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Old 01-25-2014, 04:51 PM
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K-1 for a trust

How does the trust's trustee report distributions to beneficiaries of a trust? My understanding is that the trustee must send each beneficiary a K-1 that shows their share of the distribution and they attach the K-1 to their individual return. Is that correct? Does the trustee need to report anything to the IRS about the distributions? What form is necessary to do this? Thanks for any assistance.



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Old 01-26-2014, 01:49 AM
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Originally Posted by FBN2014 View Post


#1;How does the trust's trustee report distributions to beneficiaries of a trust? My understanding is that the trustee must send each beneficiary a K-1 that shows their share of the distribution and they attach the K-1 to their individual return. Is that correct?


#2;Does the trustee need to report anything to the IRS about the distributions? What form is necessary to do this? Thanks for any assistance.
#1;Revocable and irrevocable trusts are treated quite differently under U.S. tax law. The main reason for this disparity is that the assets of a revocable trust are considered the property of the grantor, while an irrevocable trust is treated as an independent legal entity that owns its assets. Creating a trust may carry unexpected tax consequences, some of which may be unfavorable.in the case of irrevocable trust, the trustee of an irrevocable trust must complete and file Form 1041 to report trust income, as long as the trust earned more than $600 during the tax year. Irrevocable trusts are taxed on income in much the same way as individuals. The trustee must also file Schedule K-1 and deliver copies of it to each beneficiary who received a distribution from the trust during the tax year.in the case of revocable trust, a trust may earn income in the form of interest on funds held in a bank account, for example, or rent paid by a tenant living in a house owned by the trust. If you create a revocable trust, known as a grantor trust by the IRS, all trust income is taxed as your personal income, and you must report it on your Form 1040 tax return even if it remains in the trust. You must also complete a small identification section of Form 1041 and file it, although you don't have to report trust income.so, a beneficiary of a revocable trust does not have to pay income taxes on his distributions from the trust since the trust grantor has already paid these taxes. Distributions to beneficiaries of an irrevocable trust, however, are taxable to beneficiaries at ordinary income tax rates.

#2;it depends; The factors that determine who is responsible for paying the taxes on trust income depends on the stipulations of the trust document and whether the grantor retains the right to revoke it.once a grantor transfers assets to a living trust, as in revocable case, any income accrued to the principal is taxable. The trust must report all trust income on Form 1041; however, this does not necessarily mean the trust is liable for paying the income tax. When the trust document requires the trustee to distribute trust income to the beneficiaries, the beneficiaries are responsible for all tax payments on those distributions. If the trustee has discretion as to the timing and amount of income distributions, then the trust is responsible for the tax payments, irrespective of how and when the trustee decides to distribute the income. The IRS imposes special rules on the grantor of a living trust if he retains the authority to revoke the trust. In this case, the IRS still requires the filing of a 1041 on behalf of the trust, but the grantor is personally responsible for reporting the trust income on a personal tax return and paying the appropriate tax. Therefore, regardless of whether the trust distributes all income to beneficiaries, the grantor and not the beneficiaries, is responsible for the tax.as mentioned previously in another post, at some point, the terms of the living trust may require the trustee to distribute all or some of the trust assets, also known as the principal, to beneficiaries. Since the trust principal and any income remaining in the trust for prior years was already taxed, beneficiaries will receive these distributions tax free. However, if the trustee has the authority to retain trust income, meaning the trust document doesn’t require its distribution to beneficiaries, the trust is responsible for paying the tax on the income in the year it accrued even if the income is earned and distributed in the same year.



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Old 01-26-2014, 11:27 AM
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This involved 2 types of trusts: one was an irrevocable life insurance trust, the other was a revocable trust that became irrevocable at the grantor's death.



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Old 01-26-2014, 12:20 PM
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Originally Posted by FBN2014 View Post

#1;This involved 2 types of trusts: one was an irrevocable life insurance trust,


#2;the other was a revocable trust that became irrevocable at the grantor's death.
#1;I guess life insurance trusts commonly employ trusts that are irrevocable but treated as grantor trusts for income tax purposes. I guess you need to check it with thetrust/trustee. Irrevocable trusts, however, are useful in life insurance planning. For instance, a properly structured irrevocable life insurance trust can avoid probate costs and fees, and estate taxes on the insurance proceeds paid to the trust upon the grantor's death.The reason is that an irrevocable trust will be treated as a completed transfer for gift and estate tax purposes but be disregarded for income tax purposes. In other words, the grantor will be taxed on all of the trust income, even though the transfer to the trust is respected for gift and estate tax purposes. The basic rule (subject to a number of exceptions which we will ignore) is that items of income and deduction attributable to any portion of a trust that is treated as owned by the grantor are not reported by the trust on its own income tax return (Form 1041) but are shown on a separate statement to be attached to that form. In other words, the trust obtains a TIN and completes only the entity part of the return and then sets forth all income and expenses on an attachment to the 1041.There are, however, several optional methods. First, if the trust has only one person treated as a grantor, then the trust may furnish the name , the TIN for the grantor, and the address of the trust to all “payors” during the taxable year. For this purpose, spouses filing a joint return are treated as one person. A “payor” is anyone who is required to provide information reporting (such as a 1099 or K-1) to the trust.Under this option, if the grantor is also a trustee, no further reporting is required, and no 1041 is needed. If the grantor is not a trustee, then the trustee must provide a detailed statement to the grantor showing all items of income, deduction, and credit of the trust for the year, providing the information necessary to take the items into account in computing the grantor's taxable income, and informing the grantor that the items and other information shown on the statement must be included in the grantor’s own tax return. In order to take advantage of this option, however, the regulations require that the trust obtain a W-9 from the grantor.Under another option, the trust may use the trust’s own TIN for all accounts and all payors of income and then prepare timely 1099’s to report all significant categories of trust income. If the grantor is not a trustee, the trust must then provide the grantor a statement and the information referred to above. In that case, the trust does not file a 1041.When there are multiple “grantors,” the trust must use its own TIN and then prepare 1099s for the grantors along with a statement and the information referred to above. There are special rules for changing from one reporting method to another.



#2; Probably and Probably Not. A lot depends on the trust. It is hard to say without seeing the trust. But in general, a trust becomes irrevocable upon ones death, that said, the trust could leave everything to a surviving spouse. A popular planning technique for moderate estates is to use what is often called an AB trust. This trust splits into two separate trusts on the death of the first spouse and one of the trusts, usually the b trust, becomes irrevocable but the a trust is still revocable by the surviving spouse.sograntors need to set up a trust that provides asset protection for the beneficiaries. In other words you might have some protection under the terms of the trust, but you will have to look at the trust to determine if it calls for an outright distribution or if it maintains asset under trust leaving a distribution trustee with the sole authority to make distributions; revocable living trusts become irrevocable when the grantor or settlor , the person who created the trust dies. Only the grantor can revoke the trust, so death makes changes impossible. Control will pass to a successor trustee chosen by the grantor, but she can't revoke the trust; all she can do is carry out the grantor's instructions. The trustee of an irrevocable trust must complete and file Form 1041 to report trust income, as long as the trust earned more than $600 during the tax year. Irrevocable trusts are taxed on income in much the same way as individuals. The trustee must also file Sch K-1 and deliver copies of it to each beneficiary who received a distribution from the trust during the tax year. Distributions to beneficiaries of an irrevocable trust, however, are taxable to beneficiaries at ordinary income tax rates. The first tax return for the irrevocable trust is due on the 15th day of the 4th month following the close of the trust's tax year. The calendar year method is the default tax year for trusts, which ends on Dec. 31.



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Old 01-26-2014, 11:36 AM
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The trust language gives the trustee discretion as to whether to distribute income and principal. So are you saying that even if the trust makes distributions of income that the trust has to pay tax on that income that it already distributed and then the beneficiaries would not have to pay the tax? I know that trusts are taxed in a much higher tax bracket then an individual so my thinking is to distribute the income each year to avoid the higher trust taxation rates. Also, are capital gains within the trust taxed at a higher rate then individual beneficiary rates?



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Old 03-07-2014, 12:24 PM
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Please respond to my last post. Your previous answer seemed to indicated that with an irrevocable trust that was originally revocable but became irrevocable at death and where the trustee has discretion as to whether to distribute to the beneficiaries; the trustee is then required to pay the income taxes at the irrevocable trust's tax rate even if the trustee did make distributions of income? Is that correct or am I misinterpreting what you wrote? Thanks



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Old 03-07-2014, 05:46 PM
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#1;Your previous answer seemed to indicated that with an irrevocable trust that was originally revocable but became irrevocable at death and where the trustee has discretion as to whether to distribute to the beneficiaries;


#2; the trustee is then required to pay the income taxes at the irrevocable trust's tax rate even if the trustee did make distributions of income? Is that correct or am I misinterpreting what you wrote? Thanks
#1;correct. You can make changes to a revocable trust at any time, but when you die the trust becomes irrevocable since you no longer have the capability to revoke it;it depends; the new irrevocable can be either simple or complex trust, either one of them I guess, depending on the situation.

#2;No;I should say ITDEPENDS;the trust can deduct D/B of income made to beneficiaries on 1041; the Income Distribution Deduction ,Sch B of 1041, is unique to trusts/estate I guess. When trust gives income payments to beneficiaries, those payments carry income tax consequences for the trust and for the beneficiaries. The trust or estate receives a deduction, and the beneficiaries must include the amount deducted from the Form 1041 on their individual Form 1040. if you’re preparing the return for the trust , as simple trust, you can ignore Sch B, line 8. If yours is a complex trust and you’re either not required to distribute all income or you distributed more than just income, you need to calculate trust accounting income;The decedent’s final income tax return (both state and federal) needs to be taken care of by either the personal representative (if there is a probate estate) and if not, then by the trustee. In addition, it needs to be determined if a federal estate tax return or state inheritance tax return is required. Again, the personal representative would be responsible for such filings if there is a probate estate, and if not, then the trustee is responsible.



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Old 09-20-2014, 10:46 PM
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Another Irrevocable Trust Distribution Question

Does anyone know if it is ok as the Trustee to distribute taxable distributions from an annuity in different amounts to the trust's beneficiaries to minimize the taxes paid. I have 4 brothers and sisters that are all in different income tax brackets and I am wondering if (for example) I can give 2 of them more income than the other 2 legally. Say $12,000 to 2 of them and $3,000 to the other two for the $30,000 I need to distribute. Thanks.



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Old 09-20-2014, 11:07 PM
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Originally Posted by BachelorF16 View Post
Does anyone know if it is ok as the Trustee to distribute taxable distributions from an annuity in different amounts to the trust's beneficiaries to minimize the taxes paid. I have 4 brothers and sisters that are all in different income tax brackets and I am wondering if (for example) I can give 2 of them more income than the other 2 legally. Say $12,000 to 2 of them and $3,000 to the other two for the $30,000 I need to distribute. Thanks.
Distributions to beneficiaries could be governed by the trust document. Its the first place to start. Hopefully, it will describe the trustee's obligations and discretion in making distributions. Distributions can be from income or corpus. you need to understand what the trust's distributionrules are. An irrevocable trust should have a document
spelling that out, it usually isn't at the discretion of the trustee; As you have 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.
Basically, Trust beneficiaries need to consider the potential several different taxation issues in connection with the trust. Distributions from the trust may result in federal or state taxation liabilities. At some point in time, a trust beneficiary will pay some level of taxes. The question is simply when and how much, and the answer changes depending on the type of trust involved and the timing of any distributions from the trust. An irrevocable trust may create tax liability from year to year, even if the beneficiary does not actually receive any distributions from the trust.



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