Distributing dividends and gains from a complex trust


S

saz

Hi,
I am the Trustee of a Complex Trust set up upon my Mom's death two
years ago. The Trust is for the benefit of her 4 grandchildren. There
were no detailed instructions in her will (as to how the income and
gains were to be handled) except that the proceeds are for the
grandchildren and they receive their equal share upon their 18th
birthday.

This year the Trust generated about $4400 in distributable income. It
seems that I have several choices (I think) as to how I can handle
that tax liability.

1) I can generate 4 Sched K-1 forms, where each kid is responsible for
taxes on about $1100.

2) Two of the kids are in the 0% tax bracket since they have way less
than the standard deduction in other income. They would have to pay
virtually $0 in tax if I generated ONLY 2 Sched K-1 forms and gave
them $2200 each of income to pay taxes on.

3) I generate no Sched K-1 and let the Trust pay the tax on it all and
any penalties too.

In all three cases, I was planning to leave all the income, gains, etc
in the Trust to grow for the benefit of the kids which is what Mom
expected. My preference would be 2). Is this legal and fair ?

Thanks,
Steve
 
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S

Shyster1040

Since the trust is a complex trust (i.e., the trustee has discretion to
accumulate or distribute the fiduciary accounting income of the trust),
the beneficiaries are not taxed on the trust's tax accounting income
unless the trust makes an actual distribution to them (specifically, the
beneficiaries of a complex trust are only taxed on the tax accounting
income allocated to amounts that the trust is required to distribute to
them and to amounts that the trust actually distibutes to them.

Thus, if you're going to retain the gains in the trust, then none of the
tax accounting income will be taxed to the beneficiaries but will instead
be taxed to the trust. The K-1s to the beneficiaries would therefore
report $0 income and expenses.

In addition, you need to keep in mind that some of the capital gains may
be excluded from the trust's taxable income if those gains are allocated
to principal instead of to income.

Based on your posting, I would very strongly suggest that you spend an
hour or two talking to a CPA with complex trust accounting and tax return
experience.
 

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