How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask jgordosea Your Own Question

jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3095
Experience:  I've prepared all types of taxes since 1987.
3653323
Type Your Tax Question Here...
jgordosea is online now
A new question is answered every 9 seconds

Is it correct to deduct the capital gains from a distribution

Resolved Question:

Is it correct to deduct the capital gains from a distribution to heirs rather than the actual income taxes due on the capital gains? I had a forensic accountant review the 1041 from the year after my mother died. And the amount paid on three K-1 s by the three heirs was much less (over $100,000 less) than the trust reports deducted for income taxes on capital gains. I think we are owed some more money on the distribution. Or is it more complicated than I understand it.
Submitted: 1 year ago.
Category: Tax
Expert:  jgordosea replied 1 year ago.

Greetings,

 

The amount of the final distribution might or might not include the amount of gain on sale of assets. Final distributions do have to be reduced not only by the tax that was paid by the trust but also by any and all other items payable by the trust.

That is, the trust will not distribute any amounts that may have to still be paid from the trust assets.

There usually are other items than the taxes on income that will be taken from the assets prior to distribution. Very often the final tax return and accounting fees are not yet paid prior to distribution; but the specific items that were retained should be able to be identified from the accounting.

 

Usually there is an accounting or computation from which one can see how the amount of distribution was computed for a final estate or trust. For example, the trust accounting will show the beginning assets, disbursements for expenses (including taxes), income received, distribution amounts and any reserves for yet unpaid expenses to account for the assets.

 

If this is for an income beneficiary please know that trust accounting income very often does not include capital gain. The trust agreement can specify whether or not income includes capital gain; but if not specified the state law is used. Capital gain is generally considered part of the corpus, or body, of the trust and not income to be distributed.

 

For a discussion see http://www.nysscpa.org/cpajournal/2005/405/essentials/p52.htm

"Trust income can include an allocation of capital gains, if allowed under the governing instrument and local law. Such allocation may also be made in accordance with a discretionary power granted to the trustee by local law or the governing instrument, provided it is not prohibited by applicable law. "

As you see, including capital gain in income is something that can be dictated in the agreement, left to the discretion of the trustee to do so or not but is not the default or usual method for trust accounting income.

 

That is, it often is correct to not distribute capital gain to an income beneficiary.
Since this does depend on the specific trust agreement this would have to be confirmed by a practitioner that review the facts and documents in your case.

 

If you are seeing a deduction in the computation of distribution to a beneficiary for the entire amount of capital gain that may be correct when only income is being distributed to that beneficiary and the assets will be distributed to another beneficiary, or remainderman. The capital gains are often deemed part of the assets that go to the remainderman and not part of income to the income beneficiary.

 

So, those are possibilities - other items that are unpaid or that capital gain is not income to be distributed (either under the terms of the trust or applicable state law) can both explain why the amount distributed was reduced by more than the tax on the gain.

 

Please do ask if you need more discussion.

Thank you.

 

 

Customer: replied 1 year ago.

Sorry I meant to compare the income tax which was from capital gains not the capital gains themselves . A fraudulent cpa prepared the last trust report 1 year before the 1041 was done and deducted $187,000 from the distribution for income tax to the estate.


However, the real CPA did the 1041 in April following the distribution to the heirs and that triggered a K-1 and amended return for me. But I see on the 1041 that the income taxes actually paid tothe IRS was only $76,000.


Aren't all the heirs due an additional distribution of the difference?

Expert:  jgordosea replied 1 year ago.

Hello again,

 

From what you wrote there was incorrect reporting or computation of distribution in a prior year.

It is not possible to say that the difference between what was correct and the incorrect amount reported is or is not the amount that is to be distributed. In almost all cases the amounts would not be identical.

 

First, the fictitious amount reported may or may not have actually represented funds that existed and could be available to be distributed.

 

Second, even if the incorrect amounts were actual funds in the trust when the improper return was prepared by the time the proper reporting was done the value of the assets might have fluctuated with the market so it would usually not be the same.

 

Once the books were corrected an accounting or computation from which one can see how the amount of distribution was computed for a final estate or trust would be made and available.

The correct trust accounting will show the beginning assets, disbursements for expenses (including taxes), income received, distribution amounts and any reserves for yet unpaid expenses to account for the assets, and so on.

 

So it is not at all certain that any additional distribution would or would not be needed due to incorrect reporting in the past. Also, if one was needed it would rarely just be the difference between the correct and incorrect amounts.

 

In any case it is the accounting that can be examined to see how that distribution amount was computed and to trace the use of all the trust assets and where it all went.

 

Please ask again is you need more help.

Thank you.

 

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3095
Experience: I've prepared all types of taxes since 1987.
jgordosea and 3 other Tax Specialists are ready to help you

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
< Last | Next >
  • http://ww2.justanswer.com/uploads/KU/KUMI95/2013-9-30_195031_kumar.64x64.jpg Wallstreet Esq.'s Avatar

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
  • http://ww2.justanswer.com/uploads/CU/Cuttinggirl/2011-10-29_03719_wcrop2.64x64.jpg Wendy Reed's Avatar

    Wendy Reed

    Enrolled Agent

    Satisfied Customers:

    3052
    15+ years tax preparation and tax advice.
  • http://ww2.justanswer.com/uploads/CATax/2009-08-04_204548_Mark.jpg Mark D's Avatar

    Mark D

    Enrolled Agent

    Satisfied Customers:

    985
    MBA, EA, Specializing in Business and Individual Tax Returns and Issues
  • http://ww2.justanswer.com/uploads/IN/insearchoftheanswer/2013-8-16_0233_attorney.64x64.jpg Richard's Avatar

    Richard

    Tax Attorney

    Satisfied Customers:

    3229
    29 years of experience as a tax, real estate, and business attorney.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    6121
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JG/jgordosea/2012-6-7_43138_GordosVeritas.64x64.jpg jgordosea's Avatar

    jgordosea

    Enrolled Agent

    Satisfied Customers:

    2783
    I've prepared all types of taxes since 1987.
  • http://ww2.justanswer.com/uploads/OZ/ozaukeecpa/2012-6-7_193219_Picture1croppedandshrunk.64x64.jpg MequonCPA's Avatar

    MequonCPA

    Certified Public Accountant (CPA)

    Satisfied Customers:

    2231
    CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
 
 
 
Chat Now With A Tax Professional
jgordosea
jgordosea
Enrolled Agent
2839 Satisfied Customers
I've prepared all types of taxes since 1987.