Colorado Trust Return

[range69]

Need help with Colorado state Form 105 for a Trust filing. The trust distributed more that just the trust's income. (There were capital gains from Mutual fund sales and simple interest) The resulting "Income" is far less than what was distributed to the beneficiaries.   Schedule B of Form 105 appears not to let more than 100% of "income" be distributed.

What do I do?

[jtax]

This may be too hard a question for an Internet volunteer help forum. It is important that you understand how trusts work, the details of the langue of the trust instrument in question, and local law. Your best move may be to pay the high estimate and extend your returns will you research the issue. I highly recommend that you hire an estate planning attorney in the state in which the trust was created or its current situs.

What may be going on is that the way trusts usually work is that interest and dividends are distributed to current beneficiaries and capital gains are kept by the trust for the ultimate beneficiaries (the "remaindermen" beneficiaries when the current beneficiaries die). The trust pays tax on the capital gains and the bene's pay on the dividends/interest to the extent that dividends/interest are actually distributed. If more is distributed than the dividends/interest that is considered principal and the benes do not pay tax. (It is a gift -- gifts are not taxable per https://www.law.cornell.edu/uscode/text/26/102)

But that is only the usual way trusts work. When creating the trust the grantor (settlor) could have said that capital gains will be distributed to benes. Or that the trustee can so allocate.

There are three cases that the capital gains may be passed out and taxable to the benes. See https://www.yeoandyeo.com/resource/allocating-capital-gains-to-distributable-net-income-in-estates-a...

If the words in your trust require/allow or your practice per Tres. Reg. 1.643(a) – 3(b) is consistent, then in TT federal you indicate how much of the capital gains are allocated to the bene's and how much stay with the trust.  I would think that should flow to the state return but I don't have CO's 1041 to verify.

If you determine that you can (or must allocate) capital gains to the benes see this prior discussion for how to do so:

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/how-to-enter-trust-ca...