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hativered
Level 2

(Trust) Made equal distribution to all beneficiaries. It was the final distribution.Can I allocate the "Required" amount not equally among the beneficiaries?

It's the final distribution / final return for a complex trust. The amount distributed includes income that was a result of capital gains. 

The trust document has the following clause, which I think might be relevant to my question:

"Adjust for Tax Consequences. The Trustee may take any action and to make any election to minimize the tax liabilities of the trust and its beneficiaries. The Trustee shall have the power to allocate the benefits among the various beneficiaries and shall have the power to make adjustments in the rights of any beneficiaries, or between the income and principal accounts, to compensate for the consequences of any tax election or any investment or administrative decision that the Trustee believes has had the effect of directly or indirectly preferring one beneficiary or group of beneficiaries over others. In making such adjustments, the Trustee may ignore or adjust for different tax bases of assets distributed to beneficiaries."

My question: even though I distributed equally among all beneficiaries, can I say that certain beneficiaries received more of the income portion (e.g., more of the capital gains) and less of the principal portion? If yes, this can significantly reduce the tax liability of the beneficiaries in higher tax brackets. 

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Accepted Solutions
tagteam
Level 15

(Trust) Made equal distribution to all beneficiaries. It was the final distribution.Can I allocate the "Required" amount not equally among the beneficiaries?

"... can I say that certain beneficiaries received more of the income portion..."

The short answer is "No" (explanation follows).

You can allocate different classes of income to different beneficiaries only if a specific allocation is required in the trust instrument and, even then, only if the allocation has an economic effect independent of the income tax consequences of the allocation. IRC §1.652(b)-2(b)

Importantly, allocation pursuant to a trust provision granting the trustee discretion to allocate different classes of income to different beneficiaries is not a specific allocation. See IRC §1.652(b)-2(b)(1)

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1 Reply
tagteam
Level 15

(Trust) Made equal distribution to all beneficiaries. It was the final distribution.Can I allocate the "Required" amount not equally among the beneficiaries?

"... can I say that certain beneficiaries received more of the income portion..."

The short answer is "No" (explanation follows).

You can allocate different classes of income to different beneficiaries only if a specific allocation is required in the trust instrument and, even then, only if the allocation has an economic effect independent of the income tax consequences of the allocation. IRC §1.652(b)-2(b)

Importantly, allocation pursuant to a trust provision granting the trustee discretion to allocate different classes of income to different beneficiaries is not a specific allocation. See IRC §1.652(b)-2(b)(1)

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