Trust 1041 - K-1

[DC1994]

My father passed last year and he had a guarantor trust. Some of his accounts were distributed to me and my sister, who are trustees and beneficiaries, most were not. The basis for all the accounts was reset. One retirement account had a significant capital gains and the trust received a 1099-R under its tax EIN number. We have to file a 1041 and pay taxes on the capital gain at the federal and state level, but we did not distribute any funds from the trust to my sister or I in 2021. Assume we have to issue K-1 in 2022 for the funds held by the trust, but how do we avoid paying double taxes on that.   (I assume we erred in not distributing the net gains last year).  Many thanks.

[DianeW777]

No double taxation. Distributions from the trust are not necessarily income to the beneficiaries.  The only income that will be taxed to the beneficiaries is income that is earned by the trust in 2022.  Check your trust document to see if there are required distributions of income.  If not, then the trust can pay the tax in 2021, then distribute the income to the beneficiaries in 2022.  

Any income already taxed by the trust is not income to the beneficiary, simply a distribution of the corpus.

Corpus is the principal or property of an estate or trust.  It does not include the income it earns, receives or realizes from the corpus.  

Income is earned by the estate or trust on its assets and could be realized in the following six classes of income:
1. Interest
2. Dividends
3. Net Income or Loss from the operation of a Business, Profession or farm
4. Net Gain from the Sale, Exchange or Disposition of Property
5 Net Income or Loss from Rents, Royalties, Patents or Copyrights
6 Estate or Trust Income.

[DC1994]

Many thanks