trust income distribution

The following quote I found from this group's archives is pretty close to my questions:

KAK wrote: >> Can I just not claim the line >> 18 and schedule B Income Distribution Deduction? > > Well, no--the income distribution issues and the K-1 rules > aren't an "election" that can be made. If a distribution > was made to an income beneficiary, then the K-1 will have > to be filled out. > > Ed Zollars, CPA Phoenix, AZ

I'm trying to research what a 1041 for a family member trust (died in

2007) would look like.

I've determined it is a simple trust for 2007 and there is about $10K of interest income in 2007, with five equal beneficiaries.

Question 1: can the trust simply not take the income distributions deduction and pay the tax at trust tax rates? Then there would be no need to send K-1's to the beneficiaries? The tax rates look higher, but the simplicity of distributing tax free money might make up for it.

Question 2: if the trustor died in 2007, then it is possible that trust income required to be distirbuted annually has not actually been distributed before year end. But if K-1's are issued to each beneficiary and the income distribution deduction is taken on the 1041, the beneficiaries might suddenly have a 2007 tax hit for cash they didn't receive until early 2008. But, then I read that the trust can pay estimated taxes and pass the estimated payments through to the beneficiaries. Will this avoid any underpayment penalty for the beneficiaries due to cash they got a 2007 K-1 for, but didn't physically receive until 2008?

Reply to
Noman
Loading thread data ...

Elsewhere in this thread someone suggested the trust documents should state whether distributions are mandatory or optional. You may not have the choice. And if you do, why do you think the beneficiaries won't care? $2000 is still a lot of money to some people.

Pull a copy of a blank 1041. Mine looks like this: Income Line 1 - Interest - $$ Line 2a - Ordinary Dividends $$ Line 2b - Qualified dividends $$ Line 4 - Cap gain/loss (need 1041 sch D) - $$ Line 9 - Total income - $$

Deductions Line 18 - Income distribution deduction - $$ (this equals line 9)

A schedule K is attached reflecting the above numbers as income to the beneficiary, along with a check for the line 18 total.

In your case, Sch K is duplicated 5 times and the numbers all 1/5 of the amount (and you say you have only interest, so just that one number)

A trust has a bit of time to distribute for prior year, I believe 2/28, but not sure. The beneficiaries put it on their taxes for 2007 even though they actually received the money in Jan/Feb 08.

It's not that complicated once you go through the process, and to save ten minutes not doing the distribution is really throwing money away. But again, you must review the trust docs. What is its purpose? When does it end? These things should all be spelled out pretty clearly in the docs.

formatting link

Reply to
joetaxpayer

This trust says "Mandatory income payments shall be made at least annually.". My question is , is it a choice for the estate to pay the tax instead of the beneficiaries? The quote I found in the archives seems to say it's not an option, but I have read in at least one reputable book that it may be. It is true that the estate will pay a higher marginal tax than any of the beneficiaries.

The instructions for Form 1041 almost make it sound optional. "*If* the trust claims an income distribution deduction, then attach schedule K-1 for each beneficiary". Can the trust simply not take the deduction, not issue K-1, and pay the tax itself (whether or not this makes sense at the tax rates involved). The income would still be distributed, just not taxable to the beneficiaries.

I read that a complex trust can make this choice of 65 days, but not a simple trust. What I am thinking about is estimated taxes and underpayment penalaties. The trust has been earning interest income throughout the year, but no estimated tax payments were made. If the annual share of money is paid to the beneficiaries, say, by Jan 15th

2008, is it treated as being received on the last day of 2007 for underpayment purposes? I also read that the trust can make estimated payments and transfer them to the beneficiaries, so would it be good to do this by January 15th?
Reply to
Noman

I fear you may be making this far more complicated than it need be. $10,000 in dividends will impact the 5 beneficiaries by $2000 each, and a $300 tax due (or less depending on their bracket.) This sum is too low to worry about estimated payments or quarterly taxes. Page 2 of the 1041 instructions suggest "a trust or decedent's estate sometimes is referred to as a "pass-through" entity. The beneficiary, and not the trust or decedent's estate, pays income tax on his distributive share of income." I understand there may be an option for the trust to pay taxes at its own rate, but what benefit is that? The trustee still must file the

1041, and a K-1 for the beneficiaries is hardly a burden. JOE
Reply to
joetaxpayer

joetaxpayer wrote: ...

...

On top of which, by paying a higher marginal tax rate via the trust, the beneficiaries just might have a valid complaint the Trustee is not exercising proper fiduciary responsibility on their behalf.

If I were one (a beneficiary, that is) I'd certainly question this as being a proper way in which to manage the Trust and ask for relief (directly, first, indirectly if that became required although for the size discussed probably would only make the noise; the other effort probably not worth the loss other than "the principle of the thing").

Reply to
dpb

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.