the beneficiaries’ income late, distributions of property in kind, the length of the estate’s existence, and skip beneficiaries.
Place the total tax-exempt income we talked about in the Interest section on the line underneath Question 1.
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 asks about cash and securities held in foreign accounts. Refer to the list of assets you compiled for the estate or trust, and see if 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 the trust or estate has no foreign accounts, but owns foreign securities in a U.S. based account, the answer to Question 3 is no.
Along the same lines, Question 4 asks about distributions from foreign sources, or whether or not your estate or trust funded a foreign trust. 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.
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 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 are 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. Check the box next to Question 7 to make this election (under Code Section 643(e)(3)).
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.
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 asks 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 is more than one generation below that of the transferor of the property. So, grandchildren may be skip beneficiaries of their grandparents’ estates. In the case of unrelated parties, a skip beneficiary is anyone who is more than 371/2 years younger than the transferor.