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Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3153
Experience:  EA, CEBS - 35 years experience providing financial advice
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Question regarding legal trust agreement. Who pays the taxes

Customer Question

Question regarding legal trust agreement. Who pays the taxes on distribution? Paragraph from the trust:
"The Trustees are authorized to credit additions and other receipts attributable to the Trust estate, and to charge taxes, fees, expenses and other disbursements incurred in the administration, protection or distribution of the Trust property, wholy or in part to income or principal as the Trustees shall deem proper . . .
Submitted: 7 years ago.
Category: Tax
Expert:  Bill replied 7 years ago.

If the trust is irrevocable then any income retained in the trust is taxed to the trust at applicable trust tax rates. If the income is passed through to the beneficiaries of the trust then the income is taxed to the beneficiaries at their tax rates.


The trust would report the income on Form 1041. Any income passed through to a beneficiary would be reported on a Schedule K-1. The beneficiary would report the income from the K-1 on his/her personal income tax return.


Customer: replied 7 years ago.
Sorry, I'm confused. The trust is irrevocable but my son did receive a distribution on his 30th birthday and received a K-1. Another recipient of his trust dollars did not receive a K-1 nor did he have to pay taxes - ?
Expert:  Bill replied 7 years ago.

If the other recipient received income from the trust then the other recipient should have also received a K-1 unless for some reason the trust provided for a distribution of principal that may not have been taxable. Generally, distributions of principal are also reported on the K-1 but identified as nontaxable.


You may want to contact the accountant or tax preparer that completed the form for an explanation.


Bill and other Tax Specialists are ready to help you
Customer: replied 7 years ago.
Does that mean my son received a distribution and a K-1 but he doesn't owe the taxes? Sorry to be so thick.
Customer: replied 7 years ago.
This question wasn't answered. Will it be?
Expert:  Bill replied 7 years ago.

A K-1 is issued when the beneficiary receives income that is taxable. The taxability of the income depends on the type and character of income that is received. The type and character of income would be identified in the specific boxes on the K-1. For example, if there was an amount in box 1 of the K-1 that would indicate that interest that was earned in the trust was passed through to the beneficiary. The interest would be taxable to the beneficiary and reported as interest by the beneficiary on line 8a of his/her Form 1040. If there was an amount in box 2a of the K-1 then it would be taxable as ordinary dividends and reported on line 9a of the beneficiary's individual tax return. If it was tax-exempt income it would be reported in box 14 with a code A.


If a distribution is from principal (not income) then some practioners do not report it on a K-1 at all as it is not taxable. So it's possible that if the other beneficiary only received a distribution representing principal and not income then a K-1 may not have been issued to that beneficiary.


Edited by Bill on 10/20/2009 at 11:49 PM EST