Unequitable Trust Distribution

[Snaggletooth]

Decedent dies in 2008, leaving a trust upon his death to three daughters in equal ownership amounts.

Money is not available for distribution until 2010. Oldest Daughter A is Trustee, and during 2010 she distributes $45,000 to Daughter B and $45,000 to Daughter C, leaving herself out.
Cash is almost gone and it will take 3-4 more years for the trust assets to generate another $50-$60K in cash.

How is the best way to handle the distribution with respect to the Sch K-1s, Form 1041?

a. The trust issues K-1s to Daughters B and C for $45,000 each. The trust "owes" Daughter A $45,000.

b. Daughter A has made an unequitable distribution. The trust issues K-1s to Daughters A, B, and C for $30,000 apiece. Daughter B owes Daughter A $15,000 and Daughter C owes Daughter A $15,000.

Additionally, the legal treatment for the above may (or may not be) the same as the tax treatment. Daughter A may have been acting on advice of a lawyer and it's quite possible there has not been any violation of state law.

[Golden Rocket]

Scant Situation

I don't think there is going to be a huge outpouring of response for the above. I don't know the answer and perhaps very few will. Would there be someplace this could be researched?

[Davc]

What does the trust document say about distributions or crediting of income?

[DaveO]

The question of "Why" is of course, too late. If the unequal distribution is not inviolation of the controlling law or the document I would opt for option "A". I had a similar situation this year where one sibling had been left out of the trust since they had "taken" their share during the parents lifetime. Despite that the remaining siblings elected to pay the odd one out a smaller share as a "gift". I treated it as such with the income spread across the remaining siblings.

The greatest risk with these things is that one bene is going to be unhappy with the distribution and will cause problems for the trustee. In the instant case that would seem not to be a problem since the one shorted is the trustee. One has to wonder what will happen down the road when they take a distribution and the others don't get one.