1041 Trust Question

[arlo]

A client is the trustee of an after tax trust of a deceased relative. The trustee says that a friend of the deceased will get an annual payout from the trust. The trust pays taxes on the income of the trust. How does the trust
handle the annual payout. Does it issue a K-1 or 1099? The trustee uses the funds for paying all kinds of personal expenses. I have not seen the trust document. Any input would be appreciated

[Koss]

Trust

You wrote:

The trustee uses the funds for paying all kinds of personal expenses.

Is the trustee using the funds to pay his own personal expenses? Or personal expenses of the beneficiary?

BMK

[Burke]

1. Get the trust document and read it. Don't even attempt the tax return without it.

2. If it specifies a fixed annual payout to this friend, and that payout is made, then it is handled through the DNI calculation on Page 2 of Form 1041 and some net taxable income may pass through to the beneficiary via the K-1. The same result will be achieved if it specifies any other expenses are to be paid on behalf of the beneficiary. They are treated as distributions. If the trust is required via the trust document and elects to pay the taxes (not a good idea, but whatever) then nothing is given to the recipient because it would not be taxable to him.

3. If the trustee is paying his own personal expenses out of this trust, and there is no authorization to do so under the trust document, then he is in big trouble. And the beneficiary has some legal wherewithal to stop it.