Trust Question

[Gary]

A very good friend of mine posed this question to me, and i need help answering him. I'm not proficient with Trusts.
Thanks for your help.

Gary

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Let's says there is a Trust A that has a long-term loss in 2008 due to the sale of stocks of $15K.

That sale is credited to John Doe as a beneficiary and a K-1 form is sent to him that credits the loss of $15K to him.

I think that $15K should be reported as a loss on Schedule E in Part II Income and Loss from Estates and Trusts. That line in Schedule E is transferred to 1040 line 17 and shows ($15K).

The irony of my thinking is that

(a) trust stock losses no matter how big -- much larger than ($3000) can be deducted from ordinary income during the year of the loss.

(b) past years of losses can be deducted without the limit of $3K in this way through the K-1 form

(c) the difference between short and long-term gains is not recognzied.

Are my conclusions true?

[DonPriebe]

Let's says there is a Trust A that has a long-term loss in 2008 due to the sale of stocks of $15K.

That sale is credited to John Doe as a beneficiary and a K-1 form is sent to him that credits the loss of $15K to him. I think that $15K should be reported as a loss on Schedule E in Part II Income and Loss from Estates and Trusts. That line in Schedule E is transferred to 1040 line 17 and shows ($15K). ... [and gets deducted without the usual $3K limit]

Unless this is the last year of the trust and it terminates, capital gains (but NOT losses) are allocated to the beneficiary in box 4 of the K-1. These flow to the taxpayer's Schedule D, not E. (See instructions for the 1041, page 48. and the instructions on page 2 of the K-1)

If it is the last year of the trust, any remaining capital loss or loss carryover is allocated to the beneficiary in box 11 using codes B or C. These also carry to the taxpayer's Schedule D (op.cit.) and are subject to the usual $3,000 limits.

[Bees Knees]

As Don pointed out, its kind of the worst case scenario. Capital gains are allocated to the trust, except under certain cases described on page SB10-9 of TTB Small Business Edition where they may be allocated to beneficiaries on the K-1 under state law. Capital losses, on the other hand, are always allocated to the estate or trust, regardless of what state law says, except in the year of termination. Another exception is that capital losses can be used to offset gains allocated to the beneficiary. However, only those losses up to gains can do that. Net capital losses are always carried over to the following year at the trust level until the year of termination.

[Gary]

Thanks

Thank you both for your input.

Gary