401k Based on 1099-Misc Income for serving as Trustee

Submitted by Brian Bishop on Tue, 2014-09-09 19:54

I have a client who will receive approximately 80,000 this year in Misc Income for serving as the trustee of both of her parents investment accounts. Evaluating options on how to reduce taxable income and ultimately reduce total tax liability. 2 Options I am looking at are: Solo 401k and Donor Advised Fund. I know we can do the DAF, trying to confirm the 401k.

Can we establish and contribute to a Solo-k based on the 80,000 in 1099-Misc income received for serving as a trustee of parents accounts?

Thanks!!



Submitted by Bruce Steiner on Tue, 2014-09-09 20:47

The income wouldn’t be shown on a Form 1099.  Trustees don’t issue Forms 1099 to themselves.Whether it’s self-employment (subject to self-employment taxes but eligible for retirement plans) or not depends on the facts and circumstances.  If you’re the lawyer, you should advise the client accordingly.  If not, the client should consult with counsel.

Submitted by mk foss on Thu, 2014-09-11 01:16

I never disagree with Bruce but I wanted to add a few things.

  1. In order to do a retirement contribution you need to pay SE tax on the income. A qualified plan (like 401k) is a permanent arrangement and wouldn’t be appropriate for one-time income. A SEP might be a better option if you want a retirment-type solution (but contribution may be less).
  2. Donor advised funds are great and there is a lot of information on the web to help with that.

Submitted by Bruce Steiner on Thu, 2014-09-11 01:42

Since she’s a trustee, assuming the value of the trust remains reasonably constant, she should have about the same amount of trustee’s commissions each year.

Submitted by Brian Bishop on Thu, 2014-09-11 12:09

Thank you for the responses.This is what I found online, do you agree:From the PR or Trustee’s perspectiveA related issue is the PR or Trustee’s individual tax treatment upon receipt of such fees. A nonprofessional PR or Trustee (such as one serving in a family or friend setting) will simply include the fees in the Trustee’s gross income on Line 21 of Form 1040 as other income, and such fees are not subject to self-employment tax. A professional PR or Trustee, however, will report fees as self-employment income subject to self-employment tax in addition to income tax.In which case, per above, it is not subject to SE tax.  Does that mean she cannot do a SEP or 401k?  What about traditional IRAs?  Other thoughts on offsetting taxable income.

Submitted by mk foss on Thu, 2014-09-11 17:46

I treat trustee expenses as other income and not eligible for a retirement contribution. I have a client who is co-trustee of his mother’s trust and was a trustee of two other trusts for family members – but he’s nonprofessional with no SE tax. We do deduct expenses of being a trustee that are not reimbursed by the trust – mileage, postage, long distance calls, etc. 

Submitted by Bruce Steiner on Thu, 2014-09-11 20:33

See Revenue Ruling 58-5.

Add new comment

Log in or register to post comments