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Old 11-16-2015, 02:15 PM
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Does K1 Dollars for Irrevocable Trust have to be Distributed?

We have an irrevocable trust that generates income each year that we K1 to a beneficiary with the lowest tax bracket or effective taxes to reduce overall taxes paid. The question is does there actually have to be a transfer of funds to that individual or can they be kept in the trust? In other words can you K1 for tax purposes and leave the money in the trust?



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Old 11-16-2015, 11:56 PM
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We have an irrevocable trust that generates income each year that we K1 to a beneficiary with the lowest tax bracket or effective taxes to reduce overall taxes paid.====>> Trust income is generally taxed at higher rates than personal income, and distributions are deductible from the trust income, so both trust and beneficiaries benefit from distributions, whether from income or principal. A mass distribution of all assets on the death of a trust grantor may be subject to estate taxes, but those have a $5.45 million exemption for 2015 I guess, so most estates won't produce trust or beneficiary taxes.For irrevocable trust, the grantor of a irrevocable trust needs to put all assets into the hands of a trustee, managing the trust for income and to parcel out the proceeds to the beneficiary. When and how those assets get passed out will affect your taxes and those of the trust; the trust is taxed on any income earned from investments or other assets, but payments to the beneficiary are deducted. Distributions to the beneficiary in any year are taxed on the beneficiary’s individual return. The amounts are reported along with other income of the beneficiary. if the beneficiary has several family members as trust beneficiaries, the trustee can reduce the tax implications by splitting distributions among individuals. Distributions also can be spread over several years, rather than being made in a lump sum. Some large irrevocable trusts provide for income to be allocated over many years so that no beneficiary is taxed for a large sum in any one year.


The question is does there actually have to be a transfer of funds to that individual or can they be kept in the trust? In other words can you K1 for tax purposes and leave the money in the trust?=====>>I guess it depends; a simple irrevocab le trust can not retain any income earned by the trust; aslongas it is considered “complex trust, then the trsut can retain some current income within the trust



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Old 11-17-2015, 10:02 AM
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Clarification

with regards to the second answer you indicated that if complex, WHICH IT IS, then it can keep some of the income. Well, that is the question, say it earned $60,000 with rental income and dividends and then it K1'd to a beneficiary for tax purposes, can it keep the whole $60,000? The complex testamentary trust says it can be distributed or kept, which in this case we want to keep, but transfer the tax liability. Please elaborate. Thank you.



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Old 11-17-2015, 10:21 AM
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Originally Posted by Jerryd57 View Post
with regards to the second answer you indicated that if complex, WHICH IT IS, then it can keep some of the income. Well, that is the question, say it earned $60,000 with rental income and dividends and then it K1'd to a beneficiary for tax purposes, can it keep the whole $60,000? The complex testamentary trust says it can be distributed or kept, which in this case we want to keep, but transfer the tax liability. Please elaborate. Thank you.
in a complex trust, trust income and expenses for the trust are separated by principal and income. The income part of the trust can be distributed to the beneficiaries, and the principal will stay within the trust until the trust expires, regardless of whether there are losses to the amount of principal within the trust. At that time, the expenses can be allocated to both principal and income. This allocation is determined by state law. Expenses for the trust include any item that is relevant and allowable for managing the trust, including financial management fees, state taxes and so on. The ordinary income from the trust can be from various sources, including interest, dividends, rental income, royalties, and so on, and this income can be distributed to the beneficiaries or stay inside the trust and the trust will pay taxes on the income. The capital gains and losses will stay inside the trust until its expiration. The trust instrument will determine whether tax



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Old 11-17-2015, 10:31 AM
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More Clarification

It appeared your answer was cut off at the end, but it was not addressing the question was can it K1 tax liability while keeping the dollars of the K1 in the trust. Also this trust allows for distribution of principal and other earned income for beneficiaries as needed during the life of one member, then it ends when that member dies and then is distributed to the other beneficiaries after that member's death. But again the question is not about income, expenses, principal, etc., it is simply, can it K1 earnings for tax purposes and not distribute that income? Thank you.



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Old 11-17-2015, 09:44 PM
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Originally Posted by Jerryd57 View Post
It appeared your answer was cut off at the end, but it was not addressing the question was can it K1 tax liability while keeping the dollars of the K1 in the trust. Also this trust allows for distribution of principal and other earned income for beneficiaries as needed during the life of one member, then it ends when that member dies and then is distributed to the other beneficiaries after that member's death. But again the question is not about income, expenses, principal, etc., it is simply, can it K1 earnings for tax purposes and not distribute that income? Thank you.
As said, a complex irrevocable trust is permitted by law to retain income, distributing only a portion to a beneficiary.In general, A complex trust is allowed to retain SOME of its earnings from year to year.If the trustee has control over the distributions , then, he can decide when and if the beneficiary receives money and how much under the discretionary distribution.Current income of the trust is figured under the state law applicable to the trust and the trust's governing document.So basically, if the trust document states that the trustee must distribute the income generated by the trust's assets, he must do so according to specific instructions included in the trust. Some trusts specify exactly how the trustee must distribute income, while others designate a beneficiary and allow the trustee to control income distribution. The trustee cannot distribute any assets or income from the trust until the survivorship period passes. The exact length of this period appears in the trust document, but it is usually 30 days .Aslongas the full amount of th eincome is distributed, it is shown on Sch B and is not required to be shown on the beneficiary’s Sch K-1 while if you distributed half or part of the th eincoem to the the beneficiary, all the 2015 income will be taxed to the beneficiary, and accordingly you will need to complete a Sch K-1 for the beneficiary.



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