Are You the Fiduciary of an Estate or Trust?
There’s a pile of money out there that needs managing either because the owner is deceased or because the owner gave it to someone but doesn’t want that person to have it all at once. The former situation is called an estate. The latter is called trust. Both are legal entities that must pay federal income tax as if they were people. To do that we use a form called U.S. Income Tax Return for Estates and Trusts. To understand how to fill out this tax return we use IRS form 1041 Instructions, to the extent that we can understand them.
Understanding IRS 1041 Instructions
Should you maybe have a lawyer or other tax professional prepare the U.S. Income Tax Return for Estates and Trusts for you? That depends on how you feel about doing your own taxes in general. Can you understand the 1041 instructions at all? Even if you can’t, get a lawyer to do it the first time, then take control the following tax year. Ask lots of questions and you might save some money. However, if the entity in question is an estate and the deceased named a certain individual as the person who would manage the estate, then that’s how it has to stay. By the way that’s called the fiduciary.
But if that person is you and you don’t know how, get a lawyer to help you and then you’ll have the option to do it yourself in the future. Here’s a quick look at what you’ll be getting into. We’re going to introduce you to the IRS 1041 Instructions in hopes that you’ll find them less intimidating after reading this.
Making IRS 1041 Instructions Easy to Digest
There are 40 pages so no wonder you feel nervous. You’re the fiduciary and you have to understand this lengthy instruction booklet published by the IRS. Well the first thing to know is that much of the information in the publication is for special circumstances like if the trust is an Alaskan Native Settlement trust. Or if the trust becomes a small business. Or if the estate files for bankruptcy.
Take a big old maker and slash out the parts that don’t apply to the trust or estate you’re managing and I’ll bet you’ve only got half or less than half left.
IRS Form 1041 is Just Like an Income Tax Form for Individuals
Trusts and estates have to pay income tax and they basically also have the same tax credits and deductions as individuals. One big difference is that, according to the IRS 1041 instructions, estates and trusts get an additional deduction: any money they dole out to the designated beneficiaries is deducted. Nice! It’s called the Income Distribution Deduction.
Now That You’re No Longer Scared of Filing the 1041…
Take a look at the 1041 instructions with the tips I’ve mentioned. Trust me, it’s not so bad and you’ll be on your way to fulfilling your obligation as fiduciary of an estate or trust.