3 Mistakes To Avoid When Filing A Trust Tax Return

As the executor of an estate, you could have the responsibility for filing a tax return for a trust that was established by the deceased. Individual tax returns can be challenging, but trust tax returns are far more complex. A mistake could have a long-term impact on the estate, so it is important that the return is accurately filed. To help you avoid future tax-related problems, here are some common mistakes you could potentially make. 

Filing the Wrong Forms

The forms used for individual tax returns differ from those used for a trust. If you file the wrong form, there is a possibility that you will calculate owed taxes incorrectly and the estate could end up retroactively paying for a newly discovered tax bill. The estate could also incur penalties related to filing the wrong form and after the due date.  

To avoid this, you need to verify that the form you are using is Form 1041. In addition to this form, there are others that you could potentially need. Which forms you need are largely dependent on the financial details of the trust and the estate.  

Failing to Provide Documentation of Assets

As part of completing the tax return for the trust, you will be required to detail the assets that are owned by the trust. You have to provide documentation for the assets that are listed. Without the proper documentation, the Internal Revenue Service, or IRS, can question everything from whether or not the assets are truly owned by the trust and the value of those assets.  

If that occurs, the trust could miss out on valuable deductions and credits that could help to lower its tax bill. Worse yet, as the executor, you could end up facing an audit. You need to ensure that copies of all pertinent documentation are included with your filing.  

Failing to Create Beneficiary Statements

Whenever assets are distributed from the trust, a beneficiary statement needs to be generated. A copy of the statement should be provided to the beneficiary and also to the IRS. The statement helps to establish to the IRS that the asset is no longer in the possession of the trust.  

The statement should include the name of the beneficiary and his or her address. You also need to include an appraisal or assessment of the value of the asset on the day the beneficiary took ownership of it.  

To avoid other potentially costly mistakes, consider working with a professional tax preparer.