Distribution to the beneficiary

The FAQ appears to be wrong.  Distributions from the estate to beneficiaries come first from the income received by the estate during the estate's tax year (Distributable Net Income or DNI).  Any amount of taxable DNI required to be distributed currently (tier 1) plus any additional amounts of income actually distributed (tier 2) to beneficiaries are reported as an income distribution deduction on the estate's tax return and are reported via the Forms K-1 to beneficiaries for taxation on the beneficiaries' individual tax returns.  The income is only taxed once, either on the estate's income tax return because income not required to be distributed was retained, or on the beneficiaries' tax returns because the income was distributed or required to be distributed.

I appreciate your answer.  I'm stuck in another situation.  What if the estate and trust distributed property to the beneficiaries?  Should the beneficiaries also recognize capital gain in their Sch. K-1?

In brief, the trustee accidentally put property in its management company's QB (3 trust are the partners of this management company and they are the only partners), but the actual investors are the beneficiaries and not the management company.  Accordingly, the accountant recognize this as property distribution to the beneficiary, but when I file 2014 1041, I did not enter the distribution (property distribution) since it was mistakenly entered in management QB.  Was this a wrong tax treatement?  Thank you for your answer!!

Form 1041 is an estate *income* tax return.  Distributions of corpus are only included on the Schedule B line 10 to ensure that amounts distributed are treated as first coming from DNI.  Distributions of corpus are not reported on Schedule K-1 (Form 1041); Schedule K-1 reports the the beneficiaries the beneficiaries share of the items that must be reported on the beneficiaries' individual tax return, i.e., estate income, deductions and credits.

seadrag76, if the property was owned directly by the individuals and not by the estate/trust, what does the trustee have to do with this property?  If the property is not part of the estate/trust, it seems that the trustee simply make a bookkeeping error that needs to be corrected and the estate/trust did not receive or distribute any income having to do with this property.

I think I get the point.  Each trust (three trusts total) directly owned the property, in which the trustee invested in 2013 in the name of each trust.  Accordingly, each trust has to keep tracking of its FMV to recognize gain or loss in the future and that is why the property distribution should be not included in beneficiaries' Schedule K-1.  Am I understanding correctly?

If the trusts own the property and the property was never sold by the trusts, the trusts did not realized any capital gains or losses from the property that need to be passed through to the beneficiaries of the trust.  If the trust distributed the property to the beneficiaries, the distribution would not be taxable income to the beneficiary and would not be included on the Schedule K-1.  I'm not particularly familiar with such transactions, but I believe that the trust's cost basis in the property generally transfers to the beneficiary along with the property.  This cost basis would be used to determine the capital gain or loss reportable by the individual when the property is sold by the individual.

Given the complexities of trusts, it might be best to have this gone over by a local tax professional.  This is getting way off of the topic of the original question here.

So, as the "personal representative" of my parent's estate, there was income into the estate by sale of stocks.  Does that mean I have to file a tax return for the estate due to the income, then once distributed, that same money is taxed a second time on the individual basis?

Unsure of the tax law for discretionary income distributions, but the majority of the trusts I have seen which allow for discretionary payments of principal  also require distribution of all income.   Maybe that's not your situation, but if it is, the distribution should be deductible by the trust to the extent that it is from income which the beneficiary is entitled to.   If indeed distribution of income is discretionary and taxed at the trust level regardless of whether or not it is distributed, which I think is correct,  it would seem to be trust principal at at point.  As a lay trustee of various trusts, I can't recall every observing my CPAs charging the beneficiary with income if it was principal they received rather than distributable net income. I would get a second opinion if I were you!

@dmertz 

Following your response that distribution from a trust principal is not reported on Schedule K-1...  I thought the trust needs to inform the IRS who it distributed principal to and how much.  If so, where is it reported if not on Schedule K-1?  By the way, in my process of completing the tax return for the trust and the schedules K-1, I noticed an entry on the K-1 for AMT adjustment.  Does this take care of the distributed principal?

Thanks

"Following your response that distribution from a trust principal is not reported on Schedule K-1"

The Schedule K-1 reports items of income, deductions and credits that are necessary for the beneficiary to complete the beneficiary's tax return.  Nontaxable amounts distributed are not reportable on the beneficiary's tax return.

@dmertz 

Does this mean the principal in an irrevocable trust is not considered a taxable income for the beneficiary regardless of the amount?

The only amounts that are taxable income to the beneficiary are those that would be taxable to the trust if they were retained by the trust instead of being distributed.

Reading through this thread I get partial answers.  I'm dealing with an irrevocable trust and understand that if any current year income is distributed, it is reported on a K1 and the beneficiary has to report it on their taxes and pay tax.  I also understand that if trust principal is distributed, it is at the discretion of the trustee and that this is not taxable to the beneficiary since tax has already been paid on this money.  The definitive answer I'm looking for is (1) does the trust have to report a distribution of principal and if so, on what form and (2) does the beneficiary have to report the distribution of principal and if so, where on form 1040?  Someone answered schedule B, line 10 but that is obviously incorrect as there is no line 10.  If anyone can answer, I would appreciate it, thanks. 

Line 10 of Schedule B (Form 1041), not Schedule B (Form 1040).

Thanks for the quick reply, duh, I misread, you clearly responded form 1041.  Looking at this form, I assume distribution of principal qualifies as "other amounts".  So does the beneficiary report anything?  One other question that I believe is obvious but will ask anyway, if current year income is distributed and a K1 is issued for that amount, does the money actually have to be paid/transferred to the beneficiary or can the beneficiary elect to leave it in the trust, even though they are responsible for paying the tax?  Many thanks.

No, the beneficiary does not report nontaxable distributions of corpus or income previously retained and taxed to the estate.

The calculations on Schedule B result in distributions to the beneficiaries effectively being first from current-year income to the extent that there is current-year income.  If the amount distributed to the beneficiaries is less than the current-year income, the amount not distributed is taxable to the estate, not to the beneficiaries; the estate does not get a deduction for distributable net income that is not distributed.

Well, this is never easy.  Not sure if you are an independent expert or with Turbo Tax software but I'll ask anyway.  So I entered the distribution of corpus on schedule b, line 10, which is not taxable or reportable to beneficiary.  The program creates a K1 with amounts for the beneficiary to report which according to our discussion on this subject would be incorrect.  There are no "step by step" questions in the software on distribution of corpus so the only way to do this is by direct input to the "form".  Perhaps the distinction of the various income tiers impacts this somehow and needs further direct input?  If someone has an answer, I would appreciate it, thx

If the trust received income and a distribution was made to a beneficiary, there will be reportable income on the Schedule K-1.  If the trust received no income, the result on Schedule B line 15 should be $0 and no income will be passed through on the Schedule K-1.

Nothing of the distribution of corpus will appear as taxable income on the Schedule K-1.  If the trust did receive income, the distribution to the beneficiary is treated as coming first from the income and will appear on the Schedule K-1 in the box associated with the type of income.  You can't distribute corpus without first distributing income.  When making the entry in TurboTax Business, a distribution of corpus is indicated by increasing the amount that TurboTax shows as distributed to beneficiaries to an amount above that beneficiary's share of income to the trust.

Distribution is from a Disputed Ownership Fund

I don't know where to invlude the money, under interest or dividends. The amount is less then $20.00

Do you have a K-1 from a trust or some other tax document?

Or are you preparing the 1041 and asking directions?

See also this TurboTax Help.

This is maddening! Taxpayer wants to know how to handle distribution of corpus on the 1041 and gets answers on how to handle distribution of income!

Yes, we understand that the beneficiary doesn't have to report such distributions. But does the trustee have to report it on form 1041 and where on that form or its schedules do we report it, exactly? I see references to Schedule B, but when I try to open Schedule B the only thing that comes up is Schedule B QBI aggregation statement which is unrelated.

Distributions of corpus are not reported on Form 1041.  Form 1041 is an income tax return for reporting income, deductions and credits of the estate or trust and it is those that are passed through to beneficiaries on Schedules K-1 for reporting on the beneficiaries individual income tax return.

I've been searching for answers on how to report the principal distributions to irrevocable trust beneficiaries and this string is the closest I've found to what I'm looking for. I'm the trustee for my mother's estate. I'm wading through the muddy 1041 waters just trying to figure out how to complete these forms since this wasn't any grand estate. Her home was in the trust and she had about $10,000 in her bank account.  We sold the home for slightly less than the appraised market value. I distributed the money from the sale to my siblings - eight of us. Q.1 - I think the sale of the home is reported on Form 8949 and then schedule D - is that right?  Q.2 - Where do I report the distributed money (principal) or do I not report that?  Q.3 Since there is no income, do I issue K-1's to my siblings showing that, and does the principal get reported anywhere on the K-1's?

From Page 4 of Instructions for Form 1041:

Distributable net income (DNI). The income distribution deduction allowable to estates and trusts for amounts paid, credited, or required to be distributed to beneficiaries is limited to DNI. This amount, which is figured on Schedule B, line 7, is also used to determine how much of an amount paid, credited, or required to be distributed to a beneficiary will be includible in his or her gross income.

Please refer to the following link for additional information:

IRS Instructions for Form 1041

You can distribute corpus, but it generally is not taxable because only the taxable income is reported on the 1041.  The taxable income is allocated to beneficiaries via k-1 and any excess distributions (corpus) beyond the taxable income does not show on the 1041 nor k-1s unless a comment is made in the comment section to that effect.

Also, the amount of corpus distributed beyond the taxable income allocation is also not deductible on the