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Fiduciary income tax returns, filing years 2003 and 2004.

In 2003, nearly 3.7 million fiduciary income tax returns were filed, primarily for income earned in 2002, also referred to as Tax Year 2002. In that year, estates and trusts reported aggregate gross income worth $71.3 billion, aggregate total deductions worth $53.6 billion, and total tax liability worth $7.9 billion (see Data Sources and Limitations for information regarding tax liability). Approximately 3.7 million estates and trusts filed income tax returns in 2004, primarily for income earned in 2003, also referred to as Tax Year 2003. In that year, estates and trusts reported aggregate gross income worth $85.2 billion, aggregate total deductions worth $59.0 billion, and total tax liability worth $9.4 billion. In 2004, capital gains (less loss) were reported as $35.2 billion. Capital gains (less loss) were the largest source of income in both years. The $35.7-billion deduction taken for income distributed to beneficiaries on returns filed in 2004 made up 60.6 percent of aggregate deductions taken by estates and trusts.

Introduction

The United States Income Tax Return for Estates and Trusts (Form 1041) is filed by decedent estates, bankruptcy estates, and domestic trusts. Often called the fiduciary tax return, Form 1041 is used to report income and deductions. Additionally. details of distributions to beneficiaries and the tax liability of the entity are reported on the return [1].

A fiduciary is charged with holding, investing, and distributing the assets of an estate or trust. Fiduciaries of trusts are often referred to as "trustees," while fiduciaries of estates are generally referred to as "executors" or "administrators." A fiduciary may be an individual, a group of individuals, or an entity, such as a bank. Each has a legal responsibility to both manage the property of the estate or trust and to ensure that all transactions, including distributions, conform to estate or trust documents as well as applicable laws. Fiduciaries must also coordinate the preparation, verification, and submission of all required state and Federal tax forms and legal documents. They must also ensure that any fiduciary income tax liability is paid from the assets of the estate or trust. In exchange for their services, fiduciaries often receive a fee.

A decedent's estate is created at the time of death, and the decedent's will generally acts as the fiduciary instrument that assigns an executor and designates beneficiaries. The estate contains all of the decedent's property at the time of death, and it typically exists for a short time because the sole purpose of the estate is to allocate all of the assets. Once the executor of a decedent's estate resolves all debts, including taxes owed, and distributes any remaining assets to designated beneficiaries, the estate is terminated.

Bankruptcy estates are created when an individual files a bankruptcy petition with the United States Bankruptcy Court under Title 11 of the United States Code, otherwise known as the Bankruptcy Code. There are two types of bankruptcy proceedings available to individuals under Title 11 to create a bankruptcy estate, Chapter 7 and Chapter 11. The proceedings differ in the method of debt resolution. Frequently, individuals file for bankruptcy under Chapter 7, which resolves debt by appointing a trustee to sell the debtors' possessions and distribute any proceeds to creditors. Individual debtors may also file under Chapter 11, which allows for a reorganization of assets as well as a temporary reprieve from creditors. During the reorganization, debtors must work to decrease their debt-to-asset ratios. Bankruptcy estates contain all of the debtors' property at the time of filing and remain in existence until all debt is paid for Chapter 7 filers, or until Chapter 11 filers can resume responsibility for their debts.

A domestic trust is an arrangement in which a trustee assumes control of property, also known as the trust corpus, in order to safeguard it for designated beneficiaries. The grantor of the trust is the individual who owns and then transfers the assets that make up the trust corpus. A trust can be created by a will or trust document. In either case, a trust instrument usually specifies the term of the trust, designates the trustee as well as the beneficiaries, outlines trustee responsibilities, and provides parameters for managing assets and distributing income to the beneficiaries. The contents of a trust are usually outlined by the trust instrument, which specifies the assets to be transferred to the trust. However, assets may also be contributed to the trust at a later date, which commonly occurs when an existing trust is funded by a will.

There are numerous types of trusts that are required to file Form 1041. The types of trusts are differentiated by the distribution requirements delineated in the trust instrument, as well as by the degree of control retained by the grantor. Simple trusts are required to distribute all income, but are not permitted to distribute from corpus, or make charitable contributions. If a trust fails to meet one or more of the conditions to be a simple trust, it is deemed a complex trust. Qualified disability trusts distribute incomes for the benefit of disabled individuals. Split-interest trusts and pooled income funds are trust entities that distribute to both charitable and noncharitable beneficiaries. A qualified funeral trust is a method of securing payment for funeral and burial services. Grantor trusts are fundamentally different than other types of trusts. The trust is not a separate taxable entity because the grantor retains substantial control over some portion of the trust. Trusts that are a combination of grantor trusts and complex or simple trusts are classified as grantor trusts for the purposes of this article. The fiduciary income tax exemption is based on the type of trust.

Tax Law

Domestic estates with gross incomes of $600 or more must file Form 1041 for the tax year in which the income was earned. Domestic trusts with any taxable income or with gross income equal to or exceeding $600 must file a fiduciary income tax return. Additionally, all trusts and decedent estates with a nonresident alien as a beneficiary are required to file Form 1041 [2]. Bankruptcy estates of individuals must file a return when the gross income equals or exceeds the sum of the Federal individual income tax exemption and the standard deduction for a married person filing separately for that tax year. This threshold was $6,925 for Tax Year 2002 and $7,800 for 2003 [3]. Estates and nontaxable trusts have the option of utilizing either a calendar or a fiscal tax year, while taxable trusts must file using a tax year based on the calendar year.

Income

The fiduciary income tax return is divided into three main parts: income, deductions, and tax and payments. Reported income is divided into eight classifications: interest income; ordinary dividends; business income; capital gains; income from rents, royalties, partnerships, other estates, and trusts; farm income; ordinary gain; and other. Income from financial investments is principally divided between interest income, ordinary dividends, and capital gains. Other income includes income in respect of a decedent (IRD) and distributions from pensions, annuities, and retirement plans as claimed on Form 1099-R [4]. Total income from all sources is referred to as "gross income" for the purposes of this article. Fiduciary accounting income is a portion of gross income and is defined by guidelines included in the governing instrument as well as local and Federal laws [5]. Generally, fiduciary accounting income does not include capital gains, which are considered to be apportioned to corpus by many trust instruments as well as State laws.

Deductions

Estates and trusts may deduct certain expenses from gross income for the purpose of determining taxable income. Interest payable on debts incurred by an estate or trust is deductible, as are amounts paid for State and local taxes, and taxes paid on generation-skipping transfers. Fees paid to fiduciaries, as well as those paid to attorneys, accountants, and return preparers, are also deductible. A deduction is allowed for donations made to qualified charities. The value of estate or trust income that was previously included in a decedent's estate and taxed under the estate tax is also permitted as a deduction. Expenses related to the production or collection of income, for example, investment advisory fees, are deductible as allowable miscellaneous deductions [6]. Other allowable deductions include bond premiums, losses due to casualty and theft, net operating losses, and the entity's share of amortization, depreciation, and depletion not claimed elsewhere. There is also a standard fiduciary exemption that may be claimed by certain types of estates and trusts. The value of the fiduciary income tax exemption is adjusted for inflation annually and ranged from zero to $3,000 for Tax Year 2002 or $3,050 for 2003.

Distributions

Estates and trusts also receive a deduction for distributions or payments made or payable to beneficiaries. The distributions required by trust documents play an integral role in defining the entity as well as determining factors such as exemption amounts. Distributable net income (DNI) acts as a limit to the deduction that fiduciaries can take for amounts distributed to beneficiaries. DNI is calculated by modifying the value of taxable income of the estate or trust. Generally, this modification includes adding the values of the distribution deduction, fiduciary income tax exemption, and tax-exempt interest and subtracting net capital gains [7]. The characteristics of the income of estates or trusts are retained after transfer to the beneficiary. For example, tax-exempt income distributed by a trust maintains its tax-exempt status once it is transferred to the beneficiary [8]. Distributions of taxable income must be included in the gross income amount on a beneficiary's U.S. Individual Income Tax Return (Form 1040) for that tax year. Schedule K-1, Beneficiary's Share of Income, Deductions, Credits, Etc. details the amounts and types of distributions made to a beneficiary and will be attached to the Form 1041 when the estate or trust claims an income distribution deduction.

Taxation

The taxable income of an entity that files a Form 1041 is generally equal to the value of the gross income less total deductions. Schedule G of the return is used to calculate the income tax by applying the appropriate tax rate to the taxable income. For Tax Year 2002, the tax rates range from 15.0 percent for entities with taxable income less than $1,851, to 38.6 percent for entities with taxable income greater than $9,200. The tax rates for Tax Year 2003 range from 15.0 percent for entities with taxable income less than $1,901, to 35.0 percent for entities with taxable income greater than $9,350. The threshold for the highest tax bracket is far lower for fiduciaries than for individuals in Tax Years 2002 and 2003. The calculated amount is then added to any additional taxes, including alternative minimum, recapture, and household employment taxes, to determine the preliminary tax liability. The preliminary tax liability may then be reduced by the value of applicable credits, resulting in the final total tax liability of the estate or trust [9].

Overview of Filers

The number of fiduciary tax returns filed has gradually increased during the last 20 years (Figure A) [10]. In 1983, slightly more than 2.0 million trusts and estates filed Form 1041. The population of filers increased to approximately 3.7 million in 2004. This article will primarily focus on the trends in fiduciary income taxation for Filing Years 2003 and 2004 [11, 12].

The number of fiduciary tax returns filed decreased slightly, by 18,350 or 0.5 percent, from 2003 to 2004. The filing frequency of entity types changed little between the two years. Grantor trusts were the most common entity in both years; these trusts made up 35.5 percent of the population in 2004, slightly more than in 2003 (Figure B). Complex and simple trusts were also relatively common filers. Complex trusts comprised 33.1 percent of the population in 2004, while simple trusts comprised 20.3 percent. Only 890 pooled income funds filed Form 1041 in 2004, compared to 1,099 pooled income filers in 2003, making it the least common entity type in both years.

Overall, the gross income reported on Forms 1041 increased from $71.3 billion in 2003 to $85.2 billion in 2004. In 2004, estates and trusts claimed $59.0 billion in deductions, an increase of 10.0 percent from 2003. Similarly, reported tax liability increased considerably between 2003 and 2004. Total tax liability reported in 2004 was $9.4 billion, compared to $7.9 billion in 2003. Complex trust filers reported the greatest share of aggregate gross income, total deductions, and total tax liability in 2004 (Figure C). Notably, complex trusts contributed nearly half of gross income and incurred nearly 70.0 percent of reported tax liability for both 2003 and 2004.

Capital gain (less loss) was the largest component of income reported by Form 1041 fliers; approximately $35.2 billion were reported in 2004 (Figure D). Ordinary dividends were the second largest share of gross income, contributing 23.0 percent of the aggregate reported gross income. Approximately $21.5 million in farm income were reported in 2004, while a net loss of $246.7 million was reported as ordinary gain (loss) in the same year. Deductions for income distributions to beneficiaries accounted for 60.6 percent of deductions claimed in 2004 (Figure E). The estate tax deduction made up the smallest share of deductions claimed; only $189.5 million were claimed in Filing Year 2004 [13].

Decedent Estates

The estate of a deceased person is a taxable entity until such time as the estate is resolved. The period of administration is defined as the time required for all assets to be distributed and all debts to be paid. Any income, including capital gains, earned by assets included in the estate during the period of administration is taxed to the estate and reported on Form 104l. A decedent estate is allowed an income deduction for the amount of the executor's discretionary distributions, required distributions, and property distributed in kind. A $600 fiduciary income tax exemption was allowed for an estate during Tax Years 2002 and 2003. Property transferred to beneficiaries from an estate is assessed a value as of the date of the decedent's death and is not taxable to the beneficiary [14]. Any increase in value accruing from that date, up to the date the asset is distributed, is reported on Form 1041.

Decedent estates made up a considerable portion of Form 1041 fliers. More than 389,000 fiduciary tax returns were filed for estates in 2004, making up more than 10.9 percent of the filing population (Table 4). In 2004, reported tax liability increased to $940.4 million from $860.0 million in 2003 (Figure F). Decedent estates made up more than 13.7 percent of gross income reported by fiduciaries and more than 19.1 percent of total deductions claimed in 2004.

Bankruptcy Estates

A bankruptcy estate is created when an individual debtor files for bankruptcy under Chapter 7 or Chapter 11 of the Bankruptcy Code [15]. Once bankruptcy is declared, property belonging to the debtor prior to filing is transferred to the bankruptcy estate [16]. A bankruptcy estate is taxed in the same manner as an individual and receives a standard deduction equal to the standard individual income tax deduction for married persons filing separately. In addition to Form 1041 filed by the estate trustee, debtors are required to file Form 1040.

In 2004, some 7,853 fiduciary tax returns were filed for bankruptcy estates as compared to 7,211 that were filed during 2003 (Table 2). Overall bankruptcies contributed a small amount to gross income and total deductions. The total tax liability for bankruptcies in 2004 was $14.7 million, a 3.9-percent decrease from 2003 (Figure G).

Simple Trusts

Simple trusts are defined by three main conditions. First, income from a simple trust may not be distributed to charitable beneficiaries. Second, distributions may not be made from the corpus of a simple trust. Finally, in order to be a simple trust, the trust instrument must require the trustee to distribute all of the trust's fiduciary accounting income to beneficiaries. However, the income distribution requirement does not mean that current income must actually be distributed to beneficiaries during the current tax year [17]. For example, a trust instrument may require distributions of income every 2 years, so that income may not be distributed currently for a given year. However, the trust would qualify as a simple trust. These conditions are evaluated on a yearly basis. If a trust fails to meet any one of the three conditions, it is considered to be a complex trust for that tax year. It is possible for a trust to be considered a simple trust in one tax year and a complex trust the next tax year. For example, in years of partial liquidation or termination, a trust cannot be considered simple because corpus must be distributed. A simple trust may deduct all income required to be distributed currently to beneficiaries, up to the amount of distributable net income. The beneficiaries of a simple trust must include the value of their shares of the required distributions in the their gross incomes for Federal income tax purposes for that tax year, regardless of whether or not the distributions were actually made. Additionally, a simple trust is allowed to claim a fiduciary income tax exemption of $300.

Nearly 748,000 Forms 1041 were filed by simple trusts in 2004, a slight increase from the approximately 747,000 filed in 2003. Simple trusts accounted for 20.3 percent of fiduciary income tax returns filed in 2004. Figure H illustrates that simple trusts made considerable contributions to gross income, deductions, and total tax liability reported by 1041 fliers for both years, contributing approximately one third of gross income and total deductions. In 2004, simple trusts claimed nearly half, 43.2 percent or $15.5 billion, of the income distribution deduction, a slight decrease from the 46.0 percent claimed in 2003. The relatively large share of the annual aggregate income distribution deduction attributable to simple trusts is due to the requirement that simple trusts distribute all of their fiduciary accounting income. The value of tax liability reported by simple trusts increased from $1.6 billion in 2003 to $2.2 billion in 2004.

Complex Trusts

A complex trust is defined as any trust that does not meet the definition of a simple trust. Therefore, a complex trust must distribute to charitable purposes, distribute amounts from the corpus, or retain some current income by directive of the trust instrument. A complex trust receives a deduction for all amounts distributed in the current tax year as well as the trustee's discretionary distributions, the amount of annuities not paid from current-year income, and property distributed in kind by the trust during the tax year, as long as such distributions are allowed by the trust instrument and State law. The value of the deduction is limited to the distributable net income. Similar to a simple trust, distributions do not have to actually be made available to the beneficiary during the tax year in order for the trust to claim the distribution deduction. Any income that is not distributed by a complex trust will be taxable to the trust. Beneficiaries must include the value of their shares of the required distributions in their gross incomes on U.S. Individual Income Tax Return (Form 1040) for the appropriate tax year, regardless of whether or not the required distribution was made. A complex trust is entitled to a fiduciary income tax exemption of $300 if the trust instrument or local law requires all income to be distributed currently, even if the full distribution to the beneficiaries does not occur during that tax year. If the trust is not required to distribute all of its income currently, it is entitled to a $100 fiduciary income tax exemption. A generation-skipping trust, defined by having beneficiaries that are two or more generations below the grantor's generation, is typically a type of complex trust.

Approximately 1.2 million fiduciary income tax returns were filed for complex trusts in Filing Year 2004, slightly more than were filed in 2003. Complex trusts were the dominant contributor to gross income, total deductions, and total tax liability. From 2003 to 2004, the gross income of complex trusts increased by $8.1 billion to $44.0 billion, more than half of the total value of income reported on all Forms 1041 in 2004 (Figure I). Complex trusts were second only to simple trusts in the aggregate value of income distribution deductions. Complex trusts that filed in 2004 claimed income distribution deductions of $13.1, an increase from the $11.1 billion claimed in 2003. Complex trusts generated 65.7 percent of total tax liability reported on all Forms 1041 filed in 2004.

Grantor Trusts

A grantor trust differs from other types of trusts in that the grantor retains control over a portion of the trust corpus, income, or both [18]. As such, the grantor is treated as the owner of that portion of the trust and is therefore taxed directly on the income of the portion under his or her control. The grantor must report any income earned from the trust assets on his or her Federal individual income tax return. A grantor is said to have control over the trust corpus or income if he, she, or a nonadverse party, has a reversionary interest exceeding 5 percent, certain administrative powers including the ability to borrow from the trust funds, power to revoke the trust or revest the corpus, or power to distribute income for the benefit of the grantor or the grantor's spouse [19]. Only the entity information portion of Form 1041 is completed for grantor trusts; dollar amounts are reported on attachments. A grantor trust is not taxable and therefore not entitled to a fiduciary income tax exemption [20]. A trust that is a combined grantor and complex or simple trust is taxable and entitled to claim an exemption of $300 or $100. A $300 exemption is allowed if the trustee is required by the trust instrument to distribute all of the trust's fiduciary accounting income. If there is no such requirement, a $100 exemption is allowed.

Grantor trusts were the most common entity type among Forms 1041 filed for 2003 and 2004. The 1.3-million grantor trust returns filed for 2004 made up 35.5 percent of the population of fiduciary income tax returns [21]. However, Figure J illustrates that grantor trusts did not account for a large proportion of the gross income, total deductions, or total tax liability reported in 2003 or 2004. Only 1.9 percent of grantor trusts reported tax liability in Filing Year 2004.

Split-Interest Trusts

There are three types of split-interest trusts for the purposes of Form 1041: charitable remainder unitrusts (CRUT's), charitable remainder annuity trusts (CRAT's), and charitable lead trusts (CLT's) [22]. Charitable remainder unitrusts and charitable remainder annuity trusts both distribute specified amounts to noncharitable beneficiaries on an annual basis for a fixed period, after which the remaining value of the trust is disbursed to a charitable beneficiary [23]. The annual distribution amount for CRUT's is a fixed percentage of the fair market value of the trust assets for that tax year. CRAT's distribute a fixed amount annually, which is calculated as a percentage of the fair market value of the trust on its creation date. Both types of remainder annuity trusts are exempt from income taxation and are not required to file Form 1041, unless they were created prior to July 31, 1969, or have unrelated business income [24].

A charitable lead trust distributes fiduciary accounting income to a charitable beneficiary for a predetermined period of years. At the end of the period, the trust terminates and a designated noncharitable beneficiary receives the remainder interest of the trust. Generally, a CLT must file Form 1041 and is usually treated similar to a grantor trust for tax computation purposes [25]. When the trust is created, the grantor is entitled to an income tax deduction equal to the present value of the charitable contribution. However, the grantor must include any annual income from the trust assets in the gross income reported on his or her Federal individual income tax return. The trust receives an annual fiduciary income tax deduction equal to the value of the charitable distribution. A charitable lead trust that has been classified as a grantor trust is not entitled to an exemption. A nongrantor CLT is entitled to a $300 fiduciary income tax exemption if the trust instrument requires all fiduciary accounting income to be distributed currently; otherwise, the exemption is limited to $100.

The number of Forms 1041 filed for split-interest trusts increased from 4,980 in 2003 to 6,194 in 2004. Despite the 24.3-percent increase in the number of tilers, the contribution to aggregate gross income, total deductions, and total tax liability by these fliers declined slightly over the period. In 2004, split-interest trusts reported gross income of $856.4 million, total deductions of $1.2 billion, and total tax liability of $32.8 million (Figure K).

Qualified Funeral Trusts

Qualified Funeral Trust (QFT) status was first made available through the Taxpayer Relief Act of 1997, which created Form 1041-QFT [26]. Form 1041-QFT is a specialized version of the fiduciary return that can only be filed by a qualified funeral trust. A qualified funeral trust, often called a "preneed funeral trust," is created to hold and invest funds that will ultimately be used to pay for funeral or burial services for the trust beneficiary. The trust acts as a contract between the beneficiary and the providers of the services, including funeral homes and crematories. A qualified funeral trust is treated as a separate taxable entity. A QFT must pay taxes on all income and capital gains on assets included in the trust. Annual contributions to the trust must be made by, or for the benefit of the beneficiaries, and could not exceed $7,700 for Tax Year 2002 or $7,800 for Tax Year 2003. No fiduciary income tax exemption is allowed for preneed funeral trusts. The trustee may file an aggregate Form 1041-QFT for all qualified funeral trusts under his or her control [27].

In 2004, there were 3,548 Forms 1041-QFT filed, a slight increase from the 3,376 that were filed in 2003. Approximately 3.0 million preneed funeral trusts were reported on Forms 1041-QFT in 2004, a considerable reduction from the 3.8 million in 2003. Qualified funeral trusts reported $97.8 million in taxable income in Filing Year 2003 and $105.4 million in 2004 (Figure L). In both tax years, QFT's were liable for approximately 0.1 percent of total tax liability owed by estates and trusts.

Qualified Disability Trusts

A qualified disability trust (QDT's) is a trust created to benefit individuals who are disabled and under the age of 65. A QDT is generally considered a type of complex trust. When the trust is created, all beneficiaries must have been disabled, as determined by the Commissioner of Social Security, during some part of the tax year. This type of trust is typically designed to distribute income to beneficiaries in a manner that does not negate the beneficiaries' eligibility for medical disability benefits under the Social Security Act. A trust may remain a qualified disability trust even if the corpus may eventually revert to a person without a disability after the trust ceases to have disabled beneficiaries. A fiduciary income tax exemption of up to $3,000 for Tax Year 2002 and $3,050 for Tax Year 2003 is allowed for a QDT [28]. The beneficiaries are required to report the value of distributions they receive from the trust on their Forms 1040 as part of their gross incomes. The trust is taxed on any undistributed fiduciary accounting income, which is reported on Form 1041.

Qualified disability trusts make up a small but growing proportion of fiduciary returns. From 2003 to 2004, the number of QDT filings increased from 1,905 to 3,230, an increase of 69.6 percent. In Filing Year 2004, qualified disability trusts reported $41.3 million in gross income and claimed $45.2 million in total deductions (Figure M).

Pooled Income Fund

A pooled income fund is a type of split-interest trust into which grantors to a charitable organization contribute their assets to a pool of donated assets and receive income payments for the remainder of the grantors' lifetimes [29]. The pooled assets are invested by the recipient, or donee, which is often a large educational institution or charity [30]. Each year, grantors receive an income stream based on the ratio of their contribution to the value of the investment pool and the return of the fund for that year. After the donor's death, the charity receives the grantor's prorated share of the value of the pooled income fund. A grantor receives a tax deduction on his or her Federal individual income tax return at the time of his or her irrevocable donation equal to the estimated value of the final charitable contribution. The annual distribution that a grantor receives from the pooled income fund is reported as gross income on his or her Form 1040. Pooled income funds are allowed a fidu-ciary income tax exemption of $100. The exemption value increases to $300 if the fund is required by its trust instrument to distribute all of its income currently.

Pooled income funds are the least common entity type of all Form 1041 tilers. The number of filers decreased from 1,099 in 2003 to 890 in 2004. PIF's contributed less than 0.1 percent to gross income, total deductions, and total tax liability for Filing Years 2003 and 2004 (Figure N).

Summary

In 2004, approximately 3.7 million estates and trusts filed income tax returns. The number of Forms 1041 filed decreased by 0.5 percent from the number of returns filed in 2003. Grantor trusts were the most common type of trust for which a Form 1041 was filed in 2003 and 2004. Complex trusts, however, made up the greatest share of aggregate gross income, total deductions, and total tax liability in 2003 and 2004. Capital gains made up the largest share of income reported in both years, while income distributions to beneficiaries accounted for the largest portion of deductions claimed.

Data Sources and Limitations

The data presented in this article were collected from returns processed for administrative purposes in Filing Years 2003 and 2004. A filing year includes returns submitted to the IRS for processing between January 1 and December 31 of that year. A filing year is primarily comprised of returns for the tax year immediately prior. However, a filing year may include returns from numerous other tax years. For example, Filing Year 2003 includes more than 3.5 million returns for Tax Year 2002, or 94.7 percent of the population for that year. About 3.6 percent of the Filing Year 2004 population is for Tax Year 2003. The remaining returns range from Tax Year 1965 to 2001. Returns filed for Tax Year 2003 make up 94.4 percent of Filing Year 2004 population. Tax Year 2004 filings make up 3.5 percent of the Filing Year 2004population.

Filers of Form 1041 do not represent the universe of all trusts, particularly grantor trusts. Optional filing methods allow grantor trusts with a single grantor to report trust income through the U.S. Individual Income Tax Return (Form 1040) of the grantor.

All amounts were recorded prior to any audit or taxpayer correction subsequent to the original filed return, with the exception of tax liability. Tax liability amounts noted in this article are "settlement amounts," which include any changes made during processing or audit procedures. Therefore, these amounts may differ from the tax liability reported by the taxpayer on Form 1041.

The data were extracted from the Internal Revenue Service (IRS) Returns Transaction File (RTF). A total of 3,762,867 and 3,766,123 Form 1041 returns were recorded on the RTF for Filing Years 2003 and 2004, respectively. Of those, 32,606 returns from 2003 and 39,441 returns from 2004 were found to be amended returns filed for the prior tax year and were removed from the populations tbr the purposes of this study. The data presented in this article have been tabulated using these adjusted populations of Form 1041.

Fiduciary income tax returns are processed according to the guidelines presented in the Internal Revenue Manual for Returns and Documents Analysis for Income Tax Returns for Estate and Trusts. The resulting data are recorded on the RTF. Tests were run on the data to check for and correct nonsampling errors. Common types of errors found in the processing data included keying errors and incorrect mathematical calculations.

Explanation of Selected Terms

Adverse party.--An adverse party is any person who has substantial interest in the trust such that any exercise or nonexercise of the grantor's power would have an adverse effect. Beneficiaries are often classified as adverse parties in that the grantor's actions will affect the amount of the distribution the beneficiaries will receive. The specific conditions required of an adverse party are discussed in Internal Revenue Code section 672(a).

Adjusted gross income.--Adjusted gross income is calculated by subtracting interest, taxes, fiduciary fees, charitable deductions, preparer fees, other deductions, and allowable miscellaneous deductions from the gross income.

Allowable miscellaneous deductions.--Allowable miscellaneous deductions are expenses for the production or collection of income, including investment advisory fees and subscriptions to investment advisory publications. In addition, bond premiums, certain losses and costs, and an estate or trust's share of amortization, depreciation, and depletion not claimed elsewhere are included.

Corpus.--The corpus of a trust consists of the original assets transferred into the trust. Often referred to as the body of the trust, the corpus may generate income streams.

Distributable net income (DNI).--Distributable net income is the amount of income available for distributions by the estate or trusts. DNI is calculated by modifying the value of taxable income of the estate or trust. Generally, this modification includes adding the values of the distribution deduction, fiduciary income tax exemption, and tax-exempt interest and subtracting net capital gains. For a more detailed definition, see Internal Revenue Code section 643(a).

Electing Small Business Trust (ESBT).--An ESBT is a trust in which beneficiaries are considered shareholders of a subchapter S corporation.

Fiduciary Accounting Income (FAI).--Fiduciary accounting income is defined under Internal Revenue Code Section 643(b) as "the amount of income of the estate or trust for the taxable year determined under the terms of the governing instrument and applicable local law." Fiduciary accounting income generally does not include capital gains (less losses), which are considered to be apportioned to the corpus by many trust instruments as well as State laws.

Grantor.--A grantor is the individual who previously owned and subsequently transferred the assets comprising the corpus into the trust.

Gross income (loss).--Gross income (loss) is the aggregate sum of all income from an estate or trust including: interest, ordinary dividends, business income (loss); capital gain (loss); rents, royalties, partnership income (loss), and income from other estates and trusts; farm income; ordinary gains (loss); and other income. Gross income is labeled total income on Form 1041.

Other payments.--Other payments include credits for taxes paid on undistributed capital gains and credits for Federal taxes on fuels. Taxable estate or trust.--A taxable estate or trust is one that incurs a tax liability after tax credits.

Taxable income.--Taxable income is the amount that remains after total deductions are subtracted from gross income (only recorded for values greater than zero).

Total deductions.--Total deductions are the aggregate sum of all reported deductions, which includes amounts for interest paid, taxes paid, and fees, charitable contributions, allowable miscellaneous items, income distribution to beneficiaries, and the standard exemption.

Total income.--See "Gross Income" above.

Total tax liability.--Total tax liability is the calculated tax obligation incurred by the estate or trust based on taxable income, less tax credits, plus recapture, alternative minimum, and household employment taxes.

Notes and References

[1] Form 1041 also collects information not directly related to tax calculations, including the formal name of the trust or estate as well as the fiduciary's and the preparer's names and contact information. The employer identification number (or the taxpayer identification number) is a permanent nine-digit number that identifies the entity for reporting purposes.

[2] A nonresident alien is an individual who is neither a resident nor a citizen of the United States.

[3] The filing threshold is calculated by adding the Federal individual income tax standard deduction and the exemption for a married individual filing separately. Any bankruptcy estate with a gross income above that threshold is required to file a fiduciary income tax return.

[4] Income in respect of a decedent or IRD is income earned but not received by the decedent as of the date of death, and therefore not included on the decedent's final individual income tax return. The decedent's right to receive the income is subject to estate tax, and the income, when received, is taxable to the estate or other recipient. A deduction for the estate tax attributable to the item is allowed on Form 1041. For more information, see Treasury Regulation 1.691 (a) or Bittker, Clark, and McCouch, Federal Estate and Gift Taxation, (2005), St. Paul, Minnesota, Thomson/West, p. 188.

[5] For additional information on fiduciary accounting income, see Internal Revenue Code Section 643(b) or the "Explanation of Selected Terms" portion of this article.

[6] The aggregate of miscellaneous itemized deductions is only deductible to the extent that the aggregate amount of the deduction exceeds 2 percent of the adjusted gross income of the estate or trust.

[7] For more detailed information regarding the calculation of DNI, see Internal Revenue Code section 643(a).

[8] For further detail regarding the transfer of assets to beneficiaries, see Treasury Regulation 1.652(b)-1.

[9] However, some types of trusts do not calculate tax liability on Form 1041. For example, bankruptcy estates use Form 1040 to calculate liability, while electing small business trusts (ESBT's) utilize a specialized tax calculation worksheet.

[10] These numbers were obtained from the "Selected Returns and Forms Filed or To Be Filed by Type During Specified Calendar Years" table included in the historical section of the Statistics of Income Bulletin. For Calendar Years 1986 to 1988, the total number of returns filed includes the number of Forms 1041-S (U.S. Fiduciary Income Tax Return for Nontaxable Simple Trusts) filed in addition to the number of Forms 1041.

[11] A filing year contains all returns submitted to IRS processing between January 1 and December 31 of that year. A filing year primarily includes returns filed for the tax year immediately prior to the filing year; however, returns filed for other tax years are also included.

[12] This is the first time in 5 years that Statistics of Income (SOI) has published data regarding

Form 1041. See Mikow, Jacob (2000), "Fiduciary Income Tax Returns, 1997," Statistics of Income Bulletin, Winter 2000-2001, Volume 20, Number 3.

[13] The estate tax deduction is equal to the value of tax paid on the Federal Estate Tax Return (Form 706) for estate or trust income that was previously included in a decedent's gross income.

[14] For more information on estates and the Federal Estate Tax Return (Form 706), see Eller, Martha, "Which Estates Are Affected by the Federal Estate Tax'? An Examination of the Filing Population for Year-of-Death 2001 ," Statistics" of Income Bulletin, Summer 2005, Volume 25, Number 2.

[15] For more information on bankruptcy estates, see Internal Revenue Code section 1398.

[16] At the time of filing for bankruptcy, the debtor may own some types of property that will not be included in a bankruptcy estate. For detailed information regarding these types of property, see U.S. Code Title 11, Chapter 5, Subchapter III, section 541.

[17] A trust document may require that the trustee distribute current income periodically but not yearly. There are instances when the trustee is only required to distribute current income when convenient or alter income has accumulated beyond a specific dollar amount. For further detail regarding trust distributions, see Internal Revenue Code section 651.

[18] A Form 1041 does not need to be filed for a grantor trusts if the trustee chooses an optional filing method. Optional Method 1 can be selected for trusts that are owned by only one grantor (a husband and wile who will file a joint income tax return for that tax year are considered to be a single grantor). Under this optional method, trust income, deductions, and credits are taken into account when figuring the grantor personal taxable income on his or her U.S. Individual Income Tax Return (Form 1040).

[19] For further detail regarding grantor trust qualities, refer to Internal Revenue Code sections 673 through 676.

[20] Grantor trusts are classified as taxable trusts under IRS guidelines if any income or deductions are claimed on Form 1041 even if the trust incurs no tax liability.

[21] Of the 1.3 million grantor trusts filed in 2004, approximately 25,000 were classified as taxable grantor trusts.

[22] Pooled income funds, generally considered to be a type of split-interest trust, are considered to be a separate entity for Form 1041 filing purposes.

[23] Charitable remainder trusts are further discussed in Treasury Regulations 1.664-1, 1.6642, and 1.664-3, as well as Internal Revenue Code section 651 (a).

[24] Annuity trusts that are not required to file Form 1041 must file Form 1041-A, U.S. Information Return Trust Accumulation of Charitable Amounts, as well as Form 5227, Split-interest Trust Information Return.

[25] As a type of grantor trust, charitable lead trusts may not be required to file Form 1041 under

Optional Method 1, which allows grantor trusts with a single grantor or owner to report trust income on his or her U.S. Individual Tax Return (Form 1040).

[26] Qualified funeral trusts may file Form 1041-QFT only if they have applied for and received QFT status. Otherwise, they complete Form 1041 as a grantor trust. For more information on QFT's, see Internal Revenue Code section 685.

[27] The number of qualified funeral trusts included on a single return is entered on line 4 of Part I of Form 1041-QFT.

[28] Qualified disability trusts are entitled to a fiduciary income tax exemption equal to the Federal individual income tax exemption for a single taxpayer for the relevant tax year.

[29] Pooled income funds are discussed in detail in Internal Revenue Code section 642(c)(5)(a).

[30] Pooled income funds are restricted in their investments in that they may not invest in tax-exempt securities.

Lisa Schreiber is an economist with the Special Studies Special Projects Section. This article was prepared under the direction of Barry W. Johnson, Chief.
Figure B. Distribution of Fiduciary Income Tax Returns, by Entity Type,
Filing Year 2004

Grantor trust 35.5%
Complex trust 33.1%
Simple trust 20.3%
Decendent estate 10.6%
Other entities (1) 0.6%

(1) Includes bankruptcy estates, split-interest trusts, qualified
funeral trusts, qualified disability trusts, and pooled income
funds.

NOTE: Detail does not add to 100 percent due to rounding.

Figure C

Distribution of Gross Income, Total Deductions, and Total Tax Liability,
by Entity Type, Filing Years 2003 and 2004

[Money amounts are in billions of dollars]

 Total tax
 Gross income Total deductions liability (1)

 2003 2004 2003 2004 2003 2004

Complex trust 35.9 44.0 22.6 24.7 5.3 6.2
Simple trust 23.5 27.1 18.6 20.1 1.6 2.2
Decedent estate 9.6 11.7 9.4 11.3 0.9 0.9
Other entities (2) 2.4 2.3 3.0 2.9 0.1 0.1

Note: Table made from bar graph.

(1) Tax liability amounts noted in this article are "settlement
amounts," which include any changes made during processing or
audit procedures. Therefore, these amounts may differ from the tax
liability reported by the taxpayer on Form 1041.

(2) Includes grantor trusts, bankruptcy estates, split-interest
trusts, qualified funeral trusts, qualified disability trusts,
and pooled income funds.

Figure D

Distribution of Gross Income, by Source of Income, Filing Year 2004

Capital gain (loss) 41.4%
Ordinary dividends 23.0%
Rents, royalties,
partnerships, other
estates and trusts, etc. 15.0%
Interest income 13.3%
Other income sources (1) 7.4%

 $85.2 billion

Note: Table made from pie chart.

(1) Includes business income (loss), farm income (loss), ordinary gain
(loss), and other income.

NOTE: Detail does not add to 100 percent due to rounding.

Figure E

Distribution of Total Deductions, by Type of Deductions, Filing
Year 2004

Income distributions 60.6%
Other deductions
not subject to
2-percent floor (2) 9.5%
Charitable distributions 7.5%
Fiduciary fees 6.6%
Attorney, accountant, and
return preparer fees 5.1%
Other deductions and
exemptions (1) 10.7%

Note: Table made from pie chart.

(1) Includes interest paid, taxes paid, estate tax, standard exmptions,
and allowable miscellanous deductions.

(2) Includes amounts claimed under "Other deductions" (Form 1041,
Line 15a), which may include bond premiums, casualty and theft losses,
clean fuel vehicle deductions, and net operating losses.

Figure F

Decedent Estates, Selected Items, Filing Years 2003 and 2004

[Money amounts are in thousands of dollars]

 2003

 Item Number Amount Percent (1)

 (1) (2) (3)

Gross income 373,567 9,557,402 13.4
Total deductions 386,378 9,437,678 17.6
Income distribution deduction 119,684 4,837,288 15.2
Taxable income (2) 88,626 2,916,800 10.4
Total tax liability (3) 87,253 860,017 10.9

 2004

 Item Number Amount Percent (1)

 (4) (5) (6)

Gross income 357,935 11,701,830 13.7
Total deductions 373,691 11,288,082 19.1
Income distribution deduction 111,949 5,717,082 16.0
Taxable income (2) 87,602 3,896,873 10.1
Total tax liability (3) 87,095 940,446 10.0

(1) Percentage of the collective amount reported for this item on all
Form 1041 returns.

(2) Only values greater than zero were recorded for taxable income.

(3) Tax liability amounts noted in this article are "settlement
amounts," which include any changes made during processing or
audit procedures. Therefore, these amounts may differ from tax
liability amounts reported by the taxpayer on Form 1041.

Figure G

Bankruptcy Estates, Selected Items, Filing Years 2003 and 2004

[Money amounts are in thousands of dollars]

 2003

 Item Number Amount Percent (1)

 (1) (2) (3)

Gross income 331 -6,560 (2)
Total deductions 154 21,781 (2)
Income distribution deduction 23 6,687 (2)
Taxable income (3) 162 4,200 (2)
Total tax liability (4) 1,341 15.277 0.2

 2004

 Item Number Amount Percent (1)

 (4) (5) (6)

Gross income 343 -19,721 (2)
Total deductions 114 13,585 (2)
Income distribution deduction 12 1,141 (2)
Taxable income (3) 203 2,242 (2)
Total tax liability (4) 1,660 14,688 0.2

(1) Percentage of the collective amount reported for this item on all
Form 1041 returns.

(2) Represents less than 0.05 percent.

(3) Only values greater than zero were recorded for taxable income.

(4) Tax liability amounts noted in this article are "settlement
amounts," which include any changes made during processing or audit
procedures. Therefore, these amounts may differ from tax liability
amounts reported by the taxpayer on Form 1041.

Figure H

Simple Trusts, Selected Items, Filing Years 2003 and 2004

[Money amounts are in thousands of dollars]

 2003

 Item Number Amount Percent (1)

 (1) (2) (3)

Gross income 717,860 23,497,647 32.9
Total deductions 735,691 18,579,516 34.6
Income distribution deduction 596,616 14,623,232 46.0
Taxable income (2) 150,323 6,990,353 24.9
Total tax liability (3) 148,812 1,631,684 20.7

 2004

 Item Number Amount Percent (1)

 (4) (5) (6)

Gross income 716,003 27,121,295 31.8
Total deductions 735,761 20,051,762 34.0
Income distribution deduction 594,634 15,451,441 43.2
Taxable income (2) 161,824 10,060,566 26.1
Total tax liability (3) 161,459 2,160,003 23.1

(1) Percentage of the collective amount reported for this item on all
Form 1041 returns.

(2) Only values greater than zero were recorded for taxable income.

(3) Tax liability amounts noted in this article are "settlement
amounts," which include any changes made during processing or audit
procedures. Therefore, these amounts may differ from tax liability
amounts reported by the taxpayer on Form 1041.

Figure I

Complex Trusts, Selected Items, Filing Years 2003 and 2004

[Money amounts are in thousands of dollars]

 2003

 Item Number Amount Percent (1)

 (1) (2) (3)

Gross income 1,148,965 35,897,783 50.3
Total deductions 1,191,298 22,600,280 42.1
Income distribution deduction 442,820 11,136,502 35.0
Taxable income (2) 480,889 17,842,169 63.6
Total tax liability (3) 473,627 5,295,565 67.2

 2004

 Item Number Amount Percent (1)

 (4) (5) (6)

Gross income 1,156,883 44,036,120 51.7
Total deductions 1,204,393 24,730,936 41.9
Income distribution deduction 442,630 13,126,371 36.7
Taxable income (2) 489,867 24,155,795 62.8
Total tax liability (3) 479,896 6,151,144 65.7

(1) Percentage of the collective amount reported for this item on all
Form 1041 returns.

(2) Only values greater than zero were recorded for taxable income.

(3) Tax liability amounts noted in this article are "settlement
amounts," which include any changes made during processing or audit
procedures. Therefore, these amounts may differ from tax liability
amounts reported by the taxpayer on Form 1041.

Figure J

Grantor Trusts, Selected Items, Filing Years 2003 and 2004

[Money amounts are in thousands of dollars]

 2003

 Number Amount Percent (1)

 Item (1) (2) (3)

Gross income 27,187 1,443,812 2.0
Total deductions 25,351 1,511,724 2.8
Income distribution deduction 15,682 1,041,269 3.3
Taxable income (2) 6,289 62,862 0.2
Total tax liability (3) 5,760 35,031 0.4

 2004

 Number Amount Percent (1)

 Item (4) (5) (6)

Gross income 23,331 1,291,181 1.5
Total deductions 21,561 1,625,424 2.8
Income distribution deduction 12,870 1,281,130 3.6
Taxable income (2) 6,417 88,543 0.2
Total tax liability (3) 5,226 50,255 0.5

(1) Percentage of the collective amount reported for this item on all
Form 1041 returns.

(2) Only values greater than zero were recorded for taxable income.

(3) Tax liability amounts noted in this article are "settlement
amounts," which include any changes made during processing or audit
procedures. Therefore, these amounts may differ from tax liability
amounts reported by the taxpayer on Form 1041.

Figure K

Split-Interest Trusts, Selected Items, Filing Years 2003 and 2004

[Money amounts are in thousands of dollars]

 2003

 Number Amount Percent (1)

 Item (1) (2) (3)

Gross income 4,676 774,846 1.1
Total deductions 4,806 1,375,686 2.6
Income distribution deduction 2,144 112,328 0.4
Taxable income (2) 733 126,482 0.5
Total tax liability (3) 740 32,565 0.4

 2004

 Number Amount Percent (1)

 Item (4) (5) (6)

Gross income 5,789 856,365 1.0
Total deductions 5,869 1,174,943 2.0
Income distribution deduction 2,450 101,394 0.3
Taxable income (2) 1,101 176,199 0.5
Total tax liability (3) 1,088 32,802 0.4

(1) Percentage of the collective amount reported for this item on all
Form 1041 returns.

(2) Only values greater than zero were recorded for taxable income.

(3) Tax liability amounts noted in this article are "settlement
amounts," which include any changes made during processing or audit
procedures. Therefore, these amounts may differ from tax liability
amounts reported by the taxpayer on Form 1041.

Figure L

Qualified Funeral Trusts, Selected Items, Filing Years 2003 and 2004

[Money amounts are in thousands of dollars]

 2003

 Number Amount Percent (1)

 Item (1) (2) (3)

Gross income 3,257 97,818 0.1
Total deductions 2,860 32,203 0.1
Income distribution deduction 58 26 (2)
Taxable income (3) 2,733 81,242 0.3
Total tax liability (4) 2,407 9,245 0.1

 2004

 Number Amount Percent (1)

 Item (4) (5) (6)

Gross income 3,407 105,353 0.1
Total deductions 2,951 30,753 0.1
Income distribution deduction 66 11 (2)
Taxable income (3) 2,741 103,992 0.3
Total tax liability (4) 2,643 8,370 0.1

(1) Percentage of the collective amount reported for this item on all
Form 1041 returns.

(2) Represents less than 0.05 percent.

(3) Only values greater than zero were recorded for taxable income.

(4) Tax liability amounts noted in this article are "settlement
amounts," which include any changes made during processing or audit
procedures. Therefore, these amounts may differ from tax liability
amounts reported by the taxpayer on Form 1041.

Figure M

Qualified Disability Trusts, Selected Items, Filing Years 2003 and 2004

[Money amounts are in thousands of dollars]

 2003

 Number Amount Percent (1)

 Item (1) (2) (3)

Gross income 1,761 31,186 (2)
Total deductions 1,740 22,108 (2)
Income distribution deduction 351 13,039 (2)
Taxable income (3) 394 13,619 (2)
Total tax liability (4) 358 4,985 0.1

 2004

 Number Amount Percent (1)

 Item (4) (5) (6)

Gross income 3,033 41,280 (2)
Total deductions 3,046 45,198 0.1
Income distribution deduction 569 25,622 0.1
Taxable income (3) 639 7,678 (2)
Total tax liability (4) 631 2,217 (2)

(1) Percentage of the collective amount reported for this item on all
Form 1041 returns.

(2) Represents less than 0.05 percent.

(3) Only values greater than zero were recorded for taxable income.

(4) Tax liability amounts noted in this article are "settlement
amounts," which include any changes made during processing or audit
procedures. Therefore, these amounts may differ from tax liability
amounts reported by the taxpayer on Form 1041.

Figure N

Pooled Income Funds, Selected Items, Filing Years 2003 and 2004

[Money amounts are in thousands of dollars]

 2003

 Number Amount Percent (1)

 Item (1) (2) (3)

Gross income 920 36,846 0.1
Total deductions 928 41,535 0.1
Income distribution deduction 840 29,254 0.1
Taxable income (3) 30 979 (2)
Total tax liability (4) 82 128 (2)

 2004

 Number Amount Percent (1)

 Item (4) (5) (6)

Gross income 766 35,569 (2)
Total deductions 767 36,619 0.1
Income distribution deduction 702 28,204 0.1
Taxable income (3) 107 553 (2)
Total tax liability (4) 104 95 (2)

(1) Percentage of the collective amount reported for this item on all
Form 1041 returns.

(2) Represents less than 0.05 percent.

(3) Only values greater than zero were recorded for taxable income.

(4) Tax liability amounts noted in this article are "settlement
amounts," which include any changes made during processing or audit
procedures. Therefore, these amounts may differ from tax liability
amounts reported by the taxpayer on Form 1041.
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Author:Schreiber, Lisa
Publication:Statistics of Income. SOI Bulletin
Date:Sep 22, 2005
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