Trust and 1041 question

[Grace]

The trust has 3 beneficiaries. Ages 8, 15 and 22.

The trust does not require distributions of the net income. And, the trust document reads that any net income not distributed shall be accumulated and added to principal. And, the trust reads that trustees can also distribute principal.

When Wells Fargo set up the brokerage account for this trust, it actually set up 3 different, but equal, accounts. All under the same tax id of the trust. The reason they did this was to keep each beneficiaries monies separate from the other.

Brokerage Account Ending in #008 earned $900 dividends
Brokerage Account Ending in #015 earned $900 dividends
Brokerage Account Ending in #022 earned $900 dividends

The were 2 distributions made in 2013 to the 22 year old from her Brokerage Account Ending in #022. They total $5,050.

This is where I am having difficulty: Should there be only 1 K-1 issued to the 22 year old showing the $900 in dividends. The rest of the $5, 050 being principal. Then the trust would have to pay taxes on the other $1,800 dividend income which was not distributed? I am not even sure if I can make this work on a 1041. And, if the trust 1041 has a balance due, whose brokerage account should the monies come from.

Thank you in advance for your input.

Grace

[Burke]

I am wrestling with this right now and I feel for you. Never, ever, ever let them set up multiple beneficiary accounts under one trust EIN. This falls under Sect. 663 and the "separate share rule." This means you have to do 3 separate trust returns to figure the DNI for each individual bene, or the K-1's will not work. You are lucky in that this year, they all have the same income, but only one had distributions. So the one that had the distributions gets the only K-1. But unless you figure them separately, the 1041 tax return will not work out correctly as you have experienced, and the K-1 will not be correct either. My software can't do it, so I gave up and will file a paper return. I put two 1041's in the computer labeled "XXXX Doe Separate Share" (one for each of my 2 bene's) and printed the K-1 for each. I am attaching these and the other pages to show how the DNI was calculated to the overall 1041 with an explanation. Both of my bene's had different distributions.

While the separate shares work fine for the accounting, it is a nightmare on the tax return. The distributions will probably always be different, especially when the shares are liquidated at three different times. I hope you charge up the kazoo for this, as it will require you to input 4 tax returns in your software and probably override some figures. There is a box to check at the bottom of Page 2 indicating you are electing Sect 663. But if you can get it to efile, I would dearly love to know how you did it. (Only the one overall 1041 will be filed, the others are just to show the calculations.)

One of the things you have to keep in mind are the expenses. They have to be allocated to the bene's share of reportable income as well, such as fiduciary fees and accounting fees (i.e, tax preparation.) And when there are investment advisory fees and tax exempt income, those fees will be reduced.

[Burke]

? And, if the trust 1041 has a balance due, whose brokerage account should the monies come from.
Thank you in advance for your input.Grace

The trust should have a separate bank account from which to pay expenses, such as accounting fees and tax preparation, that are not attributable to any one beneficiary. How are they paying for these things now? That account, separate from the bene's share of investments, should pay the taxes and things like your fees.

[Grace]

Thanks, Burke

This is a new client. The trust was just set up and funded last year. Trustees were referred to me for tax prep. Documents just came to me on Friday.

I'll check with them as to a separate trust checking account and, if not, advise them to do so.

Really appreciate your input. Can clearly see this will entail quite a bit of work. Will take into consideration when providing them with an estimate of my fee.

Grace

[Roberts]

JMO but 3 accounts within 1 trust means each person still has claims on each account. Until assets are officially distributed, doesn't matter how they attempt to break down the assets, each beneficiary still has a claim on all of it.

I really need to do some specialized 1041 training.

[Burke]

If you can convince them to do it, have them file for two additional EIN's (use the title "Trust U/W of Jane Doe, FBO Mary Alice Doe," and "Trust U/W of Jane Doe, FBO Johnny Doe") and assign that EIN to the other two accounts. Then you are doing three trust returns, but trust me, it is a darned sight easier. You are going to do them anyway to be able to complete the overall 1041.

[Burke]

JMO but 3 accounts within 1 trust means each person still has claims on each account. Until assets are officially distributed, doesn't matter how they attempt to break down the assets, each beneficiary still has a claim on all of it. I really need to do some specialized 1041 training.

I am not sure that is true under the separate share rule, but it is an interesting scenario and bears some research. Another good reason to set up 3 separate trusts with separate EIN's. Usually the trust document will allow that. Note to Grace: don't even start on the 1041 without the trust document in hand.