[WSBAPT] Basic Questions re Trust Distributions

Tue Aug 29 13:58:22 PDT 2023

Also need to review the trust and make sure there are no grantor trust provisions if the grantor/trustor is still alive.

Amy Lewis, Attorney
Pronouns she/her/hers
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909 A Street, Suite 600 | Tacoma, WA 98402
phone 253.572.4500 | fax 253.272.5732 | www.eisenhowerlaw.com<http://www.eisenhowerlaw.com/>
From: wsbapt-bounces at lists.wsbarppt.com <wsbapt-bounces at lists.wsbarppt.com> On Behalf Of Bryce Dille
Sent: Tuesday, August 29, 2023 11:50 AM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com>
Subject: Re: [WSBAPT] Basic Questions re Trust Distributions

I would also look at the terms of the trust, since some trusts provide, that the trustee will pay the income tax liability of the beneficiaries from the trust principle, so that in essence, the income to the beneficiaries is tax free.
Bryce H. Dille
Dille Law, PLLC
Office: 360-350-0270
Cell: 253-579-5561

** Please note that I use the dictation feature of my iPhone and that sometimes everything I say does not get properly translated**

On Aug 29, 2023, at 11:31 AM, Diane J. Kiepe <DJKiepe at depdslaw.com<mailto:DJKiepe at depdslaw.com>> wrote:

Oh Mark,

Trust Taxation is its own animal and I would run, not walk,  to take tax matters to a well versed 1041 preparer.  I do some but only simple ones.  Distributions may or may not be taxable – there is a tiering system – but for Simple Trusts, income is taxed to the distributee, for Complex Trusts certain distributions are also taxed.  By way of example only, interest income distributed to a bene will be taxed as income, a distribution of corpus will not.  Simple Trust get really crazy and there is authority that the income is taxed to bene whether or not distributed.  See attached and below – many don’t know this and I would bet some of those include IRS folks.  There is also a bit of a twist for taxable year – something called the 65 day rule – I use it every year.  Distributions made in the first 65 days can be deemed to have been distributed on 12/31 of year prior.  This really can save a trust with even moderate income given the hypertaxation of trusts.

A 1041 is a blend of 1040 and a 1065 in my opinion.  Trust is reporting entity and may or may not have a tax liability (depends on trust terms (Simple vs Complex) and of course distributions made and their source).

I.R.C. § 652(a) Inclusion —
Subject to subsection (b), the amount of income for the taxable year required to be distributed currently by a trust described in section 651 shall be included in the gross income of the beneficiaries to whom the income is required to be distributed, whether distributed or not. If such amount exceeds the distributable net income, there shall be included in the gross income of each beneficiary an amount which bears the same ratio to distributable net income as the amount of income required to be distributed to such beneficiary bears to the amount of income required to be distributed to all beneficiaries.
I.R.C. § 652(b) Character Of Amounts —
The amounts specified in subsection (a) shall have the same character in the hands of the beneficiary as in the hands of the trust. For this purpose, the amounts shall be treated as consisting of the same proportion of each class of items entering into the computation of distributable net income of the trust as the total of each class bears to the total distributable net income of the trust, unless the terms of the trust specifically allocate different classes of income to different beneficiaries. In the application of the preceding sentence, the items of deduction entering into the computation of distributable net income shall be allocated among the items of distributable net income in accordance with regulations prescribed by the Secretary.
I.R.C. § 652(c) Different Taxable Years —
If the taxable year of a beneficiary is different from that of the trust, the amount which the beneficiary is required to include in gross income in accordance with the provisions of this section shall be based upon the amount of income of the trust for any taxable year or years of the trust ending within or with his taxable year.
(Aug. 16, 1954, ch. 736, 68A Stat. 219; Oct. 4, 1976, Pub. L. 94-455, title XIX, 1906(b)(13)(A), 90 Stat. 1834.)
BACKGROUND NOTES
AMENDMENTS
1976--Subsec. (b). Pub. L. 94-455 struck out “or his delegate" after “Secretary”.

Hope this helps.

Diane J. Kiepe
Douglas Eden, P.S.
717 W. Sprague Ave., Suite 1500
Spokane, WA  99201
djkiepe at depdslaw.com<mailto:djkiepe at depdslaw.com>
509-455-5300

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From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> <wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com>> On Behalf Of Mark Anderson
Sent: Tuesday, August 29, 2023 11:02 AM
To: WSBA Probate & Trust Listserv <wsbapt at lists.wsbarppt.com<mailto:wsbapt at lists.wsbarppt.com>>
Subject: [WSBAPT] Basic Questions re Trust Distributions

Trustee is required to make periodic distributions to a beneficiary.  Are the distributions taxable?  Is the Trustee required to withhold any amount from this distribution for federal taxes?

Thanks.

Mark B. Anderson
ANDERSON LAW FIRM PLLC
821 Dock St  Ste 209  PMB 4-12
Tacoma, Washington 98402
+1 253-327-1750
+1 253-327-1751 (fax)
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