Our mother passed away leaving a living trust that contained many things in 2003 when it was last updated but 8 of the 9 items listed in Schedule A have long been liquidated or closed. The only item that was still there was a $100,000 life insurance policy with policy number and specific distribution directions.
The life insurance policy had only one beneficiary which was the living trust (now irrevocable). I have worked through the EIN and setting up the trust bank account. The life insurance company and bank have both reviewed the trust documentation allowing for the death benefit of the life insurance to be wired to the trust bank account. I opened the bank account with $1000 from my personal checking just to get something in there when opening the account. So far, everything is very clean it seem.
Understanding that our mother paid a significant premium for 32 years on this life insurance with post income tax money of course, I want to confirm that as I write the disbursement checks to the other siblings as per the specific instructions in trust document that I can assure them that they will not be taxed on the disbursement but I am not finding any way to fill out the 1041 / K-1 forms that specifically explains that this is NOT income disbursements. As the trustee / fiduciary, I'm very concerned that I have not been able to get a confirmation on how to fill these forms out to make sure they do not get a huge tax burden in early 2025.
Had the beneficiaries been directly listed on the life insurance policy there is no doubt it would not be taxable. It makes no sense that a trust that essentially contains ONLY this life insurance policy with beneficiaries listed there instead of directly on the life insurance policy itself should not turn this from nontaxed inheritance to taxable income or something is very wrong with our tax system. My gut tells me that not even the IRS is this terrible but I cannot seem to find the method to fill out the final 1041 and issue the K-1 to the beneficiaries as principle distributions rather than "income".
Any help is welcome here. I will be paying for the desktop business edition of TurboTax next year so I can do these forms.
Thank you in advance for all input for us and more than likely others that have this exact scenario also.
