1041 K-1 question

[L.S.]

Preparing a final 1041 for estate. Will says estate to go equally to 4 nephews, however, there are claims so money is going to executor fees, atty fees, court costs, funeral home claim and balance to our Estate Recovery Program. No income and deductions shown on 1041. Do I have 4 K-1's for the nephews showing an amount they may use as deductions even though they are getting no money?

Thanks.

[Burke]

You can do 4 K-1's for benes with "excess deductions on final termination of estate" only. Not everything will qualify. See instructions for 1041. Sophisticated software should take care of this for you. Goes on line 11, K-1.

[L.S.]

Why do the beneficiaries who do not receive any money get the benefit of the excess deductions on final termination?

[Burke]

Because those deductions effectively reduced their share of the estate inheritance proceeds is my guess. Regardless of Congress' reasoning, it is in the tax code. Review IRC 642(h). Excess deductions only happen in the final year when they exceed the estate's gross taxable income. So there would not be any income to go to the K-1. I just re-read your post and you said "no deductions on the 1041." Why aren't the eligible ones shown there? (Just as sale of stock or assets by the estate may have produced net capital losses which the estate may not have been able to take, those would go on the K-1 too, then flow to bene's Sche D's. ) The excess deduction share goes on Sche A, subject to 2% exclusion, so they may not get a benefit if they don't/can't itemize, but you don't know that unless you also do all of their tax returns as well. PS: Don't forget to do the 1099MISC for the executor's fees.

[L.S.]

I was unclear in my first post. There was no income, but yes the deductions were shown so the deductions do flow through to each K-1. My question was just "how come", but I guess you answered that.

Thank you.