When File "Final" Trust Return

[jonic]

As Trustee, I have been distributing funds in a Trust from when my mother passed away.  It involved 2 minor children as beneficiaries at the time of her death, so the funds have been being slowly distributed per the trust terms. By the end of 2025, all but $6K will have been distributed, all due to 1 of the 4 beneficiaries.  (Just saving some for any remaining expenses).  There will not be any realized trust  income this year or next year. However, there is a carryforward loss.

1.  Can I file the final trust return for 2025, knowing there will not be any trust income in 2026? Or do I need to file a return in both 2025 and 2026, making 2026 the final year?

2. My understanding is that the carry forward loss is passed down to the beneficiaries via the K-1.  At this point there is only 1 beneficiary still receiving trust funds. The other 3 beneficiaries have been paid in full.  Does the carry forward loss get proportionally distributed based on the original trust allocations? In other words, I would issue a K1 for all of the beneficiaries in the final year, even though 3 of them did not receive a distribution this year?  (They are still entitled to their portion of the carry forward loss, correct?)

Thanks for all your help!

[M-MTax]

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@jonic wrote:

....do I need to file a return in both 2025 and 2026, making 2026 the final year?

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You file the final 1041 after the trust terminates which is typically when all assets have been distributed except for a "reasonable amount which is set aside in good faith for the payment of unascertained or contingent liabilities and expenses....".

See https://www.law.cornell.edu/cfr/text/26/1.641(b)-3

[M-MTax]

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@jonic wrote:

......I would issue a K1 for all of the beneficiaries in the final year, even though 3 of them did not receive a distribution this year? 

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Yes, if they're entitled to receive their share of the loss carryover.

[jonic]

Thanks.  If the trust doesn't terminate until 2026, and in 2025 there is no income, but I make a distribution to the beneficiary, do I need to file a return for 2025?  (Then I would file the final return in 2026 when I make the final distribution, and distribute the carry forward loss to the beneficiaries via K1.)

[M-MTax]

No, not necessary for 2025 if there is no income but you need to track your carryforward, and I don't think the software will do that for you if you skip a year.