Distribution from a trust

"Ron Rosenfeld" wrote

If the trust is selling the investments, then the trust will report the gain (if any) on it's return, which often times is distributed to the beneficiaries via a Form K-1. That form will report the beneficiaries portion of income from the trust. Similar to a W-2, the income is thought to be earned evenly throughout the year. Estimated tax payments can be made based on the anticipated amounts of income, and the person who is handling the trusts should be able to tell you the expected amounts of earnings based on the types of investments. I would think that between last April and now, someone has a handle on the trust assets, where they're invested and the expected income for 2010.

Well, the income will all be from dividends as nothing was sold April-December 2009, but it could be substantial.

And, for a variety of reasons, the amount won't be known for a while yet -- possibly not until the K1's are issued.

But from what you are writing, it seems that even though the distributions won't be made until next month, that I would still have to consider the income as having been paid over the course of the year (and not on

Thanks for the information.

--ron

I don't think that is true. I have looked at the instructions for estimated tax payments for trusts, and it seems it was not required to make estimated tax payments. "A trust that was treated as owned by the decedent if the trust will receive the residue of the decedent's estate under the will (or if no will is admitted to probate, the trust primarily responsible for paying debts, taxes, and expenses for any tax year ending before the date that is 2 years after the decedent's death."

You were required to make estimated tax payments on the "Adjusted gross income you expect in 2010".

You did not expect any income from the trust or estate, so were not required to include it in your original calculations. I would use the annualized method for calculating your estimated tax payments, and show all trust income as being received at the end of 2009.

Unless you are also the Trustee (who certainly must be able to add up checks he received for dividends) you should consider the income as being received in the 4th quarter for purposes of figuring your 2210 AI installment requirements. On the other hand, if you are the trustee you should have known what money was coming in and had discretion to distibute it to yourself, and therefor you are taxable on it as actuallly received by the trust.

Presuming you are NOT the trustee and that you 2009 tax (including tax on the trust income) will exceed your 2008 tax ( or 110% if applicable), you should make a January 15th installment in the amount of your 2008 taxes less whatever installments and withholding you had in 2009. This will avoid a penalty and gives you until April 15 the come up with the remainder with no penalty. It also avoids the questions of whether you have to consider the trust income in 2009 at all, sinice you didn't recieve it in 2009, or whether it shouldl have been recognized throughout the year. Using the last year's tax "safe harbor" avoids all of these questions, and you don't need the Annualized Income method if you have paid in enough to cover last year's tax. You're a week late paying the January 15th Installment, but you should have paid it even without the trust income hanging over you.

As for the capital gains, they are retained by the trust for taxation and after all the dividend and ordinary income is distributed they can be distributed as capital, not income ,UNLESS the trust and your State Laws allow the trust to consider gains distributions as Income. It's a minor point since both you and the trust are linimted to tax of only 15% on gains, but an individual has the advantage of a larger 0% bracket to absorb gains without taxation. So technically you cannot enjoy this unless speicificlaly allowed by trust and State law. Without this specfic direction the trust would distribute all the income taxable to the beneficiaries, retain all gains taxable to the trust, and distribute non-taxable capital.

ed

It would certainly be preferable to realize the income in the 4th quarter for estimated tax purposes.

And I am one of three trustees. However, it was not possible to make distributions prior to this year due to a bunch of issues including re-registering the trusts appropriately; gathering all of the assets and re-registering their ownership; setting up appropriate accounts to receive any distributions, etc.

Theoretically, it should have been possible to account for all the dividend payments. But in real life it was not. Some of the dividends were deposited automatically in any one of several accounts owned by my mom; some of those dividends were stopped when those particular accounts were closed until we could notify the appropriate payors; the payment advices, in general, went to another trustee and we had our plate pretty full just trying to sort things out. I understand the IRS may not be able to "give us a break" in that regard, but that is the situation as of now.

For most years, it is generally my practice to pay in what I paid the previous year, to take advantage of that safe harbor. However, in 2008 I had a huge (for me anyway -- 6 figure) income bump due to liquidation of a tax shelter which will not be repeated in 2009 (or ever, hopefully). So it would be much less expensive to pay the interest on late payment for 2009 than to make the kind of payment I might need to get into that safe harbor.

This will avoid a penalty and gives you until April 15 the

Actually, my projected taxable income without any trust distributions was covered by the estimated tax payment I made back in April 2009. One of the consequences of my 2008 bump in income was significant additional state income tax deductions for payments made in 2009.

This stuff is not easy.

I may be able to reconstruct the income (before seeing the actual paperworkd) by looking at the holdings and declared dividends.

I'm going to try that approach.

--ron

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WOW! If you want to lessen any penalties I suggest you try the 2210 AI because your first quarter certainly doesn't have any trust income and the second quarter minimal trust exposure. So maybe you can either calculate a good guess for distributed 3rd quarter income, , or "pro- rate" total annual income to June through August for the 3rd quarter, and then put the remainder in the 4th quarter.

If it's a bad as you depict, perhaps you should put it all in after August (4th quarter) on the basis that you really didn't know nor receive any income in the first 3 quarters. Personally, I would do that, complete the 2210AI and compute tha penalty (if there is one),

distributions

Not true. See the "annualized method" in the instructions for Form 2210.

That's what I first thought I could do. And I thought that since the Trust will be claiming the distribution as if it were made on 12/31, that I could annualize and claim that all of the income was in the 4th quarter.

But it seems that Paul Thomas feels that the income needs to be reported as if earned over the course of the year, whereas you and others feel that the annualized method is allowed.

Parenthetically, I tried calling the IRS for an opinion and was told that whether I reported this income as having occurred on 12/31, or over some other period of time, depended on *STATE* rules.

Hmmm. I think I'm going to plan to use the annualization method, but I'll also check with the CPA doing the trust tax returns.

Thanks.

--ron

Thanks Ed. That's basically what I'm going to plan to do -- put everything into the 4th quarter unless I find some good reason to do it otherwise.

I appreciate your input.

--ron

Ron: I think if you make a sec 645 election using form 8855 you effectively will make the trust an estate, and an estate can have a fiscal year ending in 2010 and its distriutions are taxable to the beneficiary as he/she receives them, not when the estate receives them. I've never done one, but iI understand it is very common. Check with your CPA or estate lawyer.

ed

Thanks Ed. I will check that out.

--ron