Final 1041 for estate and estate is receiving a credit from Lawyer due to unspent money in the iolta trust

Forum|Forum|3 years ago
June 24, 2022
1 reply
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I'm pretty sure I know the answer but I want to be sure.

When I hired a lawyer for the estate I had to pay money into an IOLTA trust. All legal fees were then deducted from this initial deposit. I only spent 1/2 of the money. The lawyer is going to close the trust and distribute the remaining money to the heirs.

I deducted the entire amount on the 1041 the tax year I paid it . Deduct it when you write the check was the rule. Now that I did not use the entire amount for legal fees do I have to put a negative amount for legal fees in the final return? I assume I do but need to verify.

Thank You

TurboTax Business Windows

Critter-3

You cannot have a negative expense instead since you deducted it in the past against the estate income you must enter it back as income. Since the deposit was made to a trust account and not directly to the attorney you should NOT have deducted the amount paid into the IOLTA trust since the attorney did not earn the fee and it was still in the trust's control.

M

MatildaAuthor

Employee

Deducting it at the time did not seem right to me. But I had an accountant helping me at the time and he said to include the entire deposit in that years taxes but make sure not to deduct any legal fees on future taxes until the trust is used up. I guess he did not expect the trust to not be used up.

I was so looking forward to being done. -this really complicates things. The tax year ended 5/31/22 and there was no more income expected as this was to be the final 1041. Executor fee has been paid, all final fees paid, all distributions done. Now there is additional income of well over $600.00 (so a 1041 has to be filed) and also distributions of that income in the next tax year. So - The return I thought was final is no longer final and I have to submit a short return for one month including only the iolta refund. Is that correct?

Thank You for the assistance.