Testamentary Trust and DNI

[Happy Camper]

Have a new client with a Trust return. The prior year return reported all the Distributable Net Income (DNI) as a distribution to the TP on a K-1. TP says they received no distributions from the trust. I know I need to get the trust documents to determine whether DNI is required by the trust to be distributed (deemed distributed?). But it brought up a question on another trust, on the other trust, TP receives distributions that are less than DNI. Last year actual distributions were reported on the K-1. This may sound silly, but can the distribution amount up to DNI be 'adjusted' and considered 'deemed distributions' if the there is a better overall tax outcome? Or are the distributions always supposed to equal DNI in a complex trust?

[Burke]

No, distributions do not always equal DNI. You cannot "adjust" the DNI to make it come out better. It is what it is, if all information has been properly entered. I do not know how "distributions" flowed through to the K-1 you speak of last year if no distributions were made, unless the trust document requires that all income be paid to the beneficiary. There are two lines in calculating DNI, one is income required to be paid currently, and one is distributions actually paid. Note that it is the taxable income which flows through to the K-1, to the extent of distributions. The reportable taxable income on the K-1 can be less than the actual money paid out in the form of distributions, and often is. Also sometimes, dispositions of property (not cash) can be deemed distributions. Another thing is, capital gains most often are automatically retained by the trust and not passed through to the beneficiaries. However, the trustee can make the decision to do so, and this changes the outcome. See Page 2 of Schedule D, 1041.

[Happy Camper]

Confirmation

Burke I really appreciate your input! I understand what you are saying-the only way distributions can be greater than DNI is if a portion of the corpus was distributed. I have been reading everything I can on this but I second guess myself when I see a return completed by another CPA that has total DNI flowing through the K-1 and the taxpayer says they have received no distributions. I do still have to call the broker to determine it was just distributed to another of her accounts though... What I found interesting, is the 'distribution' of total DNI left a negative net income on the PY 1041. There was no benefit to the TP to do that?!

Just to confirm, my other TP with the testamentary trust gets $1,500 a month distribution for living expenses. DNI is greater than the $18k. I cannot increase the amount of the distribution if it is more favorable to report on his personal return-Correct? (I was thinking of that as deemed distributions-from your explanation, deemed distributions are property)

[Burke]

Just to confirm, my other TP with the testamentary trust gets $1,500 a month distribution for living expenses. DNI is greater than the $18k. I cannot increase the amount of the distribution if it is more favorable to report on his personal return-Correct? (I was thinking of that as deemed distributions-from your explanation, deemed distributions are property)

That is correct. You cannot arbitrarily increase the amount of distributions so that the taxpayer pays the tax on his return. If the trust allows distributions on the discretion of the trustee, he/she could pay more out, perhaps. But that decision has to be made and actually accomplished within 65 days of the end of the trust (calendar) year. That would be March 5 this year.

[Happy Camper]

Relief

Thanks so much Burke! That is the way I was understanding it, in fact we actually elected the $1500 for Jan and Feb 2015 distributions for 2014-so we are looking at less distribution for this year. Again, I freaked out and really starting questioning my method on the previous TP when I received the new one. I am so relieved to know I did not screw up previous TP return! Now I can move forward to determine if he will be in a better tax position if we increase distributions by electing the Jan/Feb 2016 distributions to 2015 (or can get more in the next 6 days )

[Burke]

You really don't have to advance the next year's income. If the trust document allows the trustee to pay amounts on his/her discretion or for reasons allowed in the document, he can do it. It doesn't depend on the monthly income amount the beneficiary is currently receiving. I hope you have a copy of the trust document. You need to have it on file in order to do the return.