Distribution to the beneficiary

Forum|Forum|7 years ago
June 1, 2019
6 replies
0 views

I'm stuck in discretionary distribution as TurboTax stated from the following link. https://turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Forms/What-is-a-Schedule-K-1-Form-1041--Estates-and-Trusts-/INF20134.html. The link stated that "If the income distribution is discretionary, meaning the trustee or estate administrator has authority to decide whether beneficiaries will receive distributions, the payments aren’t deductible on 1041 and are not reported on Schedule K-1. The trust or estate is responsible for paying the income tax on these distributions, not the beneficiaries."

However, my accountant insisted that no matter the character of the distribution, if the trustee distributed to the beneficiary, then it will be taxable on beneficiary's individual tax return. Is this correct?

TurboTax Basic Windows

Best answer by dmertz

The FAQ appears to be wrong. Distributions from the estate to beneficiaries come first from the income received by the estate during the estate's tax year (Distributable Net Income or DNI). Any amount of taxable DNI required to be distributed currently (tier 1) plus any additional amounts of income actually distributed (tier 2) to beneficiaries are reported as an income distribution deduction on the estate's tax return and are reported via the Forms K-1 to beneficiaries for taxation on the beneficiaries' individual tax returns. The income is only taxed once, either on the estate's income tax return because income not required to be distributed was retained, or on the beneficiaries' tax returns because the income was distributed or required to be distributed.

D

dmertzAnswer

Employee

The FAQ appears to be wrong. Distributions from the estate to beneficiaries come first from the income received by the estate during the estate's tax year (Distributable Net Income or DNI). Any amount of taxable DNI required to be distributed currently (tier 1) plus any additional amounts of income actually distributed (tier 2) to beneficiaries are reported as an income distribution deduction on the estate's tax return and are reported via the Forms K-1 to beneficiaries for taxation on the beneficiaries' individual tax returns. The income is only taxed once, either on the estate's income tax return because income not required to be distributed was retained, or on the beneficiaries' tax returns because the income was distributed or required to be distributed.

S

seadrag76Author

Employee

I appreciate your answer. I'm stuck in another situation. What if the estate and trust distributed property to the beneficiaries? Should the beneficiaries also recognize capital gain in their Sch. K-1?

In brief, the trustee accidentally put property in its management company's QB (3 trust are the partners of this management company and they are the only partners), but the actual investors are the beneficiaries and not the management company. Accordingly, the accountant recognize this as property distribution to the beneficiary, but when I file 2014 1041, I did not enter the distribution (property distribution) since it was mistakenly entered in management QB. Was this a wrong tax treatement? Thank you for your answer!!

I

intothenight65

Employee

So, as the "personal representative" of my parent's estate, there was income into the estate by sale of stocks. Does that mean I have to file a tax return for the estate due to the income, then once distributed, that same money is taxed a second time on the individual basis?

V

vendor

Employee

Unsure of the tax law for discretionary income distributions, but the majority of the trusts I have seen which allow for discretionary payments of principal also require distribution of all income. Maybe that's not your situation, but if it is, the distribution should be deductible by the trust to the extent that it is from income which the beneficiary is entitled to. If indeed distribution of income is discretionary and taxed at the trust level regardless of whether or not it is distributed, which I think is correct, it would seem to be trust principal at at point. As a lay trustee of various trusts, I can't recall every observing my CPAs charging the beneficiary with income if it was principal they received rather than distributable net income. I would get a second opinion if I were you!

R

Rose 04

Distribution is from a Disputed Ownership Fund