k-1 when principal only distributions

[maglib]

Why is a k-1 produced if a Trust paid principal only, NO DNI? The Trust is a complex trust  which the Trustee has flexibility with no required payouts.  The Trust plans on paying all the taxes with multiple beneficiaries  of differing amounts. Some withdrew most of their money.  

Level2  distributions show no where on the K-1's so why even reported?

Thank you.

[RobertB4444]

K-1s are generated even if they are nothing but zeroes,  It is a reporting requirement.

@maglib 

[maglib]

@RobertB4444 Since the Trust has a loss as it's the first year and there is no DNI,  the k-1's are all $0. If a beneficiary already filed their taxes as no k-1 was yet done, would it matter since 0's?

One of the beneficiaries was divorced prior to being a TRUST beneficiary.  They are still filing MFJ for 2023.  Would he have to still report a k-1 with 0's as he prefers not to acknowledge it to her if he doesn't need to.

Another questions:

1. If the TRUST agreement allows for funeral expenses to be paid, they still won't be expenses for tax purposes, am I correct on that?

2. I had lawyers fees for getting all the assets, filing all the papers to obtain the trust assets. Lots of meetings with family to get paperwork signed.  Are these expenses of the Trust for tax purposes?

3. As home sat with nobody in it and it was an investment upon Trust obtaining it, there were numerous costs of cleaning out, lawn maintenance.  I read differing rulings on these costs as being costs to maintain assets.  Thoughts on being other expenses?

THanks.

[tagteam · Accepted solution]

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@maglib wrote:

1. If the TRUST agreement allows for funeral expenses to be paid, they still won't be expenses for tax purposes, am I correct on that?

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Yes, you are correct; funeral expenses are not deductible on a 1041 (only on a 706 for estate tax).

See https://www.irs.gov/instructions/i1041#en_US_2023_publink100077445

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@maglib wrote:

2. I had lawyers fees for getting all the assets, filing all the papers to obtain the trust assets. Lots of meetings with family to get paperwork signed.  Are these expenses of the Trust for tax purposes?

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Those legal fees should be deductible as expenses directly related to the administration of the trust.

[tagteam]

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@maglib wrote:

3. As home sat with nobody in it and it was an investment upon Trust obtaining it, there were numerous costs of cleaning out, lawn maintenance.  I read differing rulings on these costs as being costs to maintain assets.  Thoughts on being other expenses?

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For these expenses see https://www.irs.gov/instructions/i1041#en_US_2023_publink100077445

Other costs paid or incurred by estates and non-grantor trusts.

Under section 67(e), deductions are allowable for costs which are paid or incurred by an estate or non-grantor trust in connection with the administration of the estate or trust and would not have been incurred if the property were not held in such estate or trust.

In determining whether a cost is deductible by an estate or non-grantor trust, it must be determined whether the cost would be “commonly or customarily” incurred by a hypothetical individual owning the same property. If the cost would be deductible by a hypothetical individual, it is not deductible by the estate or non-grantor trust.

Ownership costs.

Ownership costs are costs that are chargeable to or incurred by an owner of property simply by reason of being the owner of the property. These costs are commonly or customarily incurred by a hypothetical individual owner of such property and are not deductible by an estate or non-grantor trust. Under section 67(b), they include, but are not limited to, condominium fees, insurance premiums, maintenance and lawn services, automobile registration and insurance costs, and partnership costs deemed to be passed through to and reportable by a partner. Other expenses incurred merely by reason of the ownership of property may be fully deductible under other provisions of the Code.

In short, if a hypothetical individual could not deduct these expenses, then neither can the trust.

[tagteam]

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@maglib wrote:

....the k-1's are all $0. If a beneficiary already filed their taxes as no k-1 was yet done, would it matter since 0's?

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This makes absolutely no difference.

The trust does not have to generate and issue K-1s if there is no need to do so (e.g., "all $0's").

[maglib]

@tagteam As normally the owner would have lived there and this is an inherited property that is not the normal another CPA actually told me they are costs not normally incurred by the average person since most average persons don't live in other states and have to maintain homes nobody is living in.  I can see the argument but, I agree with you. Thnanks.

[maglib]

@RobertB4444 

The K-1 has no place that reports principal distributions that I can see nor is there one on the 1041. Let me know what line items, if any, they should be on.  DNI is only reported and allocable shares of income and expenses related to the DNI.

The TRUST is an irrevocable complex trust that the TRUSTEE has rights to distribute income or principal. So the TRUST maintains all income and expenses and files a 1041 and has NO DNI deductions for principal distributions. Unless the tax rate of the TRUST is over the beneficiaries, it is best to allow the TRUST to pay all related taxes if the TRUST agreement allows for it.  In a COMPLEX TRUST you can move income to lowest tax rate.  Some have one person taking all income upon the TRUST reaching certain tax rates.  

Since principal only distributions have no impact to tax returns, many spouses would not be made aware of assets of their spouse.