How to report distributions of principal from a Trust

[sunrise131]

Our mother had a revocable trust.   It included several rental properties and a mutual fund.  When she passed away in 2022 her revocable trust became an irrevocable trust.  We (my sister and I both sole trustees and beneficiaries) sold all the properties and now want to distribute all assets and close out the trust.  The trust did earn any income after becoming irrevocable.  I am using the Business & Trusts version of TurboTax but cannot see where to report the principal distributions or even enter in the starting assets.

[Anonymous_ · Accepted solution]

A 1041 is not required to be filed for a trust unless the trust has taxable income for the tax year or gross income of $600 or more (regardless of whether or not that income is taxable).

You do not need to report distributions of corpus (principal) to the IRS.

[Mike9241]

sorry for your loss. if the trust had properties and mutual funds that were sold the trust needs to report these sales. each asset has a tax basis of the date of death fair market value + the tax basis of any additions such as improvements to the real property or mutual fund dividends.  it is doubtful every asset was sold for exactly its tax basis. thus the trust will need to issue you each a k-1.  

[Anonymous_]

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@sunrise131 wrote:

The trust did earn any income after becoming irrevocable. 

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Except I just noticed that you stated it included rental properties. 

Did the trust not receive any rent prior to the properties being sold?

Further, as pointed out by @Mike9241, there could be gain and recapture if the properties were being used as rentals after the trust became irrevocable but prior to the properties being sold.

[Critter-3]

This is one of those times where getting local professional assistance would be the wisest choice so things are done correctly.  

[sunrise131]

Thank you.  All properties were sold within 90 days of death so I believe we can use the sale price of each as the step-up basis.  There was rental income but it was slightly exceeded by expenses.  Do these sales still require some form of reporting?

[DianeW777]

Yes, the sales of the property must be reported.  If they were sold once received by the beneficiaries then it will be reported on their returns. If they properties were sold while still in the trust then the trust return would report the sales and complete the K1s for each beneficiary. Likewise the mutual fund earnings after death and before distribution to the beneficiaries would be reported on the trust return.

As indicated by @Critter-3 you might consider professional advice for this year of ending the trust and the sales.

[Anonymous_]

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@sunrise131 wrote:

All properties were sold within 90 days of death so I believe we can use the sale price of each as the step-up basis. 

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The sales are required to be reported. but there is no such tax law, regulation, rule, or guideline (i.e., 90 days).

Generally, the fair market value on the date of death controls and that value must be substantiated if questioned by the IRS. For real estate, there may not be much variance, if any, but mutual funds and other investments may be more volatile.

[sunrise131]

This irrevocable trust has been terminated.  It earned no income.  All properties and equities were sold at a small loss relative to their step-up basis.  So there is only corpus distribution; no income distribution.  Therefore K-1s are not required, right?  Is a tax filing for the trust even required?  The IRS says “Trusts must file a Form 1041, U.S. Income Tax Return for Estates and Trusts, for each taxable year where the trust has $600 in income.”  The trust had a small loss.

[Critter-3]

Actually the loss can be pushed out to the beneficiaries using the K-1 so they should be produced. 

[Anonymous_]

I agree with @Critter-3; you can distribute the loss to the beneficiaries which will appear on their K-1s if you prepare a 1041.

Moreover, if the trust sold property, you need to report that transaction if for no other reason than to establish the basis in the property. If the IRS happens to receive a tax reporting statement, it will likely only contain the gross sales price.

[Taxes886677]

The trust tax return, form 1041, must report the sale of the rental properties even if they did not produce any income. Proceeds out of the trust are considered distributions.  The trust tax return will issue a K-1 to each of the beneficiaries with their share of income, expenses if applicable. 

[sunrise131]

Thanks to all of you!  One more question.  I see no place on either the 1041 or the K-1s to report the payout of principal (corpus) to the beneficiaries.  Is it not necessary to report it since it is is neither income, nor taxable?

[Anonymous_]

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@sunrise131 wrote:

Is it not necessary to report it since it is is neither income, nor taxable?

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Correct.

[millar72]

Hi - wouldn't the proceeds from the real estate sales become part of the amount distributed from corpus (principal) and then get reported on Schedule B Line 10?