trust distribution of capital gains to beneficary - TT is producing a very strange K-1

[dorff99]

I've got a new trust and want to set the practice of distributing capital gains to the beneficary from year one.  

I have $10,000 of dividend income and $10,000 of capital gains in year 2 (2021)  The trust has a capital loss carry forward from year one of $40,000 due to inherited assets declined in value before being sold in year one. 

In the step-by-step, --INCOME/INVESTMENT INCOME/ALLOCATION OF CAPITAL GAINS -- I input that $10,000 of short term gains are distributed to beneficiary and the same on the next screen (If I leave the next screen with a  $0, & hit continue, it returns to the "Your Income" screen showing $0 of allocation of CG. ??????)

With that the "Dist Inv - K-1" form under Part II, Line 14 Amount distributed to Beneficiary $5,000 of NQ dividends & $5,000 of capital gains.  This is also what the K-1 is showing.   Should be $10,000 & $10,000.    

Also strangely, even though the $10,000 of capital gains is being distributed to the beneficiary and will be reported on his personal return, TT is reducing the $40,000 CG loss carryover inside the trust by $10,000, even though the CG is being passed through to the beneficiary.  It should remain unchanged since the CG is being passed through.  ??????????????????

[Anonymous_]

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@dorff99 wrote:

With that the "Dist Inv - K-1" form under Part II, Line 14 Amount distributed to Beneficiary $5,000 of NQ dividends & $5,000 of capital gains.  This is also what the K-1 is showing.   Should be $10,000 & $10,000.    

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Yes, strange. You may have to contact Support for this issue (there may be an adjustment that would be required to be done in Forms Mode).

What is the TurboTax phone number? (intuit.com)

[Mike9241]

several issues - some tax-related some not

distribution of capital gains

Exception No. 3: Allocated to Corpus but Actually Distributed
Capital gains may also be included in DNI when they are allocated to corpus but actually distributed to the beneficiary or used by the fiduciary in determining the amount that is distributed or required to be distributed to a beneficiary (Regs. Sec. 1.643(a)-3(b)(3)). A fiduciary could distribute capital gains to a beneficiary when relying on this regulation in a couple of different scenarios.

Another consideration when applying exception No. 3 is the ordering rule for capital losses. Generally, any capital losses will first be netted against capital gains at the trust level (Regs. Sec. 1.643(a)-3(d)). Any net remaining capital gains are available for inclusion in DNI. However, netting does not apply when capital gains are distributed under the third exception; rather, the distributed capital gains are taxed to the beneficiary prior to netting. Trusts with capital losses must consider this rule when planning capital gain distributions.

there is the prudent man rule and  one would ask if it's prudent to distributed STCG when there is a capital loss carryover 

you have a complex trust (capital gains are being distributed at your description). did you distribute cash of $20,000 to the beneficiaries either during 2021 or within 65 days after year-end - IRC 663(b)(2)

the amount distributed to beneficiaries can not exceed the cash/property distributions during this period.

does state law or the trust give you the power to distribute capital gains? 

[Anonymous_]

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@Mike9241 wrote:

Exception No. 3: Allocated to Corpus but Actually Distributed

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The TurboTax Interview (Step-by-Step) requires that the gains be allocated to the beneficiaries and allocated to income before they are allowed to be distributed (in the Distributions section).

[dorff99]

Yes I understand your issues regarding what I can or should do regarding electing to make a capital gains distribution, but the questions I'm trying to resolve is why is TT producing the strange results on the "Distributable Income for Schedule(s) K-1" of only showing half of the  "Dividends" and half of the "Total Capital Gains".   

You infer that if a capital loss carryover exist, then your forced to use it up at the trust level before you should distribute CG's out, otherwise you waste the capital loss carryover at the trust level because the beneficiary also must report the CG on their personal return, in effect wasting the capital loss carryover.   Its your opinion that this is a correct per IRS regs? 

So then the thing to do is for the trustee to elect to make a distribution of corpus equal to the capital gains each year (until the capital loss carryover is used up) to accomplish the objective of distributing all earnings and gains. 

So when I go back in TT and delete the capital loss carryover, but still distributing the $10,000 of dividends and $10,000 of CG's, (via the "Allocation of Capital Gains" in the step-by-step), the K-1 is only showing $5,000 and $5,000.  

However if I then go to distributions in the S-B-S and put $10,000 into the second tier box, the K-1 is then finally correct.  

Whether that is by design or not, its a terrible programing design when there is no "flag" or warning that the second tier box must contain the same value as what you put into the "Allocation of Capital Gains" in the S-B-S.  Thats what it appears anyway.  Your thoughts?

[dorff99]

could you please outline for me the process to accomplish your response.  In the SBS I know where to Allocation of Capital Gains on the Income Tab, but what is the additional step to then allocate to income as you described.  thanks

[Anonymous_]

[dorff99]

thanks for the response. 

I had done this before, and the result on the K-1 was still showing $5,000 of dividend income & $5,000 of CG, when it should be 10k & 10k.  On the 1041 Schedule B line 7C, its showing split between benef & trust of 50% & 50% ???? weird....  Only when I go back to the SBS under the distributions tab and put in $10,000 the second tier box, does it revert the split on the 1041 to 100% & 0%, and then the K-1 correctly shows $10,000 of dividend and $10,000 of CG. 

What is the explaination for why you have to put $10,000 into the second tier box under distributions for this work correctly, do you know.    Just trying to understand the logic of the thing. thanks

[Anonymous_]

@dorff99 

I have no idea how the program (the 1041 module) is coded. I suspect it might be for the most common scenarios.

I do know, however, that I have had to resort to Forms Mode on test returns (in a number of instances) to get the proper results.