1041 trust

[wardpallotta]

The taxpayer died mid-2020. Her irrevocable trust went to two sons who liquidated in January 2021.

The 1099 reports capital gains before and after death. Are these gains subject to trust tax?

[George4Tacks]

Sales up to date of death go on the 1040. After death they go on the 1041. You might consider what is in this article. https://www.thetaxadviser.com/issues/2013/dec/clinic-story-02.html

[wardpallotta]

Are the 1041 capital gains subject to trust tax?

[BobKamman]

Capital gains would be based on FMV at date of death.  The 1099-B might not show the correct basis.  Consider a fiscal-year 1041 under Section 645 so only one return has to be filed and gains flow through to beneficiaries on their 2021 return.  

[sjrcpa]

If the trust owned the stock at the time of sale, the sale is reported on the trust's 1041.

Were the stocks in the trust before she died?

You say irrevocable trust. Was it treated as a grantor trust? If not, there may not be a step up to date of death value.

If it was a grantor trust, the others answers are correct. 

[wardpallotta]

Stocks were in the trust before death. The trust was irrevocable before death. The irrevocable trust was created in 2007 by the taxpayer's mother when the mother died. Would it qualify as Grantor?

[BobKamman]

Maybe it was an Intentionally Defective Irrevocable Trust!  (We were just talking about that yesterday . . .)

So the trust has been filing 1041's since 2007?  Then you don't get stepped-up basis, and the capital gains are probably taxed to the trust, although that depends on state law and the trust document.  

[wardpallotta]

From what I can determine, the trust stopped filing 1041s when the beneficiary's husband died ~8 years ago. The trust document was no where to be found along with tax records. After that the trust income and gains were reported directly on the beneficiary's 1040 through 2019. The estate attorney chosen by one of the sons uncovered the document. Yes, the 1041 is on extension. 🙂