I am the Fiduciary for a Simple Trust, and have correctly filed a 1041 each year, with copies sent to each of the other two co-Trustees. This is basically a single Fidelity mutual fund that just gets Dividends and ST/LT capital gains each year.
In 2007, one of the beneficiaries turned 21, so we completed a K-1 for that beneficiary.
My question is, if the income for the Trust is *not* distributed to the beneficiaries in a given year, but remains reinvested within the Trust's mutual fund, must the Beneficiaries receive a K-1 anyway? I have not done this in the past. Thanks.
It's not that the money was paid out or not. The wording of the trust documents dictate if the income is to be allocated to the beneficiaries (reported on a K-1) or if it is to be taxed at the trust level.
I suggest you read the Trust document and then the instructions for form 1041 as regards K-1s, at least. But, basically, you must issue a K-1 to anyone to whom you distributed income. You must also determine if the trust is separatae for each beneficiary, or a common trust with several beneficiaries. If you do not distribute all the income to the beneficiaries it is not a Simple Trust, the only difference being the amount of the Exemption, and which box to check on the 1041, and the trust directions. From your questions I fear you have *not* filed the
1041 correctly each year and you need a professional.
In my experience trust documents seldom if ever specify who gets K-
1's and when. They do specify if a beneficiary is required to get a distribution or whether distribution is discretionary.
In OP's case it appears that a distribution is discretionary, and as a result the income would be taxed at the trust level - unless it's a grantor trust, which is unlikely.
So why should they get K-1's for income they are not taxed on?
(That said, depending on the amount of income, the tax might well be less to the beneficiaries than the trust on the same income. But that wasn't the question that was asked.)
**CORRECTION** I mis-spoke; its actually a Complex Trust (I wrote the actual wording of the Trust); in that, distributions are to be re-invested into the Trust, and there will be no distributions to any of the Beneficiaries until each turns 21. My apologies for the confusion!!!
Are you suggesting that a beneficiary can be required to acknowledge receipt of K-1 income and pay tax on it without actually receiving any money? Sorry, I may have mis-read and/or misunderstood your post. Joe
Your CORRECTION statement is stil confusing. The trust's trustee distributes the taxability of iincome and corpus via its K-1s, whether the money is actually distributed to the beneficiary or not. If you never issued K-1s before, you didn't distribute anything (tax liability or money) yet, and the trust, not the beneficiaries, has paid taxes on all the income and gains. But, you said, the "distributions were reinvested in the trust". This implies that the money was taxed to the beneficiairies (distributed) who reinvested (did not withdraw ) it in the trust. That requires K-1s to each beneficiary
Are the age 21 distributions ourt of the beneficiary's share of the trust corpus, or just the income, and is even that discretionary? It is important to determine if you are dealing with one multi- beneficiary trust, or is each beneficiary's share a separate trust. If you wrote the trust you must know the intent of the grantor.
That was my question, too. My understanding is that trust income is taxable to the trust, not the beneficiary, unless the income is actually received by the beneficiary.
On the other hand trusts are very often in higher tax brackets than the beneficiaries, so it might be foolish to do what OP says he did.
The wording of the Trust is not specific to whether taxes will be assessed to beneficiaries, separately, or to the Trust itself.
However, in practice, the Fiduciary (me) each year completed the
1041. If $900 is due, each of the three co-Trustees pays $300, and I write the check to the IRS and mail the 1041. Before any of the Beneficiaries turned 21, no money changed hands, i.e. all dividends were reinvested. Thus, no K-1's were issued.
O.K. You have 3 specifi and equal interests in one trust, with a trustee for each interest, in which case it should be treated as three seperate trusts, ecah with a tax ID#, an Exemption, 1/3 of the total income and gains, and their own tax bracket. You will have horrendous bookkeeping problems to keep the funds equitable if you pay income out to just one beneficiary, retain his cash reiinvestedt in the trust, and pay taxes on the other 2/3, or would you give him the income but charge him 1/3 of the tax in the trust?.
Now at 21 if that beneficiary's trust is distributing cash income to him. a K-1 must be issued telling him what his tax consequences are. You are right that if all the income is reinvested no K-1s are needed
For those unfamiliar with trust taxation - which may include the fiduciary of the trust being discussed - also keep in mind that words have very specific meanings in the tax world.
For example, take the word distribution or distributed or more specifically "Distributed Income" from the front page of the trust return. On the return it is NOT talking about whether the income beneficiaries are actually getting any cash. It IS talking about whether the income beneficiaries are PAYING TAX on the income assigned to them - there is a BIG difference.
Mr. Fiduciary - if you are NOT a tax professional well versed in trust taxation issues RUN, do NOT walk, to a tax pro who understands trust taxation. You could be opening yourself up for a world of private ligitation if you do something wrong, no matter how honorable your intentions are.
Get professional help NOW, Gene E. Utterback, EA, RFC, ABA
You are in WAY over your head, you need professional help and you need it soon.
If $900 is due why are you collecting it from the co-trustees and not the beneficiaries? The beneficiaries are the ones who get the money from the trust, the tax is their responsibility - either by passing the taxable income through to them via the K-1s or by paying it from trust assets. Collecting it from the trustees is patently improper.
With the caveat that there is no where near enough info available from you for me to tell you exactly how and what to do, consider this - if the trust had reportable income AND was allowed to pay the tax directly, it could still distribute MILLIONS of dollars to the beneficaries without ever supplying them with a K-1 - from a purely technical standpoint of course.
Also consider that IF a trust document is at all unclear or ambigious about how to do something, then you MUST follow local law as it pertains to trusts. For example, consider capital gain distributions from a mutual fund. Most of us think of these like regular dividends because the fund manager generated them but that may not be correct.
In Maryland, if the trust document is silent then capital gain distributions are not considered income and may not be available to pass out to the beneficiaries BUT the beneficiaries are still responsible for paying the taxes on their share of them. It all depends on what the document says and whether it is being interpreted correctly.
Consider another common situation - a bypass trust. These are very common in second marriages - one parent will set up a bypass trust to shield some of their assets from Estate tax. By placing them in a bypass trust the assets can be used for the benefit of the surviving spouse with the residual going to the remainder beneficiary upon the surviving spouse's death. Very common situation. This gives the fiduciary BOTH an income beneficiary and a residual beneficiary whose goals are vastly different.
Now for the $64M question - HOW should the investments be managed - for growth or income? Remember, the fiduciary has a duty to BOTH beneficiaries. The surviving spouse wants the assets to produce an income stream so they can maintain a standard of living, but doing that will almost certainly stunt growth, which is what concerns the residual beneficiary.
I'll agree with the proposition in general. But my understanding (I don't do returns so I not be completely accurate in this) is that taxation of trusts is not the same as taxation of partnerships, even though both use K-1's, and that a trust distribution generally requires money or property to be removed from the trust.
I am unaware of this Maryland law, but I think when gains are retained the trust pays the tax on the gains If the trustee wishes to distribute those trust taxed gains, he can distribute corpus ( tax free to the beneficiary, and only after all income is distributed). Normally he cannot distribute the tax liability for gains, only income If the trust specifically says gains can be considered income he can distribute the gains as income, and the beneficary pays tax on them, even if the cash is left in the trust..
I agree with your statement that the actual K-1 distributions need not be of the cash income. The beneficiary pays what is said on the K-1s but can leave the income in the trust for growth. . Actual money distributions includes on.Line 10 of Schedule B of 1041 "other amounts paid, credited or otherwise required to be distributed". So, by "crediting" the beneficiary with income the beneficary is taxed on it and the cash stays in the trust.. This line 10 should include any money distribution of corpus.
You also said
If that actually happened (a trust with income distributing MILLIONS of $$ ) the beneficiary gets a K-1 for all the income, the remainder of the "MILLIONS" would be from corpus and the trust would pay no tax since all the income was distributed as the first $$ of the MILLIONS..
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