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A complex trust was created with life insurance proceeds…

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A complex trust was created...
A complex trust was created with life insurance proceeds from the death of a father with 3 daughters who are the beneficiaries of the trust. Income does not have to be paid but income & principal can be paid to care for them. They get half of their portion of the trust at 25 and the other half at 30. I've been treating the trust as having separate shares. Two daughters have already turned 30, so now only one daughter remains as a beneficiary. There is a big capital loss carryover. Does the remaining daughter get the entire capital loss carryforward in the year of termination under 642(h)(1)? The alternatives would be to create K-1's for all 3 beneficiaries in the final year with each reporting 1/3 of the carryover or maybe I should have put it on their K-1's when they turned 30. Thoughts?
Submitted: 4 months ago.Category: Tax
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Customer reply replied 4 months ago
FYI - The losses came from an investment account. The distributions have only been made with cash.
Answered in 2 hours by:
3/23/2018
Tax Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 3 months ago
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,180
Experience: Former IRS Revenue Agent
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I'm Fiona, former IRS revenue agent. I am looking at your question and will get back to you soon. Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP,IMTA

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Tax Professional: Dr. Fiona Chen, Certified Public Accountant (CPA) replied 3 months ago

Dear Customer,

The life insurance proceeds should not be an issue because it is a tax free item.

The only question I am reading is how to handle the trust investment capital losses and its flow through to the three beneficiaries.

Below is a suggestion.

First, terminate the main trust with the two beneficiaries and create one trust with one beneficiary which is a new trust to receive the gain and loss. This new trust is the one for and with the third beneficiary.

That is, the trust will distribute the 1/3 of losses to the two beneficiaries individually. Everyone will receive a last K-1. The third beneficiary's portion is flow to his/her new trust.

For the third beneficiary, a trust is created with all same regulations and rules as the existing trust, and just with a different EIN on this beneficiary's remaining trust amounts only. This is to handle the tax treatment and not to change any of the trust provisions.

This is a more fare method to handle the loss. Otherwise, year after year, the third beneficiary could use up the losses and eventually, by the time, the trust is closed, this beneficiary will likely use up the portion of other beneficiary's losses.

Make sure that tax return preparer works well with trustee and the attorneys. Everyone knows that the purpose of terminate the first EIN number is ***** terminate the first two beneficiaries and distribute their losses. The second trust is just for the third beneficiary with its own EIN.

How much paper work and documents you need to go through depends on the amount of money and losses remaining in this trust and family relationships.

Please feel free to follow up.

Regards,

Fiona

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Customer reply replied 3 months ago
I think you misunderstood my question. This trust is 15 years old, I've been filing 1041's every year, I've treated it as having 3 separate shares for DNI purposes in years that had distributions, and now I'm down to the last beneficiary who turns 30 soon. That will be the final year of the trust. There is a big capital loss carryover that I can flow through to 1 or more of the beneficiaries. It seems like the last beneficiary may get the entire $100,000 capital loss carryover, which isn't really fair because all 3 beneficiaries got hit economically with the loss because it occurred before any of them had turned 25. The statute says that the carryover goes "to the beneficiaries succeeding to the property of the estate or trust". All 3 of them received the principal of the trust at different times, which would lead me to believe that it should be split up between them, but it can't flow through until the termination year when I only have one beneficiary left.
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