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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29573
Experience:  Taxes, Immigration, Labor Relations
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The beneficiary of an irrevocable trust, who is an income

Customer Question

The beneficiary of an irrevocable trust, who is an income beneficiary only, wants to take a distribution equal to the FMV of her lifetime interest and leave the balance of the trust to the residual beneficiaries. Does this create a currentl year income tax consequence to the income beneficiary?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

If there is an income realized by the trust - any distribution should be allocated to that taxable income and reported on K1 to the beneficiary.
The rest will be allocated to the distribution of the corpus.
The distribution of the corpus is not taxable and generally is not reported.

Customer: replied 1 year ago.
the termination of the lifetime interest does not create a taxable event?
Expert:  Lev replied 1 year ago.

The beneficiary actually doesn't own "the lifetime interest in the trust" - the beneficiary owns right to receive income and trust's assets - that is not the same as life estate deed we might have on the property.
There is no ownership interest in the trust.
We are talking about distribution from the trust ONLY - and that distribution might be taxable or not.
Specifically - the distribution of the corpus is not taxable.