Must a trust return file state return(s), even when deductions and K-1 passthrough leaves no money left in the trust's bank account?

[QLaFarge]

My first time with Turbotax "Business."  Mom (as "grantor") deeded her Kentucky farm into an Irrevocable, Income-Only Trust, for which I am the trustee.  She relies on annual rent paid by a tenant farming operator there, so we enacted an "income-only" trust to allow me to pass the rent money through the trust to her on a K-1.

My understanding was that I would receive the rent from the tenant, deduct expenses to be paid by the trust (such as property tax, banking fees and other miscellaneous expenses), then pass the remainder on to her.  She would then be responsible for claiming the income declared on the income on her personal tax return.  I've devised it so that there are practically no funds left in the trust itself, following the above deductions and the K-1 passthrough to her.  However, the Turbotax software then informs me that I must file state returns both in Kentucky and New Mexico (where we both reside).  Further complicating matters is that Turbotax does not make available a state tax return that I can pick off.  Must I really even file with either state when there's practically no money left in the trust itself?

[Anonymous_]

The trust has Kentucky source income so it could be required to file a Kentucky Fiduciary income tax return.

See https://revenue.ky.gov/Individual/Fiduciary-Tax/Pages/default.aspx

The other issue, at first blush, is whether the trust is actually a grantor trust and, as a result, does not need to file a 1041 and/or issue a K-1.

First, does the trust have an EIN? If so, what kind of powers does your Mom, as grantor and, presumably, sole beneficiary possess in the trust document? Just so you are fully aware the fact that a trust is irrevocable does not necessarily mean the trust is a nongrantor trust.

[Anonymous_]

Additionally, I would highly recommend that you seek local legal counsel and/or tax guidance for this matter, particularly since there is a multi-state issue.

[QLaFarge]

Thanks for helping!  And yes, as trustee, I was required to obtain an EIN for the trust so that I could administer its finances.

Yes—there is confusing info out there about whether this is a "grantor" trust.  (It almost seems as if tax software and other pubs are unaware of the ramifications of an "income-only" trust!) 

The trust actually terms Mom as the "grantor."  She has agreed to deed her farm into this irrevocable, income-only trust (for Medicaid planning purposes); the "income-only" provision was intended by the attorney preparing the document to allow me as the trustee to pass this money on to Mom, while she retains no right to the principal or any other proceeds.  I as trustee and her descendants are termed beneficiaries.  I'm not making any distributions to myself or our children at present; I'm only needing at present to pass the rent money on to Mom for her to live on. 

Turbotax has me a little confused on this point; do I have to name Mom (the Grantor) as a "beneficiary" in order to pass the rent money through to her via a K-1?  I'm working it different ways to see if I can make it come out right.

I appreciate the link to a Kentucky "Fiduciary" return—I hope that will be a little more intuitive, and that it will not require us to pay tax on what is essentially a wash. 

If any of the above clarifies the situation, please let me know.  

[Anonymous_]

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@QLaFarge wrote:

Turbotax has me a little confused on this point; do I have to name Mom (the Grantor) as a "beneficiary" in order to pass the rent money through to her via a K-1?  

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Yes, she has to be a beneficiary in order for income to pass through to her on a K-1. 

You would input the name of the trust and your name as trustee.