In trust administration, FBO is an acronym that means “for the benefit of.” A trust with FBO in the title simply means that the trust is for the benefit of a named beneficiary. As a matter of standard industry practice, trusts that have FBO in the title are irrevocable trusts with beneficiaries who cannot change.
Locate the trust tax identification number. If the trust has not been assigned a tax identification number, complete the online application on the IRS website to obtain a new number. An irrevocable trust is a taxpayer with a unique taxpayer identification number.
Obtain a copy of the Form 1041 instructions from the IRS website.
Obtain a copy of tax return Form 1041 from the IRS website.
Collect all statements, IRS Form 1099s and all pertinent tax information from trust investment income. This will include dividends, interest, real estate rental income and partnership income, along with any and all sources of income the irrevocable trust earned during the previous tax year. The tax information from all sources totals into a whole, which completes the income earned portion of the Form 1041.
Review the trust transactions for allowable deductions. As a taxpayer, an irrevocable trust is entitled to certain deductions to reduce the tax payable by the trust. Items such as investment management expenses, trustee fee expenses, lawyer fees for the trust and real estate expenses are all allowable tax deductions. The Internal Revenue Code also allows deductions for certain types of charitable expenses, if the trust makes gifts or distributions to charity.
Complete the return with the income and deduction information. Ensure that IRS instructions are followed exactly as written.
Mail tax information form Schedule K-1 (Form 1041) to the trust beneficiaries.
Electronically file the return, if possible. The IRS requires electronic filing of tax return Form 1041, unless there are extenuating circumstances.
Completing a Form 1041 is a complicated process, as the form and instructions for completion are long and cumbersome. A trustee without experience in tax law and preparation would be wise to outsource preparation of Form 1041 to a tax professional. Trust tax laws are constantly changing, and a tax professional will have the most current software to complete and file the return.
When the trust completes its tax return Form 1041, IRS Schedule K-1 generates to beneficiaries who have received money or assets from the trust. The beneficiaries, in turn, use the Schedule K-1 to file any personal federal and state income tax that may be due. Since the beneficiaries cannot file personal income tax returns until the trust return is completed, it is critical to complete Form 1041 as soon as possible. Beneficiaries tend to get very upset if they do not receive timely tax forms from a trust.