Trust's Distribution Deduction

[LCP]

There were distributions. Is the deduction mandatory or "allowed" .................. if mandatory, the beneficiaries will have income to report this year. If there were no distributions, then capital losses would offset the interest and dividends at the trust level and nobody would owe tax.

The trust won't be final until 2006 so the capital losses would otherwise carry over until the final year.

[Acownt4it]

you will

need to read the trust documents to see what the directives are regarding distributing income.

[natiro]

trust distribution

If there are distributions from the trust, income will be carried out to the beneficiaries through DNI. There is no "allowable" concept here. The CL will carry forward until used or distributed out to beneficiaries in final year.

[LCP]

If there are distributions from the trust, income will be carried out to the beneficiaries through DNI. There is no "allowable" concept here. The CL will carry forward until used or distributed out to beneficiaries in final year.

FWIW TheTaxBook uses the term "allowed" on page 21-12.

[OldJack]

Trust document rules. You must follow what has been done in the past assuming the past was correct. If income has been passed to beneficiaries in the past you have to continue because that must be what is required by the trust document.

[natiro]

Trust distirbutions

I stand by my original answer, but with more detail. I believe LCP was asking whether there was discretion to report the distributions on the 1041 in order to be able to offset interest and dividend income with capital losses rather than have them taxable to the beneficiary (since the capital losses do not pass out to the beneficiary until the final year of the trust.) The answer is no, you do not have discretion to do this. In LCP's question, there has already been a distribution. The question wasn't whether the trust had discretion to make a distribution or not.

If this is a simple trust, that is, all income is required to be distributed, then the interest and dividend income would be carried out to the beneficiary through DNI.

If this is a complex trust the beneficiary must include distributed amounts in gross income up to a maximum amount equal to the trust’s taxable DNI, which would include fiduciary accounting income required to be distributed currently (whether or not it is actually distributed), and all other amounts paid, credited, or required to be distributed to such beneficiary.

I agree that you need to read the trust document to determine whether this is a simple trust or complex trust. Also, the trust document might indicate whether capital gains are to be distributed to beneficiaries (most trust documents that I've seen don't mention this issue.) I've never seen a trust document that indicates whether you have discretion in reporting an actual distribution made, nor do I believe that would carry any weight with the IRS. Although TTB may say "allowed" on page 21-12, I do not believe the authors meant that you have discretion in reporting the distribution or not.

As always, I'm open to the possibility that I'm wrong here if you can show me good cites that prove otherwise.

[Bees Knees]

Instructions to Form 1041, page 2, middle column, middle of second paragrph under the heading "Income Taxation of Trusts and Decedent's Estates," it says: "A trust or decedent's estate is allowed an income distribution deduction for distributions to beneficiaries."

[natiro]

Trust distribution

OK, let's go about this a different way.

This applies to simple trusts only and although I'm sure I can find a similar cite to support my position on complex trusts, too, I don't really have time at the moment (although I love a good argument!)

The question really is "does the beneficiary have to pick up the distribution as income" and the answer is yes (see excerpt, below). The answer is yes, for a simple trust, even if there is no actual distirbution.

So in the case we're discussing, if this is a simple trust (let's assume it is for a moment), the beneficiary HAS to pick up the income. So, sure, the trust is "allowed" the deduction for the distribution, but why wouldn't the trust want to take it? If the trust didn't take it, the income would be subject to tax at both the trust level and the beneficiary level. So, when you say the trust is "allowed" the deduction, that is very different than saying the beneficiary is not required to report the income. LCP wants to report the income in the trust so that it will be offset by the capital loss. OK, so go for it. What have you gained? You've used up part of your capital loss and the beneficiary will still have to pick up the income on their return, too.

I can hear it now. . ."but this doesn't specifically apply to complex trusts". I would venture to guess that similar language can be found in the code to address complex trusts, but I just can't take the time right now to look.


IRC 652 says:

(a) Inclusion.
Subject to subsection (b) , the amount of income for the taxable year required to be distributed currently by a trust described in section 651 shall be included in the gross income of the beneficiaries to whom the income is required to be distributed, whether distributed or not. If such amount exceeds the distributable net income, there shall be included in the gross income of each beneficiary an amount which bears the same ratio to distributable net income as the amount of income required to be distributed to such beneficiary bears to the amount of income required to be distributed to all beneficiaries.

[Bees Knees]

I can hear it now. . ."but this doesn't specifically apply to complex trusts". I would venture to guess that similar language can be found in the code to address complex trusts, but I just can't take the time right now to look.

But this doesn't specifically apply to complex trusts....


I agree it applies to simple trusts. The question is, when there is a discretionary distribution from a complex trust, would the same rule apply? Can the trust choose to pay tax on the income, or is it required to pass it through on a K-1?

I haven’t seen anything that says it is a requirement.

[natiro]

Trust distributions

I still stand by my answer. The beneficiary has to pick up the income whether it's a simple trust or complex trust.

Here is the appropriate IRC section re complex trusts.

§ 662 Inclusion of amounts in gross income of beneficiaries of estates and trusts accumulating income or distributing corpus.


(a) Inclusion.

Subject to subsection (b) , there shall be included in the gross income of a beneficiary to whom an amount specified in section 661(a) is paid, credited, or required to be distributed (by an estate or trust described in section 661 ), the sum of the following amounts:

(1) Amounts required to be distributed currently.
The amount of income for the taxable year required to be distributed currently to such beneficiary, whether distributed or not. If the amount of income required to be distributed currently to all beneficiaries exceeds the distributable net income (computed without the deduction allowed by section 642(c) , relating to deduction for charitable, etc., purposes) of the estate or trust, then, in lieu of the amount provided in the preceding sentence, there shall be included in the gross income of the beneficiary an amount which bears the same ratio to distributable net income (as so computed) as the amount of income required to be distributed currently to such beneficiary bears to the amount required to be distributed currently to all beneficiaries. For purposes of this section, the phrase “the amount of income for the taxable year required to be distributed currently” includes any amount required to be paid out of income or corpus to the extent such amount is paid out of income for such taxable year.

(2) Other amounts distributed.
All other amounts properly paid, credited, or required to be distributed to such beneficiary for the taxable year. If the sum of—

(A) the amount of income for the taxable year required to be distributed currently to all beneficiaries, and

(B) all other amounts properly paid, credited, or required to be distributed to all beneficiaries

exceeds the distributable net income of the estate or trust, then, in lieu of the amount provided in the preceding sentence, there shall be included in the gross income of the beneficiary an amount which bears the same ratio to distributable net income (reduced by the amounts specified in (A)) as the other amounts properly paid, credited or required to be distributed to the beneficiary bear to the other amounts properly paid, credited, or required to be distributed to all beneficiaries

[Bees Knees]

I agree

Sounds like the code leaves no wiggle room here. I guess the instructions to Form 1041 used the term "allowed" in the sense that it is a benefit to the trust to pass the taxable income through to the beneficiaries, not that there is any choice once a distribution is made.