Schedule K-1

[Anonymous_]

The K-1s, according to the information you set forth in your previous posts, should have figures on Line 11 (with various codes) since there is a capital loss and also (final year) deductions.

The beneficiaries would share in those final year deductions (on Line 11) unless it was otherwise specified in the terms of the trust.

Please do not take this the wrong way, but posing hypotheticals is a bit improper on this board, which is designed for answers to real income tax issues that arise when users are preparing their income tax returns. If you are thoroughly confused by terms used and/or how to handle varying (hypothetical) scenarios, you should consult, in person, with a local tax professional (which I would recommend for someone in your situation, regardless). 

Finally, since this is ostensibly the final 1041, the need for answers to purely hypothetical questions eludes me unless there are other facts that have not been disclosed.

[taxdean]

Got it, sorry about the hypothetical.  Back to the real world.    Your other answers seem like you may be walking back your prior answer, which I doubt is true, so I need to clarify:  I am referring to the 3 folks that got 50k each as "fixed beneficiaries" and the 2 folks that split what is remaining from the trust proceeds, as "variable beneficiaries".  I am assuming, PERHAPS WRONGLY, that the purpose of the K-1s is to tell each of the 5 (as well as the IRS) what tax responsibility each has.  If that is correct, from what you've said, I would think that means that the K-1s for the fixed beneficiaries should show them having no taxable gain or loss, whereas the K-1s for the variable beneficiaries would each show the same tax loss, which would be half of the loss shown on the Form 1041.  Is that correct?   It would be nice to be able to tell the fixed beneficiaries that they don't have to continue to wait for K-1s and that can file their tax returns today rather than waiting for K-1s to arrive in a week.

[taxdean]

<< The beneficiaries would share in those final year deductions (on Line 11) unless it was otherwise specified in the terms of the trust. >>

To be clear, I do not believe the trust addresses this, other than what we already discussed in terms of the 150K maximum.  Is that what you mean by "otherwise specified"?

<< Finally, since this is ostensibly the final 1041, the need for answers to purely hypothetical questions eludes me unless there are other facts that have not been disclosed. >>

Unfortunately, due to worries about keeping reserves for possible tax consequences and some other bills, the distributions to the variable beneficiaries did not happen until January of 2022, so I imagine there will need to be one more year of trust returns.

Thanks again!

[Anonymous_]

I think you understand, but am not 100% certain.

Sharing in the final year deductions (which apparently is all there is here) would be done ratably (assuming the trust is silent) according to each beneficiary's interest in the corpus. 

In other words, if there is nothing left after distributions to the "fixed beneficiaries", then they receive all of the final year deductions.

[Anonymous_ · Accepted solution]

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@taxdean wrote:

Unfortunately, due to worries about keeping reserves for possible tax consequences and some other bills, the distributions to the variable beneficiaries did not happen until January of 2022, so I imagine there will need to be one more year of trust returns.

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Not necessarily; it is still possible to make this the final return.

The trust can make a 663(b) election to have the distributions made in January treated as if they were made in the prior year (i.e., 2021).

Further, the trust can still file a final return if there is nothing left (in terms of assets) except a small reserve for paying the likes of taxes and expenses.

[taxdean]

I thought I understood several posts ago when I thought you told me that the fixed beneficiaries would have no participation in tax consequences which, in essence I would think, is all they really need to know in order to be able to finish their personal tax returns today, which they are clamoring to do.   A lot of what you have replied since then, especially your last reply, makes me less sure that such is the case.  I am not sure who you mean by "they".  Although I have never seen a 1041 filled out, particularly for a simple instance like this, with only a capital loss and none of what I think of as income, nor ever received a K-1, I do have the trust document in front of me and it does say that distributions (actually of principal and income) will first go equally to those 3 fixed beneficiaries up to 150k in total.  Are you still saying that means the K-1s for them should show no tax consequence, that all of the tax consequence will be shared between only the other 2, the variable beneficiaries?   Thanks!

[taxdean]

<< In other words, if there is nothing left after distributions to the "fixed beneficiaries", then they receive all of the final year deductions. >>

Are you referring to the hypothetical that I thought you told me to stop addressing?  To be clear, the reality is that there was money left for the variable beneficiaries.  So, the question I have remains the same.  Do the fixed beneficiaries have zero tax consequence when there is no interest or dividend income and merely a condo that sold for less than it was FMVd at, whose proceeds sat in a no interest bank account for several months before being distributed in almost their entirety?

[Anonymous_]

No. This thread has become extremely long and, without going back through all the posts, I believe you did not mention that the five beneficiaries were treated differently in the terms of the trust (earlier in the thread).

Thus, the primary beneficiaries are (as indicated) first in line; they share equally up to the maximum. If there is anything left over then the other beneficiaries receive whatever share is specified in the trust.

[Anonymous_]

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@taxdean wrote:

Are you referring to the hypothetical that I thought you told me to stop addressing?  To be clear, the reality is that there was money left for the variable beneficiaries. 

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I am simply not sure and that is the problem when hypotheticals are interspersed with facts.

Regardless, I am not even certain precisely what you need answered at this point and, frankly, without actually reading the terms of the trust, it is rather difficult, if not impossible, to provide a completely accurate answer.

I will state, as a matter of general principle, that the "fixed beneficiaries" would share in the loss (the final year deductions) unless the trust specified otherwise. The balance would then be split among the other beneficiaries in terms of the loss. Note that there is some math involved here since the fixed beneficiaries will receive a share of the loss up to the amount of the corpus they received based on the total amount distributed to all beneficiaries. 

This would be an example (very rough): The three beneficiaries received $150,000 and the remaining two also received $150,000 (presumably this is all corpus). The first three beneficiaries would share equally in half of the loss while the remaining two would share in the other half of the loss.

[taxdean]

I absolutely mentioned that there were two classes of beneficiaries, several times in the thread.  That has been what a lot of the posts between us have been talking about.  Perhaps you are just spread too thin to remember.  So, I think I better sum up the particulars in this single-hopefully-self-contained post:  The trust owned only a condo.  the condo was quickly sold for less than FMV at death, and the proceeds were parked in a no-interest bank account under the trust's name and were virtually all distributed to the beneficiaries sometime thereafter.  The trust document, as I read it, does not talk about tax consequences of the trusts to the beneficiaries (nor would I expect it to), merely how distributions are to be divided.  And that part seems clear: Up to 150k is to be first divided equally between 3 what I called "fixed beneficiaries" and any remainder is to be split equally between two other "variable beneficiaries".  The only issue, now that all parties have gotten their distributions, is how they would share in the 1041 tax loss due to the condo selling for less than FMV.   My original hypothesis was that the trust's tax loss would be shared ratably with the distributions.  However, since 3 of the beneficiaries got fixed distributions, I thought you then told me that those three beneficiaries should not share.  The estate attorney also believes such is the case but is not 100% sure.   I equate that to meaning that the K-1s they would get would not show them having any tax consequences.  If so, they could file their personal 2021 tax returns today, before getting their K-1s, comfortable that the K-1s would change nothing; wheres the variable beneficiaries will need to wait for their K-1s that will tell them exactly what their half of the tax loss amounts to.  

I am sorry this thread has been so long and I imagine you are so very tired of my questions and, for that, I do apologize.  I do think this is the only item I am aware of that is still undecided.  Thanks much!

[Anonymous_]

There, in fact was another thread that was somewhat similar, so I apologize.

I am now thinking (and maybe was) that the three beneficiaries are not income beneficiaries but were simply to be distributed a share of the corpus while the remaining two beneficiaries were to receive any corpus left plus share in the income (exclusively). If that is the case, then the estate attorney s correct; the first three would not share in the loss. 

I would say handling that in the foregoing manner would make the most sense and be in accordance with the terms of the trust.

[taxdean]

Actually, the wording in the trust is" ... the principal of the Trust, together with any undistributed or accumulated income, shall be distributed as follows ...", which then goes on to specify that the first up to 150k is to be distributed equally among three people, with the remainder being divided equally between two other people.  So, it does include income, not just the corpus.  That said, does getting the first 150k, specified as a maximum amount, preclude them from sharing in tax losses (or owing taxes due to tax gains, if there had been any)?  That is the question.  If you are not sure, please just say so and, perhaps, someone else on this forum might know for sure.  Thanks much!

[Anonymous_]

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@taxdean wrote:

Actually, the wording in the trust is" ... the principal of the Trust, together with any undistributed or accumulated income, shall be distributed as follows ...", which then goes on to specify that the first up to 150k is to be distributed equally among three people, with the remainder being divided equally between two other people.  So, it does include income, not just the corpus.

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That makes a world of difference! In that case, you are correct in terms of sharing ratably. Handle the return in that manner.