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Properly Claiming Distribution on Irrevocable Trusts

 
 
Jonathan
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      01-08-2007, 04:11 AM
I am the executor of an irrevocable trust which until this
year has never made a distribution to beneficiaries (nor
have I have withdrawn money to cover my expenses as
executor). The trust has its own tax ID so I have always
handled capital gains, etc. through that tax ID.

This year, however, I liquidated some assets with the intent
of distributing to the beneficiaries.

I am not clear how to treat this for tax purposes...do the
beneficiaries claim their share of the distribution as
"Miscellaneous Income" or is there some other way to do
this? One thought I had (for simplicity) was to claim the
entire distribution as my own (again as Misc Income) and
then gift the other beneficiaries (who are all family
members) their share. The gifts would all be under the $11K
limit so in that case I would be the only one with a
slightly more complicated return.

Thanks in advance.
Jonathan

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joetaxpayer
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      01-09-2007, 02:58 AM
Jonathan wrote:

> I am the executor of an irrevocable trust which until this
> year has never made a distribution to beneficiaries (nor
> have I have withdrawn money to cover my expenses as
> executor). The trust has its own tax ID so I have always
> handled capital gains, etc. through that tax ID.
>
> This year, however, I liquidated some assets with the intent
> of distributing to the beneficiaries.
>
> I am not clear how to treat this for tax purposes...do the
> beneficiaries claim their share of the distribution as
> "Miscellaneous Income" or is there some other way to do
> this? One thought I had (for simplicity) was to claim the
> entire distribution as my own (again as Misc Income) and
> then gift the other beneficiaries (who are all family
> members) their share. The gifts would all be under the $11K
> limit so in that case I would be the only one with a
> slightly more complicated return.


First, you need to understand what the trust's distribution
rules are. An irrevocable trust should have a document
spelling that out, it usually isn't at the discretion of the
trustee. Second, tax rates for capital gains or dividends
within a trust are pretty high right from the start. I take
it you've been handling that through the 1041 and its
supporting forms? When you distribute to the beneficiaries,
you use a K-1, and they are sent money along with the K-1's
explanation of what that money represents, cap gain,
dividend, etc. You should not be taking it, and 'gifting'.
Each beneficiary winds up paying tax at his/her own rate.

JOE

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Herb Smith
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      01-09-2007, 02:58 AM
Jonathan wrote:

> I am the executor of an irrevocable trust which until this
> year has never made a distribution to beneficiaries (nor
> have I have withdrawn money to cover my expenses as
> executor). The trust has its own tax ID so I have always
> handled capital gains, etc. through that tax ID.
>
> This year, however, I liquidated some assets with the intent
> of distributing to the beneficiaries.
>
> I am not clear how to treat this for tax purposes...do the
> beneficiaries claim their share of the distribution as
> "Miscellaneous Income" or is there some other way to do
> this? One thought I had (for simplicity) was to claim the
> entire distribution as my own (again as Misc Income) and
> then gift the other beneficiaries (who are all family
> members) their share. The gifts would all be under the $11K
> limit so in that case I would be the only one with a
> slightly more complicated return.


When you are an executor/trustee one of your primary
responsibilities is to LEARN your job. You do this by
reading Pub 559 or the instructions for the 1041 form you
file each year. The latter will tell you how to account for
distributions to beneficiaries, and report them properly on
form(s) K-1 to each recipient.

To get you started, the income is passed to the
beneficiaries as exactly the same type as received by the
trust. IOW, interest is reported as interest, dividends as
dividends, capital gains as capital gains, etc. There is no
miscellaneous income.

Out of curiosity, why would you want to distribute all
taxable income to yourself (and pay the taxes), just so you
can "gift" the same income to the beneficiaries? (BTW, the
gift limit is currently $12,000).

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<< that may be imposed upon the taxpayer. >>
<< >>
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Benjamin Yazersky CPA
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      01-09-2007, 02:58 AM
"Jonathan" <(E-Mail Removed)> wrote:

> I am the executor of an irrevocable trust which until this
> year has never made a distribution to beneficiaries (nor
> have I have withdrawn money to cover my expenses as
> executor). The trust has its own tax ID so I have always
> handled capital gains, etc. through that tax ID.
>
> This year, however, I liquidated some assets with the intent
> of distributing to the beneficiaries.
>
> I am not clear how to treat this for tax purposes...do the
> beneficiaries claim their share of the distribution as
> "Miscellaneous Income" or is there some other way to do
> this? One thought I had (for simplicity) was to claim the
> entire distribution as my own (again as Misc Income) and
> then gift the other beneficiaries (who are all family
> members) their share. The gifts would all be under the $11K
> limit so in that case I would be the only one with a
> slightly more complicated return.


First of all, trust accounting & tax related matters are
really not a do it yourself sort of a thing. You should seek
advice from a CPA and/or attorney.

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.

___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] >>>
-----> real address on hobokeni or hobokenx <-----

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<< that may be imposed upon the taxpayer. >>
<< >>
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gcrofton@comcast.net
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      01-09-2007, 02:58 AM
Jonathan wrote:

> I am the executor of an irrevocable trust which until this
> year has never made a distribution to beneficiaries (nor
> have I have withdrawn money to cover my expenses as
> executor). The trust has its own tax ID so I have always
> handled capital gains, etc. through that tax ID.
>
> This year, however, I liquidated some assets with the intent
> of distributing to the beneficiaries.
>
> I am not clear how to treat this for tax purposes...do the
> beneficiaries claim their share of the distribution as
> "Miscellaneous Income" or is there some other way to do
> this? One thought I had (for simplicity) was to claim the
> entire distribution as my own (again as Misc Income) and
> then gift the other beneficiaries (who are all family
> members) their share. The gifts would all be under the $11K
> limit so in that case I would be the only one with a
> slightly more complicated return.


You need to file a fiduciary tax return, federal Form 1041.
If there are taxable distributions to the beneficiaries,
they will be reported to the beneficiaries on the Form 1041,
Schedule K and Schedules K-1. Each individual beneficiary
who receives a Schedule K-1 will include the various
information from the Schedule K-1 on their individual
personal tax return such as their Federal Form 1040 on its
various forms depending upon the type and character of the
income; however, the primary form used to report income
reported on a K-1 is the Form 1040, Schedule E (page 2).

<< ================================================== ===== >>
<< 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. >>
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ed
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      01-11-2007, 02:57 AM
Jonathan wrote:

> I am the executor of an irrevocable trust which until this
> year has never made a distribution to beneficiaries (nor
> have I have withdrawn money to cover my expenses as
> executor). The trust has its own tax ID so I have always
> handled capital gains, etc. through that tax ID.
>
> This year, however, I liquidated some assets with the intent
> of distributing to the beneficiaries.
>
> I am not clear how to treat this for tax purposes...do the
> beneficiaries claim their share of the distribution as
> "Miscellaneous Income" or is there some other way to do
> this? One thought I had (for simplicity) was to claim the
> entire distribution as my own (again as Misc Income) and
> then gift the other beneficiaries (who are all family
> members) their share. The gifts would all be under the $11K
> limit so in that case I would be the only one with a
> slightly more complicated return.


Whether you paid tax in the past or not is immaterial
because IF there was any taxable income in the past you paid
tax on it in the trust, as you did with any gains.
Therefor, your only consideration is THIS year. You can
pay yourself a Trustee's fee and distribute part or all of
the taxable income (and tax free income), and if you want to
distribute more it is Principal. You can either distribute
the gains to be taxed by the beneficiaries, or pay the gains
tax in the trust and distribute tax free any priincipal.

The language of the trust in regards to distributions should
be followed. The distributions, except for you expense and
fees, need not be equally to all beneficiaires unless the
trust says otherwise.

Any taxable distributions must be made via K-1s, however,
Principal need not be specified as such, but to keep your
accounting straight I would suggest putting it on line 10
and somewhere noted on the K-1s.

Specifically as to your question, distributions of principal
are NOT taxable to anyone. Distributions of taxable income
and capital gains are taxable to the beneficiaries receiving
them (or by the trust if they are retained).

ed

<< ================================================== ===== >>
<< 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 (2006) - All rights reserved. >>
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