Schedule K-1 (Form 1041) is used to notify the beneficiaries of the amounts to be included on their income tax returns.īefore preparing Form 1041, the fiduciary must figure the accounting income of the estate or trust under the will or trust instrument and applicable local law to determine the amount, if any, of income that is required to be distributed, because the income distribution deduction is based, in part, on that amount.Ĭertain trust arrangements claim to reduce or eliminate federal taxes in ways that are not permitted under the law. The income distribution deduction determines the amount of any distributions taxed to the beneficiaries.įor this reason, a trust or decedent's estate is sometimes referred to as a “pass-through entity.” The beneficiary, and not the trust or decedent's estate, pays income tax on their distributive share of income. To figure this deduction, the fiduciary must complete Schedule B. A trust or decedent's estate is allowed an income distribution deduction for distributions to beneficiaries. Most deductions and credits allowed to individuals are also allowed to estates and trusts. See Grantor Type Trusts, later, under Special Reporting Instructions.Ī trust or decedent's estate figures its gross income in much the same manner as an individual. If the trust instrument contains certain provisions, then the person creating the trust (the grantor) is treated as the owner of the trust's assets. A trust may be created during an individual's life (inter vivos) or at the time of their death under a will (testamentary). A decedent's estate comes into existence at the time of death of an individual. Income Taxation of Trusts and Decedents' EstatesĪ trust or a decedent's estate is a separate legal entity for federal tax purposes.
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