A trust’s or estate’s executor might be a family member, who takes on pro bono management of income-producing assets following an individual’s death. They might take on this role out of love or affection for the decedent.
This could be the case, but not always. Many times, if an executor and beneficiary aren’t one and the same (which also happens), a will or trust might lay out a fee that is paid to the executor for handling an estate or trust. But if this is the case, can that fee be deducted from the estate’s taxable income? Specifically, are executor fees deductible on Form 1041?
The short and long answer here is yes. Similar to its cousin, Form 1041, Form 1041 allows a variety of expenses and deductions that can be charged against taxable income.
Let’s take a look at Form 1041, its requirements, and acceptable expenses.
Form 1041 – An Overview
While Form 1040 is the main document used by U.S. taxpayers to report their various forms of income, Form 1041 is used for reporting another type of income. Specifically, asset-generated income that an estate or trust earns from the time an individual dies until when assets are distributed to the named beneficiaries and/or owners. Generally, the estate or trust’s executor, trustee, or personal representative files Form 1041, as long as the assets they oversee produce an annual gross income of $600 or higher.
When it comes to Form 1041, the IRS requires that it be filed by “the fifteenth day of the fourth month after the close of the trust’s or estate’s tax year.” In a majority of cases, an estate’s tax year begins on the day of the decedent’s passing and ends on December 31 of that same year, meaning Form 1041 is typically due on April 15 of the following year.
But, if the executor decides to use a fiscal year instead, the tax year would end on the final day of the month before the decedent’s one-year anniversary of death. If, for example, an individual passed away on July 1, the fiscal year would run from that day of death until June 30 of the following year. Form 1041 would then be filed on October 15 (or the next business day), in keeping with the IRS’ “fourth-month” mandate, above.
Income . . . and Deductions
As mentioned above, Form 1041 allows for the inclusion of expenses and deductions against the estate’s income. These can include charitable deductions, professional fees (such as those generated by attorneys, accountants, and tax preparers), and money transferred to beneficiaries.
Also fully deductible? Fiduciary fees, also known as the amount that executors, trustees, or personal representatives charge for their services. All of those expenses and deductions are calculated against the taxable income figure. If tax is owed, the estate or trust that holds the income-generating assets is on the hook for payment.
Backup Help for Estate Income and Deductions
It’s generally a good idea to get professional help when it comes to filling out Form 1041. Determining income and deductions can be complicated, and it’s important that the right information be included, complete with the necessary documentation in the form of various schedules. Failure to do so could lead to penalties against the estate.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.