Form 1041 Reporting of Pecuniary Property-in-Kind Distributions: Tax Impact on Trusts and Estates

Tax Treatment of Formula Bequests, Distributions of Substitute Property to Satisfy Pecuniary Provisions, and Section 643(e) Elections

Recording of a 110-minute CPE webinar with Q&A


Conducted on Wednesday, May 3, 2017
Recorded event now available


This webinar will provide tax professionals who advise fiduciaries in trust and estate matters with a thorough and practical guide to reporting pecuniary property-in-kind distributions from trusts and estates on Form 1041. The panel will discuss proper reporting for property substitutions to meet pecuniary bequests, pecuniary formulas, and available tax elections to optimally apportion gain recognition. The program will also offer specific illustrations of the tax calculations and reporting of property distributions to meet pecuniary designations.

Description

A pecuniary bequest is defined as a grant of a specified sum of money from a trust or estate. In its simplest form, a pecuniary bequest consists of a distribution of an amount of cash or a specific asset designated in the trust or estate document. Payment of a pecuniary bequest represents an exception to the general rule that trust or estate distributions carry out estate income to the beneficiary to the extent of DNI.

However, when assets have to be sold to meet the pecuniary amount, or when the amount is specified as a formula, this can create significant tax issues for the trust. When an executor or trustee substitutes an asset for a property named in a will or trust, the income does not carry out to the beneficiary, and the gain is recognized at the fiduciary level. Similarly, in the case of formula pecuniary bequests, the language of the trust document or will determines the tax reporting treatment.

Formula pecuniary bequests also affect GST tax consequences in funding trusts and distributions to beneficiaries. As the federal estate tax exemption has increased substantially so that few U.S. estates are subject to estate taxation, NRA estates, with only a $60,000 U.S. asset exemption, deserve special care with pecuniary bequests being made to beneficiaries, especially ones with foreign beneficiaries.

Fiduciaries may elect to recognize gains on distributions at the estate or trust level with proper reporting. It is critical for tax advisers, trustees and estate administrators to understand the rules and planning opportunities of pecuniary bequests to avoid costly tax results as well as beneficiary challenges.

Our panel will provide tax professionals who advise fiduciaries in trust and estate matters with a practical and comprehensive guide for the tax treatment governing in-kind property pecuniary bequest distributions.

Outline

  1. Default rule for treatment of pecuniary bequest distributions
  2. Distribution of substitute property
  3. Sale of assets to satisfy pecuniary bequest distribution provisions
  4. Formula pecuniary bequests
  5. Using IRA or other IRD assets to satisfy pecuniary bequest
  6. Section 643(e)(3) elections

Benefits

The panel will discuss these and other important topics:

  • What language in formula pecuniary bequest provisions will trigger gain recognition by the fiduciary?
  • Treatment of interest income on funding pecuniary bequests
  • Mechanics of sale/exchange treatment on distribution of appreciated property to satisfy a pecuniary bequest provision
  • Section 643(e)(3) election to recognize gain or loss on property distribution at the fiduciary level
  • Form 1041 reporting of in-kind distributions to satisfy pecuniary bequests

Learning Objectives

After completing this course, you will be able to:

  • Identify property distributions that do not qualify as pecuniary bequests that receive income carry-out treatment
  • Recognize the circumstances where it is advantageous to make a Section 643(e)(3) election for distributions of property
  • Discern the specific reporting requirements on Form 1041 for distributions of property other than identified assets to satisfy pecuniary bequests
  • Determine the proper reporting treatment for distributions of IRA amounts and other income in respect of a decedent (IRD) assets to satisfy pecuniary bequests

Faculty

Lawrence H. McNamara, Jr., CPA, FVS, TEP
Bend, Ore.

Mr. McNamara has over forty years of experience practicing in the areas of trust, estate, gift and inheritance taxation. He has extensive trust and estate accounting and administrative services experience. In addition to consultation and tax preparation services, he successfully represents clients in tax audits and has been engaged as the U.S. agent to represent foreign trustees and executors in tax return filings and communications with IRS and other tax authority representatives. He also performs fiduciary accounting services for clients.

Klaralee R. Charlton, J.D., LL.M.
Katz Look & Onorato, Denver

Ms. Charlton practices fiduciary tax, estate administration, and business transactional law. As part of her practice, she guides clients through the process of administering an estate including the collection, valuation, management and transfer of assets including financial accounts, real estate, and business interests with a focus on minimizing estate and income tax liability. She also works closely with trustees of ongoing trusts to ensure compliance and prepares clients’ fiduciary income tax returns annually. She writes and lectures on topics including fiduciary income tax reporting and U.S. regulations governing the valuation of small family businesses.


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