1041 Trust Return

[Harvey Lucas]

I dont do a lot of trust tax returns, so I want to run this up the flag pole.

Client Joe died, his death created a trust.

The only assett/income of the trust was an annuity fmv of 200,000.

120,000 of the annuity was the original principal.

80,000 was the interest that had accumulated.

There are 4 benificiaries of the trust, a,b,c and d

The trust cashed in the annuity and distibuted all the $ to a,b,c,d, ie, 50,000 each.

My first thought is that we recognize the 80,000 of income to the trust, but then since it was distributed to a,b,c,d we take an income disribution deduction and the income shows up on k1 forms, $20,000 each to a,b,c,d...

However, the trustee/executor wants the trust to pay any/all tax and distibute only tax free $ to a,b,c,d..

Can I do it this way?

I assume I would simply have the trust report the $80,000 in income, take no deduction, the trust will pay income tax on the $80,000.

In this case a,b,c,d dont even need k1 forms and thier is no need to even include k1 forms with the 1041 return?

Can I do it this way?

Thanks,

Harvey Lucas

[DaveO]

It usually will result in a lower tax bill if the trust takes the income distribution deduction. Does the trustee have the money to pay the taxes? If the only thing the trust has is the annuity and it is filing it's original and final return it must distribute the income. A trust may not hold income or loss in its final year.

[Roland Slugg]

No. And even if you could, who would want to? Have you seen the tax rates on a trust's income? They climb very quickly, and the top rate of 35% is reached at just $11,650 of taxable income. The tax on $80,000 would be almost $27,000. Besides, you wrote that the $200k was distributed to the four benes. Where would the cash to pay the tax come from?

Unless the benes are all in the 35% tax bracket anyway, they are better off by reporting their share of the income and paying tax thereon at their own respective rates. You may need to do a little educating of the executor so he can understand the overall picture better.

[Harvey Lucas]

Oops

Distribution was only $160,000, executor held back $40,000 to cover taxes.

I told executor that overall taxes would be much higher if the trust paid the taxes.

She understood and said she prefered that we have the trust pay the taxes anyway..

That being the case, am I prohibited from having the trust pay the taxes?

Or, am I required to distribute the income on the k1 forms and thus forcing the bene's to pay the tax?

Thanks,
Harvey Lucas

[Roland Slugg]

The trust cashed in the annuity and distibuted all the $ to a,b,c,d, ie, 50,000 each.

Distribution was only $160,000, executor held back $40,000 to cover taxes.

What's next?

[WhiteOleander]

You need to see the trust document. It will say who should pay the taxes.

[bgiez]

I agree with whiteoleander

You need to see the trust document. It will say who should pay the taxes.

You've got to read the trust document. Make sure you drink plenty of coffee while reading

[Burke]

She understood and said she prefered that we have the trust pay the taxes anyway..
Harvey Lucas

I don't think she understands at all. If the bene's understood how much this may cost them, they may wish to intervene. If the trust document does not state that the trust is to pay the taxes, they would have cause to come after the trustee for cause. If the income is only $80K, that is $20K to each bene on their income tax return. There is $40K left, each would have $10K to cover their individual tax situation, which is not likely to be 50%, even combining federal and state.