Estates, Trusts, & K-1's


P

ps56k

Quick question -
that has been lingering with with my wife's family...
Her mom died a few years ago...
Her mom's house was recently sold,
and the proceeds went into her Trust.

None of the five kids/bene's have received any payouts from the Trust.

There has been some rumbling about the Trust and issuing a K-1.

Thoughts, comments, or pointers ?
 
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P

ps56k

ps56k said:
Quick question -
that has been lingering with with my wife's family...
Her mom died a few years ago...
Her mom's house was recently sold,
and the proceeds went into her Trust.

None of the five kids/bene's have received any payouts from the Trust.

There has been some rumbling about the Trust and issuing a K-1.

Thoughts, comments, or pointers ?

--
just as a follwup from a couple of the bene's points of view -
A - since no distributions were made, then no income would be reported
anyway
B - since if a cap loss was incurred in the Trust,
but not reported / passed thru via issuing a K-1 -
it's just unfortunate for each bene on their tax-loss, but not a big deal.
 
J

JoeTaxpayer

just as a follwup from a couple of the bene's points of view -
A - since no distributions were made, then no income would be reported
anyway
B - since if a cap loss was incurred in the Trust,
but not reported / passed thru via issuing a K-1 -
it's just unfortunate for each bene on their tax-loss, but not a big deal.
There's speculation here, but no one asking about the terms of the trust.

The trust documents spell out when/how the assets are to be distributed.
Anything else is guessing from us.

Our irrevocable trust dishes out realized gains (with K-1) each year to
my 13 yr old, but no principal until college.

My MIL's revocable trust will dish out a small percent each year (after
she passes) to each of her two daughters, and on their death, to my
daughter.

It's all about the details.
 
M

Mark Freeland

....

There's speculation here, but no one asking about the terms of the trust.

The trust documents spell out when/how the assets are to be distributed.
Anything else is guessing from us. ....
It's all about the details.
Agree completely. Don't know that much about taxing trusts, but I
believe that for estates, if the will mandates immediate distribution
(e.g. income from property to be distributed), then that income is
taxable to the beneficiaries, regardless of whether it is actually
distributed. Just another example of where the details matter.
 
S

Stuart A. Bronstein

Mark Freeland said:
Agree completely. Don't know that much about taxing trusts, but
I believe that for estates, if the will mandates immediate
distribution (e.g. income from property to be distributed), then
that income is taxable to the beneficiaries, regardless of
whether it is actually distributed. Just another example of
where the details matter.
When talking about a will, as opposed to a trust, there is
essentially no such thing thing as an immediate distribution. All
distributions are subject to estate administration.

Even with a trust, a particular asset can't be legitimately
distributed until all creditors are assured of being paid.

___
Stu
http://DownToEarthLawyer.com
 
J

JoeTaxpayer

Agree completely. Don't know that much about taxing trusts, but I
believe that for estates, if the will mandates immediate distribution
(e.g. income from property to be distributed), then that income is
taxable to the beneficiaries, regardless of whether it is actually
distributed. Just another example of where the details matter.
I know there's a choice (in how it's written) and retained earnings
inside a trust get taxed at high rates for low numbers, i.e. the
marginal rates are far steeper than for the normal brackets. 35% kicks
in after $2937.00 (not typo, under $3K).

Respectfully, I don't see how I can get a K-1 telling me to claim
taxable income with no receipt of that income. Someone smarter than I am
would need to comment. (Imagine a $100K K-1. You'd owe $28-35K
depending. Now imagine not getting any money from the trust. Doesn't
feel right)
 
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P

ps56k

The sticky part of this ongoing 6yr old situation,
is the "family" issues...
Dad died 6 years ago - Estate - Trust
Mom died 4 years ago - Estate - Trust

The Trustee is one of the family,
and basically controls what is being said or filed.
She is also a CPA for the Estates and the Trust.
So, all info is basically in her control.

Can't recall exactly all the checklist items
for filing the Dad & Mom Estate Returns,
along with any Trust returns.

The rest of the family can ask for status,
and the rumbling of the K-1,
but she can just say nothing...

The Trust currently holds these assets :
- proceeds from the sale of Mom's house
- a couple rental condos (mortgage underwater)
- a couple bank accounts

No distributions have been made,
with the thought being....
to hold cash for any expenses
or potential mortgage payoff.

SO - there you have it -
We can fight with the family member Trustee
to get the info -
and have her walk and never speak to anyone again -
or gently walk on the family egg shells
until this finally gets resolved some year....
 
P

ps56k

JoeTaxpayer said:
Respectfully, I don't see how I can get a K-1 telling me to claim taxable
income with no receipt of that income. Someone smarter than I am would
need to comment. (Imagine a $100K K-1. You'd owe $28-35K depending. Now
imagine not getting any money from the trust. Doesn't feel right)
That was kinda our point -
I guess it's a flip between the Trust reporting it's gain/loss,
vs then distributing to the bene's via a K-1
 
G

Gene E. Utterback, EA, ABA

"ps56k" wrote in message
JoeTaxpayer said:
Respectfully, I don't see how I can get a K-1 telling me to claim taxable
income with no receipt of that income. Someone smarter than I am would
need to comment. (Imagine a $100K K-1. You'd owe $28-35K depending. Now
imagine not getting any money from the trust. Doesn't feel right)
And therein lies the rub.

Certain types of entities don't pay tax directly instead the income is
divided up and passed through to the owners on a K-1. Other types of
entities, trusts and decedent's estates can CHOOSE whether to pay the tax
directly or to pass the income through to the beneficiaires. Generally the
trustee will make this decision based on the net income and tax brackets of
the trust and the beneficairies.

Once net income for a trust hits a certain level the trust will pay tax at
the HIGHEST individual rate. That income level is relatively low, I think
around $11K. So passing the income through to the beneficiaries can result
in the trust paying less in tax, thus preserving more of the corpus for the
beneficiary. It's also possible that the trust document calls for the
income to be passed through to the beneficiaries, leaving the trustee with
no choice.

BTW, when we're talking about trusts the correct terminology is
Distributable Net Income.

The same thing happens with S Corporations, Partnerships and Limited
Liability Companies - they pay no tax directly. Instead they pass the
income and other separately reportable items through to the owners who then
pay the tax directly. Almost every year we get a client with a complaint
like yours "I got this K-1 that I'm supposed to pay on but I didn't get any
money." And our response is always the same - you own, or are a beneficiary
of, an entity that pays no tax. Its up to YOU to put that income on your
return and pay the tax.

Think of it like reinvested dividends or capital gain distributions from
other investments. If your ABC stock throws off $100K in dividends BUT
reinvests those dividends you pay the tax. You may even argue that you
didn't get the money, but really you did. Its treated as if you got the
$100K and immediately used it to buy more ABC stock.

For capital gain distributions it works like this - you and I are the ONLY
owners of XYZ mutual fund. At some point I want out and tell my broker to
sell my shares in XYZ and give me my money. To do this the fund manager
must sell some of the funds holdings to generate enough cash to buy me out.
This creates a capital gain distribution that gets shared among the owners
based on their ownership percentages. While you did NOTHING you still get
to pay tax on your share of the capital gains generated internally by the
fund manager when he sold enough to cash me out.

Hope this helps,
Gene E. Utterback, EA, RFC, ABA
 
J

JoeTaxpayer

in message


And therein lies the rub.

Certain types of entities don't pay tax directly instead the income is
divided up and passed through to the owners on a K-1. Other types of
entities, trusts and decedent's estates can CHOOSE whether to pay the
tax directly or to pass the income through to the beneficiaires.
Generally the trustee will make this decision based on the net income
and tax brackets of the trust and the beneficairies.
Gene, I understand that Trusts can have unique rules for what/how/why on
the distributions. I understand the trustee can have the trust pay the
tax on gains or pass to the beneficiaries. I'm new to the possibility of
a trust having term which gives the beneficiaries no distribution, but
does issue K-1 for the tax due. When I issue a K-1, it distributes the
gains and it's for the beneficiary to pay at her rate. What's suggested
here is the K-1 is a tax bill with no distribution. I got that right?
 
S

Stuart A. Bronstein

JoeTaxpayer said:
Gene, I understand that Trusts can have unique rules for
what/how/why on the distributions. I understand the trustee can
have the trust pay the tax on gains or pass to the
beneficiaries. I'm new to the possibility of a trust having term
which gives the beneficiaries no distribution, but does issue
K-1 for the tax due. When I issue a K-1, it distributes the
gains and it's for the beneficiary to pay at her rate. What's
suggested here is the K-1 is a tax bill with no distribution. I
got that right?
That's the way it is with partnerships and S-corporations. I thought
trusts could only take a deduction and pass the income on to
beneficiaries to the extent they may actual distributions. I have
not researched this issue, though.

___
Stu
http://DownToEarthLawyer.com
 
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G

Gene E. Utterback, EA, ABA

"JoeTaxpayer" wrote in message
in message


And therein lies the rub.

Certain types of entities don't pay tax directly instead the income is
divided up and passed through to the owners on a K-1. Other types of
entities, trusts and decedent's estates can CHOOSE whether to pay the
tax directly or to pass the income through to the beneficiaires.
Generally the trustee will make this decision based on the net income
and tax brackets of the trust and the beneficairies.
Gene, I understand that Trusts can have unique rules for what/how/why on
the distributions. I understand the trustee can have the trust pay the
tax on gains or pass to the beneficiaries. I'm new to the possibility of
a trust having term which gives the beneficiaries no distribution, but
does issue K-1 for the tax due. When I issue a K-1, it distributes the
gains and it's for the beneficiary to pay at her rate. What's suggested
here is the K-1 is a tax bill with no distribution. I got that right?

--

Sort of, but not quite - the K-1 is NOT a tax bill. It is information that
must be included in the beneficiaries returns, which will impact his overall
income. If the trust K-1 ADDS income then the beneficiary's tax bill may
increase. ON the other hand, if the beneficiary has enough deductions or
other losses the inclusion of the K-1 items may NOT result in an increase in
tax liability.

And trusts are allowed to pass through income to the beneficiaries without
actually making any monetary distributions.

Gene E. Utterback, EA, RFC, ABA
 
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S

Stuart A. Bronstein

And trusts are allowed to pass through income to the
beneficiaries without actually making any monetary
distributions.
I know partnerships can do that. But my understanding is that for a
trust to deduct income, that income must be required to be
distributed under the trust document. See for example §§651 and 661.

___
Stu
http://DownToEarthLawyer.com
 

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