Wasted Distribution Money?

[Snaggletooth]

Trust sells $150,000 worth of land, basis is $130,000. $20,000 in capital gains.

$100,000 of the proceeds are distributed to 4 beneficiaries.

So the 1041 reports $20,000 in capital gains profits. However, there are 4 K-1s distributing the capital gains to the beneficiaries. However, $100,000 of cash is gone. The 1041 does not contain a balance sheet, but essentially the beneficiaries have overdrawn their income by a total of $80,000.

Is the "distributable net income" ever able to recover this $80,000 or is the overdrawn amount gone forever?? Can the $80,000 be applied to "future" distributable net income?

[Rapid Robert]

If I understand, you are asking: can one distribute corpus and call it income? I'm pretty sure the answer is "no"; However in the future the trust can distribute income and call it income, just like always.

[Snaggletooth]

Yes. In my example, the trust has lost $80,000 in corpus. My question is "can this lost corpus be applied to a future distributable deduction, or is it lost forever?"

[Snaggletooth]

O.K. please let me expound on the example to paint the picture more clearly.

In 2020, Trust sells $150,000 worth of land, basis is $130,000. $20,000 in capital gains. $100,000 is distributed to beneficiaries. The distributable income for beneficianes is $20,000 and the distributable deduction for the trust is $20,000.

But $100,000 is gone. An additional $80,000 in corpus is gone.

In 2021, Trust sells $120,000 in land, basis is only $70,000. But this year, there is no money distributed to beneficiaries. Beneficiaries will get a K-1 for the $50,000 in profit, but what about the distributable deduction for the trust? Will it be zero because nothing was distributed? Or will it be $50,000 of the $80,000 left over from the previous year??

[ATSMAN]

Refer to 1.661(a)-2 Deduction for distributions to beneficiaries. and § 1.651(a)-3 Distribution of amounts other than income.

If the trust distributes corpus it loses a Simple Trust status and becomes a complex trust.

[Snaggletooth]

Thank you ATSMAN for taking the time to respond. After reading the links, one of them applies to a simple vs. complex trust, and another describes how to report capital gains. If anyone knows how to address the overpayment of corpus and how to treat it in future years, I would appreciate a response. Check out the example below...

[ATSMAN]

Thank you ATSMAN for taking the time to respond. After reading the links, one of them applies to a simple vs. complex trust, and another describes how to report capital gains. If anyone knows how to address the overpayment of corpus and how to treat it in future years, I would appreciate a response. Check out the example below...

Again going from top of my head without checking any regulations, I would think once it becomes a complex trust and distributes a portion of the corpus along with any income/gains, the corpus portion is a non taxable/deductible event. You just have to keep the accounting correct. I don't think you can offset the corpus amount from income in future years.

[Rapid Robert]

In 2021, Trust sells $120,000 in land, basis is only $70,000. But this year, there is no money distributed to beneficiaries.

What happened to the $120K from the sale? why can't that be distributed?

To repeat the first answer you got, "you are asking: can one distribute corpus and call it income [in the current or future year]? I'm pretty sure the answer is "no";" It's still not clear what problem you are trying to address or solve. But at least you got a clear, non-argumentative answer to your questions right away.

If anyone knows how to address the overpayment of corpus and how to treat it in future years, I would appreciate a response.

I suspect there is no such thing as "overpayment of corpus".

Here try another approach: is there anywhere on the Form 1041 to show a "carryforward"? Does your software have a place to enter a prior year carryover? If not, I think that seals the answer for you.

[Burke]

........... but essentially the beneficiaries have overdrawn their income by a total of $80,000.
Is the "distributable net income" ever able to recover this $80,000 or is the overdrawn amount gone forever?? Can the $80,000 be applied to "future" distributable net income?

Based on your figures, there is a profit (capital gain) of $20K on the sale. That is income. The $100K distributed consists of $20K income, and $80K principal. DNI means Distributable Net Income. It does not consider principal as part of its calculation for deduction purposes on the 1041. The $20K is taxable, and passed thru to benes on the K-1's. The $80K is not taxable since it is part of the corpus of the trust. There is no treatment of it in future years, and it is not considered "overpayment of corpus," since that can't happen. You cannot distribute corpus that is not there. The amount not distributed from the sale remains in trust corpus. It can be used to pay future deductible expenses, if any, to reduce taxable income in those years. If it had not been distributed, it would not have changed the character of it.

[Lion]

I do so few trusts (benes passed away or "aged out" so assets distributed and trusts closed) but I think you have your answer from Rob, Atsman, and Burke.

The trust has corpus. It would be distributed eventually, either when the trust closes or for a complex trust, when the trustee decides to distribute. Your client distributed some corpus in 2020. It's not a taxable event. It will have less corpus to distribute now and in the future.

The trust earns income and distributes income; that is a taxable event.

Those two items are in two separate buckets.

[Snaggletooth]

Thanks for the recent activity on this post. I do know the difference between income and corpus, but it appears the "overdrawn" corpus is not available to reduce DNI in future years. It is gone forever, but tax-free to the recipients. This actually happened (numbers are slightly different) and it was difficult to know how much to distribute because the accounting had not yet been done during the year.