Generation Skipping Trust

[retailguy]

I have a client who is the beneficiary of this trust, after his mother passes away, of course, and his mother is currently the beneficiary of the trust income. The mother received a distribution of 9500, roughly, for 2004. Is the mother required to file a 706GSD return, or does the 11,000 limit apply to gifts from a trust?

I can give more information about this situation if needed. I just can't seem to find anything definitive about gifts from a trust.

[Bees Knees]

Beneficiaries of trusts receive distributions of either income or corpus from a trust. They do not receive gifts. If the person received a distribution, you have to wait to see how the K-1 from the trust classifies the distribution.

[retailguy]

Thanks, Bees

I appreciate the reply. Apparently I was not clear. If the K-1 has to be prepared, I need to prepare it on behalf of my client.

I have a beneficiary, the mother, who is not cooperative and a client (her son) who wants to placate her, and not just "send the K-1". She wants the income, and nothing at all to do with reporting it.

From my perspective this is not possible, however, I'm just trying to fully understand what I am up against. I came into this recently, trust has been in existence for 15 years, 2003 and 2004 have not been filed. Trust returns have NEVER been filed, the trustee's (another son and daughter who are not my clients but are doing the same thing as this client) have reported the income on their personal returns up to and including 2002.

In short, its a mess.

[OldJack]

you can't win.

You need a copy of the said trust. In all likelihood the trust may have ended with all proceeds needing to be disbursed a long time ago. Regarding the son and mother's wishes, your best bet is to simply return their paperwork and tell them to get someone else to do the taxes.

[retailguy]

Thanks Jack.

I have terminated customer relationships before and will do it again. I have had great success in convincing people the right way and the wrong way to do things. I've lost very few clients over ethical considerations. This guy needs me. He's a referral from a bankruptcy attorney and he must get these taxes filed. He really has few alternatives but to do what I tell him to do. If the taxes don't get files, the bankruptcy attorney won't file his bankruptcy.

I just need to make sure I'm on solid ground with my recommendations. While I understand trusts, this one is testing my limits. I have the trust paperwork, it is legal, it is a generation skipping trust and cannot be closed until the Mother dies, she is 73 and in excellent health. The trust doesn't make much money, as far as generation skipping trusts typically do, and I just want to ensure that I file it correctly the first time.

It has just been mismanaged by the trustee (my client), see no evidence that was intentional - my client is just not tax savvy, and needs to be straightened out prior to the bankruptcy filing.

the income goes to the mother. the principal goes to the son when the mother dies. the son cannot touch the principal until the mother passes away.

[OldJack]

I am no expert on generation skipping trusts, however, as I understand it, basically this is a GS tax (unless estate is under exemption amount) on the "transfer" at the time of the death of the grantor of the trust and that issue was 15 years ago in your case.

The fact that it is a GST trust has nothing to do with the tax of the trust income passed through (1041-k1) to the beneficiaries (mother). Your only concern would be the filing of the trust tax return 1041 and the beneficiaries 1040 tax return as a result of the 1041-k1.

[Bees Knees]

Agreed. Gift tax (or estate tax) was only an issue when the funds were first transferred into the trust. Once in the trust, distributions are not subject to gift tax. Distributions of income are taxed either to the trust or the beneficiary, depending on elections made at the time the trust files Form 1041. Distributions of corpus are not taxable to the beneficiary.