I am the executor of a non-grantor complex irrevocable trust created on the date of death. The only distributions made in 2024 were inherited property and cash from the will. There were no distributions of income. The income generated by the trust in 2024 was 26,809. Distributable Net Income was 25,174. If none of the income was actually distributed in the current tax year, Am I still required to file K-1s or can the income be distributed in 2025 and reported then?
Income reported on the 1041 includes rental, retirement and investment income. If I do need to report any of the non-taxable distributions how would i report it in TT?
Also can you confirm that inherited cash and like-kind disbursements of property would not be considered taxable since they never generated income?
You are required to file a Form 1041 for the trust for the 2024 tax year. This is because the trust's income of $26,809 far exceeds the $600 filing threshold for a trust. Even though there were no distributions of income in 2024, the distributions of inherited property and cash from the will are considered distributions of principal or "corpus" and necessitate issuing a Schedule K-1s to the beneficiaries who received them.
The Schedule K-1 serves to report to each beneficiary their share of any income, deductions, and credits from the trust. The K-1 will reflect the distributions of principal are not taxable to the beneficiaries. For instance, the distributions would not appear in the income boxes of the K-1 but may be reflected in other informational sections, ensuring transparent reporting to both the beneficiaries and the IRS.
You have the flexibility to treat income actually distributed in early 2025 as if it were distributed in 2024. This is permitted under the 65-day rule. This rule allows the trustee of a complex trust to elect to treat distributions made within the first 65 days of the new tax year (by March 6, 2025, for the 2024 tax year) as having been made on the last day of the preceding tax year. To make this election, you would check the box on Form 1041, Page 3, Question 6. This allows you to pass the tax liability for the income to the beneficiaries in the 2024 tax year, even though they receive the funds in 2025. The trust would then take an "income distribution deduction" for the amount of distributable net income (DNI) passed to the beneficiaries. This can be strategically advantageous, as beneficiaries may be in a lower tax bracket than the trust itself.
Inherited cash and like-kind disbursements of property from the trust are not considered taxable income to the beneficiaries. These assets are treated as distributions of the trust's principal (corpus). The underlying principle is that these assets were part of the decedent's estate and are not generated by the trust's activities. Therefore, they are received by the beneficiaries tax-free. The income generated by the trust from its assets (rental, retirement, and investment income) is what is subject to income tax, either by the trust or by the beneficiaries if it is distributed.
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Estates and Trusts - Questions and Answers