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I am in the process of preparing a trust tax return (Form 1041, K-1s)for a decedent's trust which only contained mutual funds and some stocks. When the decedent was alive, dividends were credited to her as trustee of her trust, under her SSN. When she passed away, the trust was "frozen," and an EIN was obtained as the new tax ID, as required by the IRS. (I am one of the beneficiaries)?

Unfortunately, not all mutual fund companies were notified in a timely manner about the tax ID change. Thus some dividends accrued under the decedent's SSN and reported as such on 1099-DIV forms. Those companies said they could not do anything about changing the SSN tax ID on the 1099-DIVs, and had to leave them as is.

I looked at IRS Publication 559, "Survivors, Executors and Administrators," and came across "Income in Respect to a Decedent," which mentions the possibility that the income of the decedent could be reported by the beneficiaries. If so, how do I indicate to the IRS that taxes on dividends paid under the decedent's SSN, are being paid by the beneficiaries? Any particular forms or notations required on the tax forms? Is there some other action I should consider?

Your input and help will be greatly appreciated! Thank you.
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I just went through the same thing, and while I don't know the terms of your decedent's trust with respect to distributions to beneficiaries, and you don't mention whether your decedent's irrevocable trust is still in place or was dissolved and distributed as yet (whether in 2015 or 2016) all I can offer is a thumbnail sketch of our experience and perhaps you will find it helpful.

My father died in June 2015 with a revocable trust that was to be distributed 50/50 to myself and my sister. It consisted only of a Schwab brokerage account. It, too, became irrevocable on his death and we obtained a new EIN for that irrevocable trust. Any income generated continuing to be retained by the irrevocable trust.

The irrevocable trust remained in place until late March of 2016 when it was dissolved and the account holdings and cash were distributed 50/50 to my sister and me--per the terms of my dad's trust--via two new individual brokerage accounts at Schwab per the terms of my dad's will/trust.

We had a CPA do the 2015 1041 for the irrevocable trust and it turned out that the irrevocable trust actually owed the IRS about $500, so no K-1's were generated and the tax was paid. As I understand it, we will have to file a 1041 for the irrevocable trust for 2016 as well since it was not dissolved until the end of March.

Jackie
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Unfortunately, not all mutual fund companies were notified in a timely manner about the tax ID change. Thus some dividends accrued under the decedent's SSN and reported as such on 1099-DIV forms. Those companies said they could not do anything about changing the SSN tax ID on the 1099-DIVs, and had to leave them as is.

I looked at IRS Publication 559, "Survivors, Executors and Administrators," and came across "Income in Respect to a Decedent," which mentions the possibility that the income of the decedent could be reported by the beneficiaries. If so, how do I indicate to the IRS that taxes on dividends paid under the decedent's SSN, are being paid by the beneficiaries? Any particular forms or notations required on the tax forms? Is there some other action I should consider?

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First of all, you have two allocations that have to be made:
1. For the year of death, between the decedent's final 1040 and the trust's 1041. The decedent's 1040 includes income up thru the date of death. This includes income in the revocable trust up to that point. Now, since the ID number wasn't changed in time, the income reported on the 1099's will be too high. So what you do is, on the 1040, include on Schedule B ALL of the 1099 income, THEN subtract off the post-death amount, labeled "LESS; REPORTED ON TRUST RETURN." Then, you report all the post-death interest and dividends on the trust return (1041.)

2. Then, as to whether the trust or the beneficiaries actually pay the tax on the trust income, depends on whether distributions were made to the beneficiaries. If not, then the trust will pay the tax. If distributions were made to the beneficiaries, then: The trust takes an income distribution deduction, and reports the income distributed to the beneficiaries on Schedule K-1 for each beneficiary. This makes it taxable to them.

Bill
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