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I am the beneficiary of a trust. The creator of the trust was

my grandmother who died 20...
I am the beneficiary of a trust. The creator of the trust was my grandmother who died 20 mos ago. The trustee attorney has been distributing the trust assets over that time (it was a very simple trust with no debt and straightforward assets so we are struggling to understand why it is taking so long...but thats another story). In 2012 he distributed a bulk of the assets to me. I received a K1 reporting $77k (a fraction of what was actually disbursed). I wondered why it wasnt the total amount (trustee attorney returns calls or messages like dead folks...never). I ended up paying $16k in federal taxes. Now it seems I may ALSO owe state tax. I live in FL and the trust is handled in VA, so this never crossed my mind. I am starting to think the reason the K1 says $77k is that was the income portion of the distribution (the rest would have been untaxable principal). If thats the case, and its not an 'accumulation distribution', it appears I may owe another $4k+. But I dont really understand the whole accumulation thing enough to know. Am I understanding this correctly?
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10/15/2013
jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3,161
Experience: I've prepared all types of taxes since 1987.
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Greetings,

 

"I wondered why it wasnt the total amount" " I am starting to think the reason the K1 says $77k is that was the income portion of the distribution (the rest would have been untaxable principal)."

 

Yes, that is very likely the case. The beneficiary does have to pay income tax on the earnings that are distributed but does not pay tax on the principal (or corpus) as that represents what was inherited, that is not subject to income tax.

 

In general, a nonresident does not owe state income tax on trust distributions unless the income was from a source in that state. For example, bank interest or stock dividends would not be from VA source even though the bank or broker was in VA.

But, if there was a business selling in VA or a rental property located in VA those would be VA source income.

Often there is no state source income that has to reported. Often when there is state income a K-1 for the state will be received as well as the K-1 for federal 1041.

 

Tax on accumulation distribution is reported on Form 4970.

See http://www.irs.gov/pub/irs-pdf/f4970.pdf

"Beneficiaries who received an accumulation distribution from certain domestic trusts that were created before March 1, 1984, must file Form 4970."

"If you received a distribution for this tax year from a trust that accumulated its income instead of distributing it each year (and the trust paid taxes on that income), you must complete Form 4970 to compute any additional tax liability. The trustee must give you a completed Part IV of Schedule J (Form 1041) so you can complete this form."

 

You can check with the trustee to see if this was an accumulation distribution and to get the Schedule J part of the trust tax return Form 1041 if needed; but that does not seem likely from the description you have given.

 

Yes, you have a good understanding (but may need to verify with the trustee).

 

Please ask if you need more discussion or clarification.

Thank you.

 

 

 

 

 

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Customer reply replied 4 years ago

It seems awfully high that the total disbursed amount was $280k but the taxable income reported to K1 was $77k. Also, the majority of the trust assets were held at Morgan Stanley so it also seems unlikely that was a VA source. I will look at my K1's again and see if I received a state copy in addition to the federal. I initially did this in April and didnt think I needed to file state (I live in FL, we have no state tax). If I DID get a VA K1, I am going to be hard pressed to get the trust attorney to respond. So far, I have had to hire ANOTHER attorney just to get the trust attorney to communicate AT ALL. But I do thank you very much for your help!

You are quite welcome.

 

Since the beneficiary only pays tax on the earnings it does not seem too small that in twenty months there would be 77K on 280K. Twenty five percent earnings would be 70/280.

 

If the assets are in a brokerage about the only state income would be from state or local bonds; so it may be safe to assume no state income tax is required.

 

Also, if you have not been provided the Schedule J and you have reason to believe that the trust was not in existence prior to March 1, 1984 then it may be safe to assume that this is not an accumulation distribution.

And, on the slight chance that it did turn out to be one you would have a reasonable basis for the waiver of any penalty due to not timely reporting due to reliance on the attorney for the trust.

 

Hope this helps clarify so you can finish the 2012 return process.

Please so ask if you need more help.

Thank you for the opportunity to be of service.

jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3,161
Experience: I've prepared all types of taxes since 1987.
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