Add’l info re my Mother’s living trust and 1041?

Thanks to you both for help and question: Mother died 3-21-06. Her trust was revocable under her SS# and after death her trust became irrevocable and I obtained an EIN. I have read the 1041 instructions without understanding that distributions must be taken in the current tax year (07) when income was received in the year just passed (06). Please cite page number. In any case then, preparation of the 1041 for the 06 tax year (those nine months after death) would mean taxation of income without any deduction? That is my big problem as the tax on $16,420 of interest/dividends received after death (the only income items) is very high. Would you say that all deaths under a living trust may yield this expensive outcome since distributions aren’t reported until the year following and that I must pay at the high 1041 rate? I have prepared a 1040 for Mother covering the 1-1-06 to 3-21-06 income ($12,246). Is there an option to report both pre and post death income with the 8855?

On page 22 of the 1041 instructions a trust or estate can elect to treat distributions within 65 days after end of tax year as being for prior year – deadline is thus 3/6/07 to pay out and tax out on K-1. A better option is to file Form 8855 and treat the trust as an estate. This means that you can use a fiscal year up to one year after death i.e. 3/22/06 to 2/28/07. If so a 1041 is due 6/15/07 and benes do not get taxed with income until 2007 not 2006. A perfect result. No 1041 is due 4/15.

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