Tax Code Section 685 has now been law for 21 years, and this marks our 20th year of preparing the Qualified Funeral Trust return. (And more specifically, the composite QFT return) The QFT return was meant to simplify income reporting for a trust that has hundreds, or even thousands, of contract beneficiaries. Yet, we continue to be surprised to find so many fiduciaries who do not understand the income reporting requirements for these accounts. During the past year we were engaged by two trustees to review their preneed trust returns. With each, we found that the administrator had prepared complex 1041 returns that resulted in Federal and state tax liabilities in excess of ten thousand dollars. A quick Google research should have alerted the administrators that a complex 1041 return cannot be used for a preneed trust. Preneed trustees have two income reporting options: reporting income to the contract beneficiaries or filing a Fed. Form 1041QFT. There are two ways to prepare a 1041QFT, and even a standard 1041QFT would have saved the trust thousands of dollars. If the fiduciary has the requisite individual account administration, a composite 1041QFT can further reduce the trusts’ tax liabilities substantially. Because these two trusts had diversified investments with substantial qualified dividends and long term capital gains, their tax liabilities were less than $1,000 each.
During the past year, we have also reviewed 1041qft returns that reflect confusion about the requirements of composite return. We will address some of those issues in our next post.