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Washington Report
February 1999
IRS Provides Additional Guidance
on Preneed Funeral Trusts
by Robert M. Fells, Esq., General Counsel
Perhaps influenced by the spirit of the holiday season, the Internal Revenue Service published additional guidance in late December to simplify the reporting requirements for preneed funeral trusts under Code Section 685. That section, enacted in 1997, created a new election whereby trustees of "qualified funeral trusts" (QFTs) could opt to pay the tax on earnings in lieu of the preneed purchaser (considered the "grantor" of the trust by IRS) paying the tax. However, a number of questions were prompted by the new Section 685 which the ICFA, other organizations and individuals raised with IRS staff. The new guidance resolves some of the more pressing concerns.
Earlier in 1998, the IRS Restructuring and Reform Act clarified that the IRS could establish rules for the simplified reporting of QFTs. In particular, the new law provided a 60-day period following the death of the contract beneficiary whereby the trust continues to qualify for the election under Section 685 (see the September 1998 "Washington Report" column for details). The additional guidance from IRS, published as Notice 98-66, explained the need for this change. "Before the (1998) amendments, a trust lost its QFT status when the grantor died because it was no longer a grantor trust. Recognizing that trust assets aren't usually distributed to a seller of merchandise or services immediately after a grantor's death, however, the amendments provide that a QFT will retain its status for the period of time between the grantor's death and the actual distribution, but not more than 60 days after the grantor's death."
The IRS Notice also discussed amendments that simplify the reporting requirements for trustees of multiple QFTs "by providing that a single, composite Form 1041-QFT may be filed for all QFTs managed by the same trustee, including short-period QFTs. A trustee of multiple QFTs has until April 15th of the year after the calendar year closes to file the composite form." The IRS has invited comments on this guidance.
Regarding short year QFTs, the Notice states that as a general rule "trust returns must be filed by the 15th day of the fourth month following the close of the taxable year. QFTs are required to adopt a calendar year. Therefore, QFTs generally are required to file an income tax return by April 15th of the year following the close of the calendar year. Under section 443, a trust that is in existence during only part of a year is required to file a return for that short period.... For example, if the beneficiary of a QFT dies on March 3rd and all trust assets were distributed prior to the end of March, the trustee would be required to file the tax return by July 15th.
"The Service recognizes that a trustee of multiple QFTs often has many QFTs that terminate during the calendar year. To simplify the reporting requirements for these trustees, a single composite Form 1041-QFT may be filed for all QFTs managed by the same trustee, including short period QFTs. Therefore, a trustee of multiple QFTs is not required to file a separate tax return for any QFT that terminates during the year. The trustee of multiple QFTs has until April 15th of the year following the close of the calendar year to file a composite Form 1041-QFT, even when the return includes QFTs that terminate during the calendar year."
In a second publication, the IRS issued Revenue Procedure 98-61, which provides cost of living adjustments to the maximum contribution to QFTs, among other things. When enacted in 1997, Section 685 limited the maximum contribution from any preneed funeral contract to $7,000 deposited into trust. Amounts exceeding the $7,000 limit would not be granted QFT status. However, the dollar level was indexed for inflation. According to Rev. Proc. 98-61, "For contracts entered into during calendar year 1999 for a 'qualified funeral trust,' as defined in section 685, the trust may not accept aggregate contributions by or for the benefit of an individual in excess of $7,100."
ICFA members who would like copies of either IRS Notice 98-66 or Rev. Proc. 98-61 should call association headquarters at 1-800-645-7700.
Copyright ICFA 1999.
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