Estates, Trusts, & K-1's

Hi, ps56k.

You asked a "Quick question", but that does not mean that anyone can give you a quick answer with so few details. :>(

For several years, I taught professional development courses on Federal Income Taxation of Estates and Trusts. The simplest trusts are quite simple. But they can become very complex very quickly! And tax rules change often, so what I knew and taught 20+ years ago is surely out of date by now, so be sure you check with your own CPA or attorney for the current rules.

Who is the Trustee? That is who has the responsibility to file Form 1041, the fiduciary return. That form will report the trust's income for its taxable year, including a Schedule K-1 for each beneficiary who receives or is entitled to income. Each beneficiary will report his or her share on the individual's Form 1040 for the year.

What legal document created the Trust? Your wife's mother's Will? Or some other Trust document? What did that document say about distributions from the Trust? Any trust that is REQUIRED by its creating document to distribute income at least annually is a SIMPLE trust, by definition - but that doesn't mean that its tax return will be simple. If it is not required to distribute all income currently, then it is a COMPLEX trust, by definition, and different rules apply.

Trust and estate accounting make a vey strict distinction between "income", which belongs to the income beneficiaries, and "principal", which belongs to the remaindermen. The trust principal (or "corpus") does not lose its character as such, even if it is converted to a different form - such as cash. So if real estate was left to a grandchild, with income to a child, and then the property is sold by the Trustee, the cash proceeds still belong to the grandchild, who will receive the remainder of the principal at the end of the trust, or other designated time. Income from those proceeds, such as interest, would probably belong to the income beneficiary and might be distributed currently, just like any rental income before the sale, depending on what the trust document provides. (This is greatly simplified, of course, with only a single simple example; the real world of estates and trusts is full of more complex situations.)

So, we cannot give you the right answers without knowing the terms of the trust. The Trustee is responsible for knowing and carrying out the terms of the trust document - and for filing the annual tax return for the trust.

Please check with your own CPA and/or with the Trustee's attorney.

RC

-- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken 2012 Deluxe R 5 and Windows Live Mail in Win7 x64)

Quick question - that has been lingering with with my wife's family... Her mom died a few years ago... Her mom's house was recently sold, and the proceeds went into her Trust.

None of the five kids/bene's have received any distributions from the Trust.

There has been some rumbling about the Trust and issuing a K-1.

Thoughts, comments, or pointers ?

RC - tnx for the feedback... I've also posted over in the moderated tax group.

This is a tough situation - because it's all family -

The father died in 2006, and then all the cobwebs were found.... Trusts with nothing conveyed over. Deeds written with JT Tenancy vs Tenant in Common and various other issues discovered and attempted to correct.

Now, layer that with internal family control of Trust info & assets, and one being Trustee along with the CPA for the family. Not sure the status of each of the Estate filings. and therefore any remaining Trust filings for some sold real estate, rental real estate, & bank accounts.

SO - with walking on the family egg shells and trying to retain piece between all family players it is really difficult to find out any info.... You get a blank staredown or just "you have no need to know that".

Hi, ps56k.

Those additional details just go to validate my original - and continuing - reluctance to try to furnish meaningful advice without knowing such facts. (Of course, the most significant reason for my reluctance is my frequently-repeated warning that any expertise I might have had 20+ years ago is dangerously out of date now.)

Reminder: As you apparently know, this is primarily the responsibility of the TRUSTEE.

RC

-- R. C. White, CPA San Marcos, TX (Retired. No longer licensed to practice public accounting.) snipped-for-privacy@grandecom.net Microsoft Windows MVP (2002-2010) (Using Quicken 2012 Deluxe R 5 and Windows Live Mail in Win7 x64)

RC - tnx for the feedback... I've also posted over in the moderated tax group.

This is a tough situation - because it's all family -

The father died in 2006, and then all the cobwebs were found.... Trusts with nothing conveyed over. Deeds written with JT Tenancy vs Tenant in Common and various other issues discovered and attempted to correct.

Now, layer that with internal family control of Trust info & assets, and one being Trustee along with the CPA for the family. Not sure the status of each of the Estate filings. and therefore any remaining Trust filings for some sold real estate, rental real estate, & bank accounts.

SO - with walking on the family egg shells and trying to retain piece between all family players it is really difficult to find out any info.... You get a blank staredown or just "you have no need to know that".