Where Do I Report Distributions To A Beneficiary, From A Trust That Is Principal Only

[IDKinTX]

I am the Grantor and Trustee of a Revocable Living Trust. The Trust is fully funded by principal only. No interest income, investments, land, or personal property. All taxes were paid before the money was moved to the trust, and the funds earn no interest. So if I make distributions to the beneficiaries, they will not owe taxes since the distributions are strictly from principal.

My understanding though, is that I still need to provide each beneficiary with a Schedule K-1 in order to provide them with a document that show's that they don't owe taxes, but there isn't a line on the schedule to report NON-TAXABLE distributions from principal. There are only lines to report taxable distributions from income. My question is, where (or what line, or other document) do I report the non-taxable principal distribution to the beneficiary?

[Anonymous_ · Accepted solution]

You need to consult a local tax professional and/or legal counsel.

A grantor trust (aka revocable living trust) is a disregarded entity for federal income tax purposes. As such, income from a grantor trust can either be reported on the grantor's individual income tax return or on Form 1041 with a grantor information letter (or statement), but not on a K-1.

If you distribute corpus to any of the beneficiaries from a grantor trust, you are essentially making a gift from you directly to those beneficiaries and, depending upon the amount, may need to file a gift tax return (Form 709).

Please seek professional guidance for this matter.

[IDKinTX]

Got it. Thank you for the quick reply!

[IDKinTX]

Before I meet with a tax professional on this subject, does this summary at least look like I'm on the right track to have that discussion with them? ...

1. A 1041 is not required if all distributions are from principal [corpus] and the Trust earns no income and owns no interest [income] earning stocks, bonds, accounts, property, or other.
2. The IRS only generates the Schedule K-1 for the beneficiaries based the information provided on Form 1041.  Since no 1041 is required for the distribution of corpus, no Schedules K-1 are generated or sent to the beneficiaries.
3. Distributions of corpus are considered gifts by the IRS.
4. Any gifts distributed, per person, over the current annual exclusion ($16,000.00 in 2022) must be reported on Form 709, but are not taxable to the giver under the lifetime exclusion of $12.09 million in 2022.
5. The IRS only uses Form 709 to track the lifetime exclusion.
6. No gift taxes are owed on the cumulative amount of distributions below the lifetime exclusion. Only the amount over the cumulative lifetime exclusion is considered a taxable gift.

[Anonymous_ · Accepted solution]

You have everything essentially correct for your scenario.

[IDKinTX]

Thank you for your help!