<p>My FIL died at the end of 2010 and unfortunately had been talked into leaving his very small estate in a trust which is really a PITA and is complicating everyone’s lives. He had some small parcels of land (in an area where land is not expensive) that he sold to people with lousy credit so payments trickle into the trust and are then distributed to the beneficiaries (my husband and his sister). Last year we received about $6,000- $7,000. (to add to the joy of all this, 2 of the people are now not paying their “mortgages”, but that is a separate if very annoying issue).</p>
<p>My SIL is in charge of the trust. She has not yet done a 2011 tax return for it and has not sent us any forms that we need to be able to file our taxes. Additionally, we have no idea how much of the income is interest and how much is the original capital, or if it makes a difference because of the way the trust was set up (which I don’t understand at all).</p>
<p>How the heck do we file our taxes and avoid any interest and penalties when the trust has not done a return yet? (I *think *the form we should receive is a schedule k1 (form 1041).) I think we should just pay the taxes we think we will owe and file an extension, but my husband really is against this as he “has always done his taxes on time and he’s not going to start filing late now”. Any tax pros put there?</p>
<p>I am tearing my hair out. Not what we need to worry about right now with him still feeling very poorly from chemo and radiation. He is about ready to shoot his sister and I am about ready to shoot him (luckily she lives 300 miles away and I don’t know how to use a gun).</p>
<ul>
<li><p>guess what you will owe, pay them, and file for an extension, finish later</p></li>
<li><p>file with what you have, and then file an amended return when you get the final info</p></li>
</ul>
<p>The second option will cost you some interest if you wind up owing extra tax, and if the underpayment is sufficiently large there could be penalties. On $6-7K of income I think penalties are unlikely but you have to run the numbers.</p>
<p>Filing for an extension is not filing late, it just extends the due date. So I’m not sure why your hubby is so against it.</p>
<p>If you over-estimate what you owe & do the 2nd option, you should spare yourself the need to pay interest. Have gotten extensions nearly every year of our 25 year marriage & had no ill consequences from it (other than my being stressed).</p>
<p>I definitely think that estimating (should be able to do it very accurately) and filing for an extension is the best way. I think we are due a refund anyway between medical expenses and education credits. He got really upset when i suggested it though.</p>
<p>I’ve had tax pros tell me your chance of being audited is lower if you get an extension. And getting income from a trust seems like prime audit material. So maybe you can sell it that way. :)</p>
<p>Lower? That surprises me, I would have thought it would be higher. That is one of the things he is worried about. I am working on convincing him we should file for an extension. Trouble is he thinks if we let his sister take an extension she still won’t be ready to file by the time the extension runs out. And he’s probably right. He’s too sick to go and deal with it himself.</p>
<p>It is a big mess. One of the people walked away from the land and moved to another state and sent an unsigned piece of paper saying he was done and no forwarding address. Can’t take back the land without his signature. Hired a lawyer who tracked him down but still didn’t get a signature and now is running for office of some sort and not doing the “lawyerin’ duties” he has been paid for. To get it back we have to do a sale on the courthouse steps (or something) and buy it back for up to the cost of the note (which we have to have the money to pay for it even though it would ultimately come back to us). Another couple got caught for some sort of drug thing and have not been paying and may go to jail and that would be another court house steps deal. (did I mention this is in Arkansas?</p>
<p>It is a real PITA. I can’t for the life of me understand why his dad did this. He was not a wealthy man (not by the time he died anyway as he worked very hard on spending it all). Apparently a pretty girl talked him into it or something. WT…H</p>
<p>You have allowed yourself to be put in the middle of a power struggle between your husband and your sister. She isn’t going to let her brother tell her when to do her taxes and he isn’t going to allow his sister to force him to file late.</p>
<p>Who does your taxes? If it is you then do the best that you can with the incomplete information. If your husband doesn’t like your solution let him take it up with his sister. You’ve done your best, that is all you can do.</p>
<p>Cant the property be repo’d if it’s no longer being paid for by the purchaser? It seems it’d be straightforward. If it’s being paid for, can’t the ‘paper’ be sold to an institution? </p>
<p>If it were me in charge of this trust in this situation I’d liquidate all the assets, distribute them, and be done with it. Someone needs to convince the trustee (SIL) and if there’s an issue with the trustee consider getting a lawyer to apply some pressure.</p>
<p>I just read your post #6 and I have a new take on things.</p>
<p>Fire your sister-in-law and hire an accountant to be in charge of the trust. We have an accountant now and they aren’t that expensive, I wish we had done it years ago. I wouldn’t just be concerned about her doing the job in a timely manner, I’d be worried about her doing it right. This stuff is hard, maybe that is one reason why she isn’t getting it done.</p>
<p>For this year I’d hire an accountant to do your taxes as well. Your sister-in-law’s irresponsiblity has made your own situation much more complicated. Maybe your husband is worried about not being in compliance with the tax code. An accountant will keep you in compliance so he won’t have to worry about that anyway.</p>
<p>I took over our taxes a few years back when we hit the college and FAFSA years. He was always an April 15th filer which was great fun the year he nearly died on April 14th when he couldn’t breath but wouldn’t go to the hospital because he had to finish the taxes. One 911 call , one ambulance, one broken foot (mine when I stepped on an outdoor power cord when I went outside to make sure the ambulance could find the right house), several hours in the ER, a blood clot, several days in the CCU (from where he still stressed out about the taxes and made me file them the next day) later, taxes became my domain. I have filed in Feb the last few years but we were in Houston at M D Anderson for 6 weeks. </p>
<p>I am pretty knowledgeable about taxes, but trusts are outside my realm. And I have no idea how the damn thing is set up.</p>
<p>I don’t think it is really a power struggle. She always files late “because Daddy did”. He is just coming off 4 months of chemo and 6 weeks of radiation and is feeling like crap and worrying about everything and is not his usual very mellow self. But I am caught in the middle.</p>
<p>The way it works where the land is, is that if the payer stops paying it gets sold to the highest bidder on the court house steps. Anything up to the balance on the note comes to the trust and anything over it goes to the delinquent buyer. So if we want the capital that is owed on it we have to buy it for up to the value of the note. Otherwise if someone buys it for less than the value of the note, that is all we would get. (so if there is $40k left on the note we have to be prepared to pay up to $40k on the day to get it back so we can re sell it, because if someone buys it for $5k that is all we would get. Anything over the $40k goes to the deliquent person. make sense? No, not to me either - my head starts spinning a la exorcism when i even think about it).</p>
<p>I am really pushing them to make sure if they resell the land they sell it outright. I don’t care if they get less for it, I want it gone!!!</p>
<p>Thank you for the link notrichenough. That is interesting.</p>
<p>And Pea, I think you are probably right that we should uses an accountant. I think she did have an accountant file last year but they charged quite a bit relative to the low value of the darn thing. It really is a ridiculous situation to be in when there is so little value involved. I guess FIL thought he was trying to save estate taxes, but his estate wasn’t worth anywhere enough to have any in the first place!</p>
<p>“He is about ready to shoot his sister and I am about ready to shoot him (luckily she lives 300 miles away and I don’t know how to use a gun).”</p>
<p>Well I can assist with transportation and firearms training. What were you thinking? Rifle? Shotgun? Uzi perhaps? (You’ll have to provide your own weapon and ammunition.)</p>
<p>OK, now that the angry moment has passed … hopefully … how about some thoughtful suggestions? Trusts are a PITA … Trust Tax Returns are very complex. I’ve signed sixteen of those things … half of which I prepared. The 1041 sounds like a minor variation of the 1040. It’s not. If this is the initial 1041 for the Trust, you’re probably better off NOT getting a “firm” number from the SIL, as it might very well be incorrect. JMHO of course, but an educated one.</p>
<p>As for how to deal with this:
(1) Accept that the Trust will provide a bumpy ride;
(2) Be glad it’s your SIL’s responsibility, and not yours;
(3) Start thinking of Trust issues the way you think of Election results, i.e., “interesting, but not something worth getting worked up over;” and
(4) Decide whether you’d prefer to file an extension … which may not help … or pay interest and penalties … which can be expensive … or sue your SIL … doable, but not recommended for obvious reasons … or estimate the distribution and pay taxes based on the estimate. You may have to file an amended return later … in fact you probably will … but at least you’ll be traveling the highest possible road.</p>
<p>It may not be easy, or even possible, to “fire” a trustee of a trust. The possibility of that will be covered in the trust documents. I would not go down that road unless absolutely necessary.</p>
<p>The trust needs to file a 1041, and if income has been paid out of the trust the trust will need to file K-1s for each beneficiary who received income. The trustee will have to make the determination of how much of the $ you’ve gotten is income versus principal, and the income will show up on the K-1 you get and will need to be reported on your 1040.</p>
<p>My advise is to file for an extension. Make an estimate and pay what you think you’ll owe. If this is the first year you get income from the trust, it seems unlikely that you’ll get hit with an underpayment penalty (if you’ve paid enough through withholding and/or estimated payments to match what you owed last year). You will owe interest on any underpayment, but that shouldn’t be that big a deal with interest rates at record lows. (I think it is 3% on underpayments.)</p>
<p>Not so much angry as frustrated by it all. The whole thing is a pain and usually i just steer well clear. But being tax time i am now having to deal with it. My usually very calm and laid back husband is getting really upset about it - probably because he is already on the edge of the cliff after chemo and radiation and not knowing yet if it all did any good.</p>
<p>But the extension or guestimates sound like the best bet. Won’t it send up a flag if i put information about income from a trust in our return when the trust itself has not filed that info? Probably an extension would be better. A bit annoying as I am pretty sure we have a refund coming and I could do with the money right now. But probably worth it in stress reduction.</p>
<p>If you file for an extension you don’t have to complete an estimated 1040. You fill out form 4868, put in an estimate of what you’ll owe for tax year 2011, subtract what you’ve already paid through withholding and/or estimated payments, and include a check for the difference. You’ll file your completed 1040 after you get your K-1.</p>
Thank you. I had been searching on the internet and had found that information - it was hard to find - but was not sure how accurate it was. Glad to get confirmation that I was not climbing the wrong tree. I should have just come here and asked in the first place. </p>
<p>My husband printed off a 1041 and the schedule K1 and was trying to sort it out with his sister over the phone. Don’t think it will get done on time, but at least it gives me info to plug into the tax return software so i can do an accurate estimate to make sure we have not underpaid when i file an extension.</p>
<p>I feel a lot less stressed with all your help. Thank you all!! I was getting really really stressed by all this.</p>
<p>Thank you dadx3. I feel much more calm knowing what forms I need and how to do it.</p>
<p>I am usually quite a calm person believe it or not. Just didn’t need this stress on top of everything else. Taxes = proverbial straw: me= the camel.</p>
<p>^^^ Another confounding issue with distributions … beyond principal and income … is what portion of the income was taxed inside the Trust and what portion was passed with beneficiaries responsible for paying tax on gains. Beneficiaries of my Dad’s Trust had very different taxation situations, so every effort was made to pay taxes inside the Trust … being smart about that of course. But two assets were distributed containing taxable gains, because the alternatives were legally awkward.</p>
<p>Bottom Line: If SIL hasn’t done the Trust Return and hasn’t provided you a K-1, there’s probably a good reason. It’s not like she benefits through delay.</p>