Fiduciary Tax Return (IRS Form 1041)
The term fiduciary return refers to the federal income tax form that is filed by executors of wills and administrators of trusts. Since executors and trustees hold assets on behalf of beneficiaries, a separate return must be filed if the assets generate taxable income.
The Internal Revenue Service (IRS) has classified estates left behind in a will and trusts as separate tax entities from those parties acting as executors, trustees, as well as the beneficiaries of these assets. Estates are created when an individual passes away, while a trust may be created while the donor is still alive.
When a grantor trust is created, the donor retains their ability to revoke, amend, or terminate the trust. Since the donor retains control over the assets and income in the trust, and is also the trust’s beneficiary, the income and deductions derived from the trust must appear on the donor’s Form 1040.
When a non-grantor trust is created, the donor gives up all rights to the trust’s assets. The IRS requires all estates and non-grantor trusts to file a federal income tax return if $600 or more in taxable income is generated in a year. The fiduciary has the option of filing this return on a calendar or fiscal basis; however, once this timeframe is selected it cannot be changed.
In order to prevent double-taxation, the fiduciary tax return will include all taxable income generated by the estate or trust, less distributions made to beneficiaries, since this income will be reported on the beneficiaries’ Form 1040. The calculation of distributable net income plays a key role in determining where the tax liability resides.