Trust Distributions to Successor Trustees from Farming Income

[cactusjack]

I have a few questions about taxes pertaining to a family trust.  The background and timeline are provided for reference.

My parents have both passed away, leaving myself and my brother as co-trustees.  Farm land is owned under the trust and generates income on a regular basis (we don't farm it directly, but have agreements with farmers who farm the land and we collect a percentage of farming profits).

My parents' state of residence = Arizona

My state of residence = Arizona

My brother's state of residence = Kansas

Farm land location = Kansas

December 1989 - Living Trust Created by My Parents

The living trust was created and my father's SSN was used for tax purposes.

January 2014 - My Father Passes Away

At this point, my mother took over the trust and her SSN was used for ta purposes.

October 2021 - My Mother Passes Away 

My mother passed away, and my brother and I are successor co-trustees.  According to my attorney, the trust is now an irrevocable trust.   An Employer Identification Number (EIN) was obtained and assigned to the trust for tax purposes.

November 2021 - Crop Grain in Storage was Sold

Following the last harvest, grain was being stored but was sold in November 2021 for approximately $100,000.   My understanding is that this will be classified as income under the Trust.  The funds from the sale were deposited to a family trust checking account dedicated to farming operations.

My brother and I verbally agreed that he would take over the farming operation and I would take over investments similar in value to the farm land and related assets.  We're in the process of transferring those out of the irrevocable trust and into our own names.

Questions:

1.  Does the $100,000 need to be transferred out of the "trust" checking account and into my brother's "personal" account to be considered a "distribution"?   

2. Do we have 65 days from 12/31/21 to make trust "distributions" for 2021 tax purposes?

3. Assuming the $100,000 distribution is made to my brother, this would be reflected on a Schedule K-1 form, correct?

4. If my brother turns around and puts the $100,000 back into the "trust" checking account for farming, does this need to be accounted for in any way?

5. Are there any other factors we should be considering regarding this issue?

If additional details are needed, just let me know and I'll do my best to provide them.  We are planning to file taxes for the trust using TurboTax Business and fill out a 1041 form.

Thanks,

Troy

[Anonymous_]

You absolutely need local legal and tax counsel. Proceeding without either could prove disastrous.

Regardless:

1. Yes, if the account is in the name of the trust, then in order for there to be a distribution of either income or corpus, the funds would have to be transferred out of the account.

2. Yes, you can make a 663(b) election in which case you would have 65 days from the end of the trust's tax year to make a distribution.

3. If the distribution is of income or gain, it will (should) appear on the K-1.

4. Adding funds back to the trust account (of an irrevocable trust) is generally improper in the absence of a mistake.

5. There may be a plethora of other factors, both federal and local, which is why legal and tax counsel is highly recommended.