Properly Claiming Distribution on Irrevocable Trusts

Discussion in 'Tax' started by Jonathan, Jan 8, 2007.

  1. Jonathan

    Jonathan Guest

    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    have I have withdrawn money to cover my expenses as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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    Jonathan, Jan 8, 2007
    #1
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  2. Jonathan

    joetaxpayer Guest

    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 have I have withdrawn money to cover my expenses as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

    << ======================================================= >>
    << 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. >>
    << ======================================================= >>
     
    joetaxpayer, Jan 9, 2007
    #2
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  3. Jonathan

    Herb Smith Guest

    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).

    << ======================================================= >>
    << 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. >>
    << ======================================================= >>
     
    Herb Smith, Jan 9, 2007
    #3
  4. "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 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 <-----

    << ======================================================= >>
    << 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. >>
    << ======================================================= >>
     
    Benjamin Yazersky CPA, Jan 9, 2007
    #4
  5. Jonathan

    Guest

    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. >>
    << Copyright (2006) - All rights reserved. >>
    << ======================================================= >>
     
    , Jan 9, 2007
    #5
  6. Jonathan

    ed Guest

    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. >>
    << ======================================================= >>
     
    ed, Jan 11, 2007
    #6
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