Question

Capital Gains, Trust, 1041 & K-1’s

Forum|Forum|1 year ago
January 30, 2025
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A couple of questions about Capital Gains in a trust, distributions and how that is reported. We inherited shares of stock into my father’s trust at his passing this past year. Shares of stock were sold (and capital gains incurred) to distribute cash to my 3 siblings. I personally had shares transferred to another account (no captital gains).

1. It appears that the capital gains show up as income in both the 1041 and the K-1’s (divided) across all 4 of us. That feels to me like double taxation (in beneficiaries taxes and in 1041 of the trust). Am I wrong? It seems to me that the capital gains should show as pass thru only and be taxed on the beneficiaries taxes. What am I doing wrong?

2. The income in the K-1’s seems to be fairly equally divided, including capital gains. However, for capital gains only, I don’t want to see capital gains on my K-1 and it should be divided across my 3 siblings since stocks were cashed to distribute cash to them. But I can’t get TurboTax to allow me to do that. Does anyone see what I might be doing wrong here?

Thanks so much for your help.

TurboTax Business Windows

M-MTax

1. I have to presume you have the authority to treat capital gain as income and distribute it to the beneficiaries. The gain will either appear on the 1041, the trust will pay the tax, and the beneficiaries will receive their share of the cash without any tax liability OR the trust will pass the gain through to the beneficiaries on their K-1s and the trust will receive an income distribution deduction (IDD) for that amount.

2. You don't have to report the transfer of stock to you from the trust. That is a distribution of corpus and you will take the trust's basis. It does not need to be reported on the trust's income tax return.

T

tinertimAuthor

1. Yes…I want to see the capital gains passed through to the K-1’s and then deducted from the 1041. However, the gains are passed to the K-1’s but there is no deduction seen on the 1041. That is my issue.

2. Yes…the stock transfer into the trust is not reported. However, for my 3 siblings, stock was sold to provide them a distribution in cash. That sale of stock incurred capital gains in the trust (as mentioned above in #1). However, TurboTax will not allow me to allocate the capital gains to just my 3 siblings. It wants to divide it based upon distribution.percentage and as a result, my K-1 is reflecting capital gains (even though my distribution was a stock transfer that incurred no capital gains). I hope that makes sense.

Thank you for your interest and response!!! I’ll keep playing with the software.

M-MTax

1. You should have an income distribution deduction on Line 18 of your 1041. If you don't and have passed through the gain properly then there might be some sort of issue with the software. Note that the gain must be allocated to income and also to the beneficiaries, and then actually distributed, before the IDD will kick in.

2. I'm not certain about the mechanics of the software but it should allow you to allocate the gain from the sale of part of the trust's holdings to just the three beneficiaries who are receiving cash from the sale. You should be able to do this either by allocating the appropriate percentages or dollar amounts to the beneficiaries who are receiving their share of the gain, and you should be able to exclude yourself or allocate 0 (percent or dollars) to yourself.