Definitions

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Definitions

Beneficiary. A beneficiary includes an heir, a legatee, or a devisee.

Decedent's estate. The decedent's estate is an entity that is formed at the time of an individual's death and generally is charged with gathering the decedent's assets, paying the decedent's debts and expenses, and distributing the remaining assets. Generally, the estate consists of all the property, real or personal, tangible or intangible, wherever situated, that the decedent owned an interest in at death.

Distributable net income (DNI). The income distribution deduction allowable to estates and trusts for amounts paid, credited, or required to be distributed to beneficiaries is limited to DNI. This amount, which is figured on Schedule B, line 7, is also used to determine how much of an amount paid, credited, or required to be distributed to a beneficiary will be includible in his or her gross income.

Income, deductions, and credits in respect of a decedent.

Income.

When completing Form 1041, you must take into account any items that are income in respect of a decedent (IRD).

In general, IRD is income that a decedent was entitled to receive but that was not properly includible in the decedent's final income tax return under the decedent's method of accounting.

IRD includes:

  • All accrued income of a decedent who reported his or her income on the cash method of accounting,

  • Income accrued solely because of the decedent's death in the case of a decedent who reported his or her income on the accrual method of accounting, and

  • Income to which the decedent had a contingent claim at the time of his or her death.

Some examples of IRD for a decedent who kept his or her books on the cash method are:

  • Deferred salary payments that are payable to the decedent's estate,

  • Uncollected interest on U.S. savings bonds,

  • Proceeds from the completed sale of farm produce, and

  • The portion of a lump-sum distribution to the beneficiary of a decedent's IRA that equals the balance in the IRA at the time of the owner's death. This includes unrealized appreciation and income accrued to that date, less the aggregate amount of the owner's nondeductible contributions to the IRA. Such amounts are included in the beneficiary's gross income in the tax year that the distribution is received.

The IRD has the same character it would have had if the decedent had lived and received such amount.

Deductions and credits.

The following deductions and credits, when paid by the decedent's estate, are allowed on Form 1041 even though they were not allowable on the decedent's final income tax return.

  • Business expenses deductible under section 162.

  • Interest deductible under section 163.

  • Taxes deductible under section 164.

  • Investment expenses described in section 212 (in excess of 2% of adjusted gross income (AGI)).

  • Percentage depletion allowed under section 611.

  • Foreign tax credit.

For more information on IRD, see section 691 andPub. 559, Survivors, Executors, and Administrators.

Income required to be distributed currently. Income required to be distributed currently is income that is required under the terms of the governing instrument and applicable local law to be distributed in the year it is received. The fiduciary must be under a duty to distribute the income currently, even if the actual distribution is not made until after the close of the trust's tax year. See Regulations section 1.651(a)-2.

Fiduciary. A fiduciary is a trustee of a trust, or an executor, executrix, administrator, administratrix, personal representative, or person in possession of property of a decedent's estate.

Note.

Any reference in these instructions to “you” means the fiduciary of the estate or trust.

Trust. A trust is an arrangement created either by a will or by an inter vivos declaration by which trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts.

Revocable living trust. A revocable living trust is an arrangement created by a written agreement or declaration during the life of an individual and can be changed or ended at any time during the individual's life. A revocable living trust is generally created to manage and distribute property. Many people use this type of trust instead of (or in addition to) a will.

Because this type of trust is revocable, it is treated as a grantor type trust for tax purposes. See Grantor Type Trusts under Special Reporting Instructions, later, for special filing instructions that apply to grantor trusts.

Be sure to read Optional Filing Methods for Certain Grantor Type Trusts. Generally, most people that have revocable living trusts will be able to use Optional Method 1. This method is the easiest and least burdensome way to meet your obligations.