Estates and irrevocable trusts (including revocable trusts that become irrevocable upon the death of the grantor) must file and report income tax on an annual basis. The first taxable year of a probate estate or a revocable trust begins the day of the decedent’s death. As noted above, it is important that all assets owned by the estate or trust carry the proper tax identification number. Tax preparation will be a lot easier for you and your accountant if 1099s properly match income with the responsible taxpayer.

Form 1041 must be filed annually for so long as the estate or trust has income that exceeds $600. Since probate estates can usually be wrapped up in a calendar year or two, only one or two 1041s will be required. Trusts, depending on their terms, may last for many years. For example, a trust for the benefit of the surviving spouse for the balance of his or her lifetime, or for children until their “35th birthday,” may continue for decades after the decedent’s death.

The following is an example of page one of Form 1041:

The decedent’s personal representative is responsible for filing Form 1041 on behalf of the estate, and the trustee on behalf of the trust. As noted in Chapter Seven, personal representatives and trustees are “fiduciaries,” and as such, must prepare and sign all returns. If your late spouse had several trusts, each must be assigned its own a tax identification number and must file Form 1041 annually.

For example, your late spouse may have had an Irrevocable Life Insurance Trust (See Chapter Nine, “Irrevocable Trusts”), as well as sub-trusts contained within his or her revocable trust known as family and marital Trusts (See Chapter Seven).

Probate estates may elect a non-calendar fiscal year. The filing of the first return constitutes the irrevocable election of a tax year. The first taxable year of an estate begins on the date of the decedent’s death and ends on the last day of any month that is not more than twelve months from the date of death.

For example, if your spouse died June 15, 2001, you may elect a fiscal year ending as late as May 31, 2002. A non-calendar year fiscal year allows you more time to get organized after the death of a spouse, as well as limited income tax deferral. In the example above, year 2001 income would be reported on the May 31, 2002 tax return, allowing you to report 2001 trust or estate income on your 2002 personal income tax return.

Except in the limited circumstance of trusts that elect to be taxed as estates, trusts must report income on a calendar year basis. If , as personal representative and trustee, you so elect, the trust will be treated and taxed as part of the estate and not as a separate trust. The election allows the filing of a single Form 1041 and the election of a single non-calendar fiscal year.

Combined reporting may continue for up to six months after the IRS issues its final determination of estate tax liability. If no estate tax return (Form 706) is required to be filed, combined income tax reporting may continue for up to two years after the date of your late spouse’s death. The election is made on the first Form 1041 filed for the estate and is irrevocable.

The election is most useful for estates and trusts that by their terms will be fully disbursed within a year or two following death, and is of little use for trusts that will continue for many years after the death of your spouse.

For Example: Harry is married to Wendy. He has a revocable trust and dies on June 22, 2001. Wendy discovers a sizable bank account in Harry’s name alone (she wonders why he didn’t tell her about it!), and must therefore open a probate estate. Both the trust and estate earn enough income to require the filing of income tax returns. Wendy receives distributions from the trust between June 23 and December 31, 2001. Wendy is required to pay income tax on those distributions reporting them on Form 1040. If the trust uses the calendar year as its tax year, which is the usual requirement, Wendy will have to report the distributions as part of her 2001 income. However, if the trust elects to be taxed as an estate, it does not have to use the calendar year and can chose any tax year (as long as the first year is not longer than 12 months). Let’s say that Mary as Harry’s personal representative chooses May 31, 2002 as the estate’s fiscal year. If Mary also elects to have the trust taxed as an estate, the trust distributions Wendy received in 2001 will not be counted as income to her in 2001. Instead, trust income will be added to estate income and reported on the estate’s first tax return for the year ended May 31, 2002. Accordingly, Mary will report first year trust and estate income as part of her 2002 income, allowing her to defer trust income an entire year. In addition, Mary only need file one Form 1041 covering both the estate and trust.

The due date for filing Form 1041 is the 15th day of 4th month following close of the tax year (April 15th for calendar fiscal years). Trusts are granted an automatic extension of time to file (not an extension to pay) for 90 days by filing form 8736. An additional 90 days extension (beyond the first 90 day extension) may be granted by filing Form 8800, if “reasonable cause’ can be established.

By contrast, estates are not automatically granted an extension of time to file Form 1041. An estate must show “reasonable cause” as to why the return cannot be filed on time. The maximum extension allowed is 6 months from the original due date. As with all extensions, an extension of time to file is not an extension of time to pay the tax. Accordingly, a tax payment (“tentative tax”) must be made on or before the original due date. If the tentative tax paid with the request for an extension is insufficient, penalties and interest on the shortfall may be imposed. Form 2758 is used to apply for an extension to file Form 1041.