My client’s 2020 1041 K1 had the following amounts:
12 A: $689
12 J: $689
14 A: $1,823
B: $137
My client’s 2021 1041 K1 had the following amounts:
12 A: $357
12 J: $689
14 A: $1,331
B: $152
My client is still receiving $5k per month from the trust. The bank that was handling the trust merged with another bank. My client asked me to explain the decreased K1 amounts. I had based estimated payments on the 2020 amounts. I am very puzzled by the decreased income on the K1. Why is there zero interest income? Did the trust change assets from interest bearing investments to growth stocks? Did something get messed up w/ the merger? Did someone misappropriate (embezzle) funds? My client reached out the the bank and a VP had this response:
Good morning Robert,
I am also copying Ross on this email as you gave permission in our phone call yesterday to do so.
We had our tax department take a closer look at the 2020 and 2021 tax years for your account and we have determined that the only material change from each tax year was the funding K-1 from the XXX Trust to your trust. Please note that the 2020 funding K-1 from the XXX Trust had $28,011 of interest income and $223 of dividend income on the K-1. These amounts were then picked up correctly on the 2020 return that was prepared by the former bank. As such, you were taxed with roughly $37,000 in 2020.
The 2021 funding K-1 from your parents trust was materially different from 2020 as there was no income to report from this K-1. There was however $5,021 of excess deductions and $2,409 of long-term capital loss carryovers. As such, you were taxed with much less when compared to 2020 as there was no additional income from the outside K-1 in 2021. As this is a complex trust, you are taxed on the lesser of the money you received and DNI (distributable net income). As DNI was less than the distributions you received in 2021, you were only taxed with DNI which was $7,352 (8,863 - 1,331 allocated to tax-exempt income).
I hope this helps to answer your questions as the main discrepancy in this account was not related to market factors, rather just the material difference in the funding K-1 from your parents’ trust for the 2020 and 2021 tax years.
Sincerely,
Mary
Does the banker's response make sense? I think I need to request all of the assets the trust held on 12/31/20 and 12/31/21 and the 1099 income documents, etc. I know this is beyond the scope of preparing their tax return, but we need some answers as to what is going on with this trust. Also, I wasn't copied in on this e-mail. My client sent it to me a day later. Are they trying to hide something?!? TIA.
- Interest Income: $22,952
- A: Ordinary Dividends: $14,172
12 A: $689
12 J: $689
14 A: $1,823
B: $137
My client’s 2021 1041 K1 had the following amounts:
- Interest Income: Zero!
- A: Ordinary Dividends: $7,352
12 A: $357
12 J: $689
14 A: $1,331
B: $152
My client is still receiving $5k per month from the trust. The bank that was handling the trust merged with another bank. My client asked me to explain the decreased K1 amounts. I had based estimated payments on the 2020 amounts. I am very puzzled by the decreased income on the K1. Why is there zero interest income? Did the trust change assets from interest bearing investments to growth stocks? Did something get messed up w/ the merger? Did someone misappropriate (embezzle) funds? My client reached out the the bank and a VP had this response:
Good morning Robert,
I am also copying Ross on this email as you gave permission in our phone call yesterday to do so.
We had our tax department take a closer look at the 2020 and 2021 tax years for your account and we have determined that the only material change from each tax year was the funding K-1 from the XXX Trust to your trust. Please note that the 2020 funding K-1 from the XXX Trust had $28,011 of interest income and $223 of dividend income on the K-1. These amounts were then picked up correctly on the 2020 return that was prepared by the former bank. As such, you were taxed with roughly $37,000 in 2020.
The 2021 funding K-1 from your parents trust was materially different from 2020 as there was no income to report from this K-1. There was however $5,021 of excess deductions and $2,409 of long-term capital loss carryovers. As such, you were taxed with much less when compared to 2020 as there was no additional income from the outside K-1 in 2021. As this is a complex trust, you are taxed on the lesser of the money you received and DNI (distributable net income). As DNI was less than the distributions you received in 2021, you were only taxed with DNI which was $7,352 (8,863 - 1,331 allocated to tax-exempt income).
I hope this helps to answer your questions as the main discrepancy in this account was not related to market factors, rather just the material difference in the funding K-1 from your parents’ trust for the 2020 and 2021 tax years.
Sincerely,
Mary
Does the banker's response make sense? I think I need to request all of the assets the trust held on 12/31/20 and 12/31/21 and the 1099 income documents, etc. I know this is beyond the scope of preparing their tax return, but we need some answers as to what is going on with this trust. Also, I wasn't copied in on this e-mail. My client sent it to me a day later. Are they trying to hide something?!? TIA.
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