K-1 and trust distribution

[taxmaze314]

This is a question about a complex trust which does not set requirements for distributing earnings . This is the 2nd year of the trust (gst) so this is all very new to me. The first issue is that Turbo Tax on my PC asks about distributions and once I say that yes I took distributions it decides that the earnings must be distributed and taxes paid via my 1040. I understand that typically that is how things are done, but not true in the case of this trust. I am allowed to receive as much or as little from the trust as I and my co-trustee decide. So the amount distributed is not directly related in any way to the amount of income for the year. 

I feel like last year the question was  " is there any distribution ALLOCABLE to the beneficiary" which made sense to me because that meant the beneficiary paid the tax. I said NO because I want the trust to pay the taxes prior to taking a distribution.

So the question is how to show  the beneficiary took distributions but not allocate the taxes to the beneficiary and not tie the distribution to the income of the trust? In other words how do I remain flexible in taking or not taking distributions, and remain flexible in distributing from already taxed dollars and not being forced to take untaxed dollars as turbo tax wants to do?

[tagteam · Accepted solution]

If the distributions are from the corpus of the trust (trust principal), they do not have to be shown on the K-1s.

Distributions, otherwise, carry out DNI and appear on the K-1s issued to the beneficiaries. 

If the distributions are discretionary, then you can choose exactly what to distribute to the beneficiaries.

[taxmaze314]

Thank you!  Sounds like I was making it more complicated than necessary.

So for funds to be considered "from the corpus" they should not be claimed as distributions and it is then the trust's (fiduciary's) responsibility to pay the taxes. If this is basically correct then it seems this is the simplest way to handle distributions correctly. I hope I have this right.

From things I read last year, I recall that the IRS wants the method to be consistent from year to year. It seems like a wise request especially for those of us doing our own returns.

[tagteam]

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@taxmaze314 wrote:

From things I read last year, I recall that the IRS wants the method to be consistent from year to year. It seems like a wise request especially for those of us doing our own returns.

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Yes, except that does not always occur (nor is it possible) when trustees have almost unlimited discretion by virtue of the terms of the trust.

Regardless, provided you are following the terms of the trust and state law (i.e., carrying out your fiduciary duties), there is little with which to be concerned as trustee.