Final Trust Fiduciary Tax Return (Form 1041): Are K1s required if all taxes are paid on the Trust income prior to the beneficiary distributions?

[Gabe_2012]

My brother and I are the beneficiaries of our mother's revocable (complex) Trust, which is now the “Decedent's Trust” as stated in the Trust Agreement. We finalized a Settlement Agreement on April 27, 2021, whereby each beneficiary would receive 50% of the estate based on the value on our mother's date of death. We agreed that all debts and income taxes will be paid by the Trust prior to the distribution to each beneficiary. The Settlement Agreement conditions have been adhered to without modification.

Facts:

1. The appraisal value of each asset is as of the decedent's date of death

2. The Trust places no restrictions on the Successor Trustee in administering the Trust.

3. Assets are distributed directly to the beneficiaries. There are no sub-trusts.

4. There is no beneficiary of an insurance policy or IRA.

Question: If all debts and taxes are paid by the trust prior to the distributions, are K1s required for the final 1041 fiduciary tax return?

(Note: I have reviewed many online references and TurboTax Community threads. While there's a lot of good information, I haven't found a succinct, definitive answer to my question)

[tagteam · Accepted solution]

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@Gabe_2012 wrote:

Question: If all debts and taxes are paid by the trust prior to the distributions, are K1s required for the final 1041 fiduciary tax return?

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Distributions carry with them items of income, gain, deductions and credits through to the beneficiaries via the K-1s.

However, if the trust has paid all federal income tax due on taxable income reported on Form 1041, then all that is left to distribute to the beneficiaries would be corpus (principal). Distributions of corpus are not reported on K-1s (1041) so they do not have to be issued in that instance.

[Gabe_2012]

Thank you for the timely response! This is what I had concluded after reviewing the IRS documents, online references and TurboTax Community. You're confirmation is appreciated!