Question of Ethics

[Terry D EA]

I prepared a 1041 for my client who was the fiduciary of his mother's estate. His brother was a beneficiary. I sent him the K-1 showing his share of income that passes thru to him. He is calling me asking for an explanation. The brother is not my client, the fiduciary was. So, should I talk to the brother or should I get a signed information release form from the fiduciary first?

[Jack from Ohio]

Refer him to his brother.  Do NOT talk to him about the return.  Circular 230 violations abound if you do.

[RitaB]

10 hours ago, Terry D said:

I prepared a 1041 for my client who was the fiduciary of his mother's estate. His brother was a beneficiary. I sent him the K-1 showing his share of income that passes thru to him. He is calling me asking for an explanation. The brother is not my client, the fiduciary was. So, should I talk to the brother or should I get a signed information release form from the fiduciary first?

I would ask my client if I could answer brother's questions.  In fact, brother most likely has tried to get answers from your client, and we all know he can't explain it like you can.  Your client may have told brother to call you, who knows?  I would be happy to answer questions about a return I prepared, as I'm sure you are, Terry.  I would also ask client if you can give a copy of the Form 1041 to brother.  That way, brother's preparer can look it over.  I would want to know where the info on my K-1 came from, too.  Possibly just having a copy of the Form 1041 would remedy the whole situation.

Regardless, I'd talk to client first and get a feel for whether there is discord here, or just a simple desire to understand something that affects my tax return.  

[Richcpaman]

Get both of them in your office at the same time.

Tell them both: "The fiduciary controls the cash, not me..."

Then explain what happened.

Rich

[RitaB]

11 minutes ago, Richcpaman said:

Get both of them in your office at the same time.

Tell them both: "The fiduciary controls the cash, not me..."

Then explain what happened.

Rich

Yes, forget what I said, and do this. 

[michaelmars]

obviously I don't know details but its unusual for an estate to pass through the income until final year.  Most estates pay the tax then distribute tax free.  And you can't make a distribution from an estate with out the courts permission.

[Roberts]

19 minutes ago, michaelmars said:

obviously I don't know details but its unusual for an estate to pass through the income until final year.  Most estates pay the tax then distribute tax free.  And you can't make a distribution from an estate with out the courts permission.

The 1041 would still pass through to the beneficiary their share of the income for TAX purposes. That's why Rich wrote "The fiduciary controls the cash, not me..."

If it's a trust you don't need court permission to distribute assets or income.

[michaelmars]

UNTIL the court filings are done, how can you be sure of who the beneficiaries are?  I read this as being a 1041 for an estate, not a trust. Income earned on estate assets until distributed go on a 1041 but often the bene's aren't know.  My recent one the court had us searching for possible relatives in 3 countries and it took almost 4 years to settle.  The Estate paid all taxes on the income for those 4 years.

[Roberts]

The estate or the beneficiaries can pay the tax on income. Your post said it is unusual for beneficiaries to pay the tax on income earned and that is simply not true. It's  very routine for them to choose to flow it through to the beneficiaries because a lot of the time it will mean less tax paid.

[Terry D EA]

On ‎5‎/‎9‎/‎2016 at 9:02 AM, Richcpaman said:

Get both of them in your office at the same time.

Tell them both: "The fiduciary controls the cash, not me..."

Then explain what happened.

Rich

Can't do this as one lives in NC and the other is in Alabama. As for the other comments, the beneficiaries due to pay the tax as Roberts has stated that income passing through to them is very routine. The estate is NOT closed but according to the will these are the only two beneficiaries awarded anything. These brother don't appear to be too trusting of each other which is why I questioned this and will not proceed until I have the permission to do so. Thanks,

[JohnH]

The "don't appear to be too trusting of each other" part of your reply is definitely a red flag.  All the more reason to do everything strictly by the book.

[easytax]

3 hours ago, Terry D said:

Can't do this as one lives in NC and the other is in Alabama. As for the other comments, the beneficiaries due to pay the tax as Roberts has stated that income passing through to them is very routine. The estate is NOT closed but according to the will these are the only two beneficiaries awarded anything. These brother don't appear to be too trusting of each other which is why I questioned this and will not proceed until I have the permission to do so. Thanks,

There is always "go-to-meeting" or if "cost-effective" like me (except I am cheap) there is Skype and at the very least conferenced call or simple 3-way calling.

Put them on the spot --- not yourself.

You are doing good by sticking to your guns --- nice work.

[SaraEA]

I always thought beneficiaries had an automatic right to the return.  Guess not.  Here it is from the Internal Revenue Manual https://www.irs.gov/irm/part11/irm_11-003-002.html

11.3.2.4.7  (08-29-2008)

Estates

1. The administrator, executor, or trustee of an estate may receive returns and return information of the estate.

2. Any heir at law, next of kin, or beneficiary who establishes a material interest which will be affected by the return or return information may also receive returns and return information. A material interest is an important interest and is generally, but not always, financial in nature.

   Example:

   Submission of a copy of a will by a beneficiary who is described in the will as entitled to "x" percent of the decedent’s gross estate, together with a statement that the decedent's return is needed to assist the beneficiary in determining whether he/she has received a proper share of the estate, would generally be sufficient to permit disclosure. The merits of an action, such as a law suit brought by a beneficiary, will generally, but not always, have no bearing on the material interest determination.

3. The requester must furnish satisfactory evidence that he/she is an administrator, executor, trustee, heir at law, or next of kin under applicable state law, or is named as a beneficiary in the decedent's will. Generally, written evidence such as a copy of the will, proof of relationship, or letters testamentary will be furnished to show satisfactory proof of entitlement.

4. See IRM 11.3.3.3, Distinction between Disclosure to Designees and the Conference and Practice Requirements, regarding representatives for estates.

5. Requests for returns must be made in writing.

[SaraEA]

You really mean you can't make distributions from the estate without the court's permission?  Hahahahahahahaha.  I wish someone would tell most of my clients that.

[Roberts]

12 hours ago, SaraEA said:

You really mean you can't make distributions from the estate without the court's permission?  Hahahahahahahaha.  I wish someone would tell most of my clients that.

You most certainly can make a distribution without a court's permission. There are size requirements before a probate court will even get involved so it's certainly legal to distribute in many cases.

[SaraEA]

Roberts, it must depend on state law.  In my state, Probate must approve all distributions.

[Gail in Virginia]

It would be helpful for this and many other questions if members put their state in their profile information so that it shows with your posts.  In Virginia, distributions can be made from an estate without prior approval.

[Roberts]

https://www.nolo.com/legal-encyclopedia/avoid-probate-small-estate-29629.html

In Missouri and Illinois, a court order is most certainly not always required. For example in Illinois:

Some things pass automatically to other people according to law, and never go into the estate. For example, real estate or bank accounts held in joint tenancy pass directly to the surviving joint tenants, and life insurance proceeds go directly to the beneficiaries. Things that aren’t part of the deceased person’s estate don’t have to be handled in settling their estate.

Probate is one way to settle an estate when someone dies, but it's not the only way. And it's not always required. Illinois law permits a simplified procedure for handling small estates that doesn't go through regular probate procedures.

When an estate contains less than $100,000 in total assets, with no land, it’s considered a “small estate,” and can be settled using Illinois small estate procedures.

 

As an example of procedure in Illinois - with TOD (for real estate especially but also bank / investment accounts) and correct usage of beneficiaries on retirement accounts you can get a rather large estate under the $100k threshold.

[jklcpa]

4 hours ago, Gail in Virginia said:

It would be helpful for this and many other questions if members put their state in their profile information so that it shows with your posts. 

 

^^   YES!

Note - new members are required to include their state; existing members would need to edit their profiles to have that appear below the avatar in posts.

[Jack from Ohio]

8 hours ago, Gail in Virginia said:

It would be helpful for this and many other questions if members put their state in their profile information so that it shows with your posts. 

I may have to do that!!

[Terry D EA]

On ‎5‎/‎11‎/‎2016 at 9:34 PM, SaraEA said:

I always thought beneficiaries had an automatic right to the return.  Guess not.  Here it is from the Internal Revenue Manual https://www.irs.gov/irm/part11/irm_11-003-002.html

11.3.2.4.7  (08-29-2008)

Estates

1. The administrator, executor, or trustee of an estate may receive returns and return information of the estate.

2. Any heir at law, next of kin, or beneficiary who establishes a material interest which will be affected by the return or return information may also receive returns and return information. A material interest is an important interest and is generally, but not always, financial in nature.

   Example:

   Submission of a copy of a will by a beneficiary who is described in the will as entitled to "x" percent of the decedent’s gross estate, together with a statement that the decedent's return is needed to assist the beneficiary in determining whether he/she has received a proper share of the estate, would generally be sufficient to permit disclosure. The merits of an action, such as a law suit brought by a beneficiary, will generally, but not always, have no bearing on the material interest determination.

3. The requester must furnish satisfactory evidence that he/she is an administrator, executor, trustee, heir at law, or next of kin under applicable state law, or is named as a beneficiary in the decedent's will. Generally, written evidence such as a copy of the will, proof of relationship, or letters testamentary will be furnished to show satisfactory proof of entitlement.

4. See IRM 11.3.3.3, Distinction between Disclosure to Designees and the Conference and Practice Requirements, regarding representatives for estates.

5. Requests for returns must be made in writing.

Thank you Sara for this post. I have gotten this situation handled for now. Thanks to everyone who responded.

[RitaB]

On ‎5‎/‎11‎/‎2016 at 8:34 PM, SaraEA said:

I always thought beneficiaries had an automatic right to the return.  Guess not.  Here it is from the Internal Revenue Manual https://www.irs.gov/irm/part11/irm_11-003-002.html

11.3.2.4.7  (08-29-2008)

Estates

1. The administrator, executor, or trustee of an estate may receive returns and return information of the estate.

2. Any heir at law, next of kin, or beneficiary who establishes a material interest which will be affected by the return or return information may also receive returns and return information. A material interest is an important interest and is generally, but not always, financial in nature.

 

15 hours ago, Terry D said:

Thank you Sara for this post. I have gotten this situation handled for now. Thanks to everyone who responded.

 

Did you read this and conclude that the brother had a right to the entire return?  I did.  

[Roberts]

https://www.law.cornell.edu/uscode/text/26/6103

(E) in the case of the return of an estate—

(i) the administrator, executor, or trustee of such estate, and

(ii) any heir at law, next of kin, or beneficiary under the will, of the decedent, but only if the Secretary finds that such heir at law, next of kin, or beneficiary has a material interest which will be affected by information contained therein; and

(F) in the case of the return of a trust—

(i) the trustee or trustees, jointly or separately, and

(ii) any beneficiary of such trust, but only if the Secretary finds that such beneficiary has a material interest which will be affected by information contained therein.

 

IMO a beneficiary should be allowed to review the return if they request it. I'm not sure if the request has to come from the beneficiary or the administrator/ executor.

[Terry D EA]

3 hours ago, RitaB said:

 

 

Did you read this and conclude that the brother had a right to the entire return?  I did.  

Rita,

I did come to the same conclusion. However, and as I read all of this, the brother or the fiduciary would have to present the will to me for verification prior to the release of any information. I think that is pretty straight forward.

[RitaB]

3 minutes ago, Terry D said:

Rita,

I did come to the same conclusion. However, and as I read all of this, the brother or the fiduciary would have to present the will to me for verification prior to the release of any information. I think that is pretty straight forward.

Or just have client give you the ok to give his brother a copy.  That would be so simple, and keep down strife, too.   I think the presenting the will stuff is if someone wanted IRS to give them a copy.  Or do I have that wrong?