Trust (& Estate) Returns – Extended Due Dates

Trusts (and calendar year estates) on extension are due two weeks later this year than last year.

Back in 2015, the Surface Transportation and Veterans Health Care Choice Improvement Act (H.R. 3236) (“the Act”) made material changes to tax return due dates. Specific to the fiduciary income tax arena was the change in the permitted extension period. Previously, extensions granted to trusts and estate were for 5 months; now extensions are for 5 1/2 months. This change is effective this year; specifically for tax years beginning after 12/31/2015, which means 2016 tax returns which are due in 2017.

Treasury has recently issued updated regulations (T.D. 9821) to conform to the time period per the Act (see T. Reg. §1.6081-6T(a)(1)).

The IRS provided an extension form last winter (Form 7004) that provided for the 5 1/2 month extension; however the regulations were not updated until last month (7/18/2017).

Actually, trusts (and calendar year estates) get a few extra days this year: because 9/30/2017 falls on a Saturday, returns can be timely filed on Monday 10/2/2017.


Multiple Trustees Statement

It is common for trusts to have multiple trustees, but it is very uncommon for fiduciary income tax returns to have attached the statement required when a trust has multiple trustees.

IRC §6012 lays out the filing requirements of for individuals, corporations, estates, and trusts. Subsection (b) defines some specific rules for “Fiduciaries and Receivers”.

IRC §6012(b)(5) states specifically that only one fiduciary is required to file a return (when there are multiple fiduciaries). And it requires a statement:

“… that the fiduciary has sufficient knowledge of the affairs of the person for whom the return is made to enable him to make the return, and that the return is, to the best of his knowledge and belief, true and correct.”

The regulation §1.6012-3(c) basically repeats the statutory language above, without providing any additional guidance.

Has anyone every filed a statement along with Form 1041?

65-Day Rule — 2015

March 6

Fiduciaries of estates and complex trusts have the option to treat certain distributions as having occurred last year. An election can be made with respect to distributions made within 65 days after the end of a tax year. The 65th day of 2015 is Friday, March 6.

Fiduciaries are allowed a deduction for amounts actually paid. During this 65-day period, a fiduciary can compute its fiduciary accounting income and distributable net income and compare these amounts to distributions already made during the year. If necessary, additional distributions can be made to balance the allocation of income between the fiduciary and beneficiary.

The election can be made on all or part of the additional distributions made. Therefore, a fiduciary can over distribute what might be necessary to pass out 2014 income to a beneficiary, but elect a smaller amount when the income tax return is prepared. Any amount distributed but not treated as 2014 distributions will naturally be 2015 distributions.

These distributions are then treated as having been made on the last day of 2014.

Remember that fiduciaries pay the highest tax rate (i.e. 39.6%) on all taxable income over $12,150 in 2014, and only have a personal exemption of either $100 (for complex trusts) or $600 (for estates). It may be advisable to make distributions to beneficiaries in a lower tax bracket for overall tax savings.

Example: A complex trust earned interest and ordinary dividends during 2014 of $20,000, and paid investment advisory fees of $2,000. If no distribution is made from the trust, the trust will pay federal income tax of $5,486. If the trustee makes a distribution to an income beneficiary in the 25% tax bracket, then she would have additional income tax of $4,500. The net tax savings is $986.

Net Investment Income Tax

In addition, fiduciaries must pay the Net Investment Income (NII) tax (at a rate of 3.8%) on the lesser of investment income or AGI over $12,150 (in 2014). Married individuals (who file jointly) must pay the NII tax only if their AGI exceeds $250,000.

While taxes are not always the driving force behind trust administration decisions, they should always be considered.

Reporting: The Form 1041 does not require any kind of formal declaration of the amount of distributions paid in 2014 and treated as paid in 2014. (However, be sure to keep good records so that the amount is not reported again as a 2015 distribution.) There is a check box on the bottom of page 2 of the Form 1041 which must be checked when a §663(b) election has been made.

Timing: A §663(b) election must be made on a timely filed return (including extensions). The election becomes irrevocable once the due date of the return has passed [Reg. §1.663(b)-2.1]

Simple trusts are not required to consider actual distributions when determining the trust’s Income Distribution Deduction, as all accounting income is required to be distributed. If some amount of accounting income has not been distributed during a calendar year, then it should be distributed as soon as administratively possible, without regard to a hard 65-day limit.

Citation: IRC §663(b)