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Posted by Stuart Bronstein on June 13, 2008, 4:52 pm
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Here's another one I hope someone has some input from.
An irrevocable trust has taxable income, which is recognizes and is
included on a 1041. All income is distributed to the beneficiaries so
the trust gets a deduction in the amount of the distribution and ends
up with no taxable income. Ok so far?
But take a slightly different situation. The trust does not distribute
the income in the current year, but retains it. Then it distributes
the income the following year. Assuming that the money became part of
the principal, is it deducted from the trust's income the following
year and included in the beneficiary's? Or is it treated as a gift or
distribution of principal?
To confuse this a bit further, what happens if the trust recognizes the
trust income, distributes the income but does not take the deduction in
the current year?
Thanks for your insight.
Stu
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Posted by joetaxpayer on June 13, 2008, 5:59 pm
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Stuart Bronstein wrote:
> An irrevocable trust has taxable income, which is recognizes and is
> included on a 1041. All income is distributed to the beneficiaries so
> the trust gets a deduction in the amount of the distribution and ends
> up with no taxable income. Ok so far?
Yes. The trust passes all income along. Bene's get K1s and pay the tax
on the income.
> But take a slightly different situation. The trust does not distribute
> the income in the current year, but retains it. Then it distributes
> the income the following year.
Huh? 2007 is over. The trustee, if a complex trust not 'having' to
distribute income, retained it, and the trust paid the tax. Now it's all
principal (including unrealized gains/losses). Now, in 2008, it has
three things to do, take the 2008 income, and distribute it or not
(that's two) and distribute any principal.
> Assuming that the money became part of
> the principal, is it deducted from the trust's income the following
> year and included in the beneficiary's? Or is it treated as a gift or
> distribution of principal?
It's a distribution of principal, if I read this right.
> To confuse this a bit further, what happens if the trust recognizes the
> trust income, distributes the income but does not take the deduction in
> the current year?
There is a requirement that the trustee be slapped with a white glove.
This is contrary to correct bookkeeping. You go through the 1041 set and
if income is distributed via K1, the beneficiaries pay the tax, and the
trust, not. This question sounds like the trustee deciding to have the
trust retain earnings (and therefore pay tax at the trust rates) but
distribute principal to the bene's. I am not confused so much as I am
shaking my head why one would do this. I know some kind soul might have
a scenario for me that offers "but the K1 income to this beneficiary
will have such and such an impact....". I don't claim to know it all, I
am certain I don't. But such a scenario (regarding the trust) seems
unlikely.
Joe
www.blog.joetaxpayer.com
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Posted by Stuart Bronstein on June 13, 2008, 6:32 pm
Please log in for more thread options > Stuart Bronstein wrote:
>
>> But take a slightly different situation. The trust does not
>> distribute the income in the current year, but retains it. Then
>> it distributes the income the following year.
>
> Huh? 2007 is over. The trustee, if a complex trust not 'having' to
> distribute income, retained it, and the trust paid the tax. Now
> it's all principal (including unrealized gains/losses). Now, in
> 2008, it has three things to do, take the 2008 income, and
> distribute it or not (that's two) and distribute any principal.
The 2007 returns weren't filed yet. The trustee took them to someone
at H&R Block who made a mistake, and I'm working with another
preparer to get it straightened out.
The current preparer wants to file the 1041 claiming all the trust's
income for tax purposes, even though it passed through to the
beneficiary (the surviving spouse). One problem was that the 1099
was reported on the beneficiary's SS# rather than on the trust's
EID#. So that needs to be straightened out.
Now, trust distributions are reported on a K-1 rather than a 1099?
Does that mean the trust can distribute depreciation as well as
income to the beneficiary?
>> Assuming that the money became part of
>> the principal, is it deducted from the trust's income the
>> following year and included in the beneficiary's? Or is it
>> treated as a gift or distribution of principal?
>
> It's a distribution of principal, if I read this right.
Thanks, that's what I was hoping. I'll look into it a bit more.
> You go through the
> 1041 set and if income is distributed via K1, the beneficiaries
> pay the tax, and the trust, not. This question sounds like the
> trustee deciding to have the trust retain earnings (and therefore
> pay tax at the trust rates) but distribute principal to the
> bene's. I am not confused so much as I am shaking my head why one
> would do this.
Nobody wants to do it. It's a matter of straightening out one
mistake made by the payor of income that needs to be recognized,
compounded by the mistakes of an H&R Block preparer.
> I know some kind soul might have a scenario for me
> that offers "but the K1 income to this beneficiary will have such
> and such an impact....". I don't claim to know it all, I am
> certain I don't. But such a scenario (regarding the trust) seems
> unlikely.
This is the same matter I asked about a few weeks ago, when teh HRB
preparer did the returns properly, and then did them again but giving
the trust the beneficiary's income and the beneficiary the trust's
income (the funds were distributed so the beneficiary should
recognize it all in any case). The preparer determined that if the
returns were prepared the right way the total tax would be about
$20,000 more than if done the other way. It made no sense to me.
Now I discover that in doing the returns both ways, in the second
scenario she included the same $100,000 of income on both returns and
deducted it on neither.
Stu
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Posted by Mark Bole on June 13, 2008, 7:29 pm
Please log in for more thread options Stuart Bronstein wrote:
>> Stuart Bronstein wrote:
[...]
> Now, trust distributions are reported on a K-1 rather than a 1099?
> Does that mean the trust can distribute depreciation as well as
> income to the beneficiary?
[...]
> This is the same matter I asked about a few weeks ago, when teh HRB
> preparer did the returns properly, and then did them again but giving
> the trust the beneficiary's income and the beneficiary the trust's
> income (the funds were distributed so the beneficiary should
> recognize it all in any case). The preparer determined that if the
> returns were prepared the right way the total tax would be about
> $20,000 more than if done the other way. It made no sense to me.
>
> Now I discover that in doing the returns both ways, in the second
> scenario she included the same $100,000 of income on both returns and
> deducted it on neither.
And I remember getting confused when I tried to be helpful back in the
earlier thread, too!
At the risk of stating the obvious, whether this is a simple or complex
trust really needs to be straightened out. If a simple trust and all
income is required to be distributed "currently", then I don't think
it's too late to send out checks for 2007, and report the distributed,
taxable income via K-1's. The actual constructive receipt by the
beneficiaries does not have to happen prior to Dec 31st.
H&R Block is a large enough organization that there should be at least a
few very knowledgeable and experienced people in the year-round or
high-end offices, so it should be possible for the client to ask
management to get someone else involved at a higher level if there is
evidence that the preparation is being handled poorly. Block provides
some basic guarantees on their work, so it is in their interest to get
this handled properly.
-Mark Bole
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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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<< Copyright (2007) - All rights reserved. >>
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Posted by dpb on June 13, 2008, 8:36 pm
Please log in for more thread options Mark Bole wrote:
> Stuart Bronstein wrote:
...
> At the risk of stating the obvious, whether this is a simple or complex
> trust really needs to be straightened out. If a simple trust and all
> income is required to be distributed "currently", then I don't think
> it's too late to send out checks for 2007, and report the distributed,
> taxable income via K-1's. The actual constructive receipt by the
> beneficiaries does not have to happen prior to Dec 31st.
IIRC, the fiduciary has 65 days from the end of the tax year to make
payments or credits to the beneficiary and be counted as being paid or
credited on the last day of that tax year.
To straighten this out definitely need to start w/ determining the
actual terms of the trust and then go from there.
I know as trustee, how it works when one does it on time and actually
makes the distributions; I have no idea what happens in a case where
distributions aren't paid (nor taxes, either) and what would be the
proper way in which to approach it.
> H&R Block is a large enough organization that there should be at least a
> few very knowledgeable and experienced people in the year-round or
> high-end offices, so it should be possible for the client to ask
> management to get someone else involved at a higher level if there is
> evidence that the preparation is being handled poorly. Block provides
> some basic guarantees on their work, so it is in their interest to get
> this handled properly.
Nice in theory, how well it will work in practice I don't know... :)
If OP were in a place like here, there is no such thing as a permanent
or "high-end" H&RB office and I've no idea how one would get ahold of
such an animal... :(
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<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
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