Where Do I Report Distributions To A Beneficiary, From A Trust That Is Principal Only

Forum|Forum|3 years ago
December 3, 2022
1 reply
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I am the Grantor and Trustee of a Revocable Living Trust. The Trust is fully funded by principal only. No interest income, investments, land, or personal property. All taxes were paid before the money was moved to the trust, and the funds earn no interest. So if I make distributions to the beneficiaries, they will not owe taxes since the distributions are strictly from principal.

My understanding though, is that I still need to provide each beneficiary with a Schedule K-1 in order to provide them with a document that show's that they don't owe taxes, but there isn't a line on the schedule to report NON-TAXABLE distributions from principal. There are only lines to report taxable distributions from income. My question is, where (or what line, or other document) do I report the non-taxable principal distribution to the beneficiary?

Best answer by Anonymous_

You need to consult a local tax professional and/or legal counsel.

A grantor trust (aka revocable living trust) is a disregarded entity for federal income tax purposes. As such, income from a grantor trust can either be reported on the grantor's individual income tax return or on Form 1041 with a grantor information letter (or statement), but not on a K-1.

If you distribute corpus to any of the beneficiaries from a grantor trust, you are essentially making a gift from you directly to those beneficiaries and, depending upon the amount, may need to file a gift tax return (Form 709).

Please seek professional guidance for this matter.