K-1 Reporting of Principal Distributions on a Trust Return Form 1041

[AnmarieA]

When an Irrevocable Complex Trust reports all the income to one beneficiary all the taxes on the income generated in a given year as outlined in the Trust and that beneficiary does not receive any distributions. The remaining distributions of "principal only" are made to the 5 beneficiaries (Children of the Decedent Trust) are such non-taxable distributions reportable on the K-1 in Box 14? The Trust has been distributing amounts annually to the beneficiaries of principal only and have never reported such distributions in the tax return. 

This is a new client that first filed a trust return in 2019 and is asking me to file returns for 2020 and 2021. When I spoke to the fiduciary company who manages the Trust assets they mentioned to me that annual distributions have been made the last 2 years of principal only. Could not find if such distributions are reportable information in the Trust return? These distributions are significant to the tune of $900K per year. 

Can you tell me where to report such information in the ProConnect software. 

Thanks

[PhoebeRoberts]

This is a return due Friday, right? Without seeing the trust document, I hate to even opine on the right tax treatment - I can't come up with a scenario where that would be the right presentation, but some days my imagination is limited. 

I would be super unhappy with a client with a delinquent 1041, a nearly-delinquent 1041, a trust company who wasn't wanting to prepare the 1041s (and didn't seem to mind them being delinquent), and an unusual way of calculating / allocating DNI. 

Can you tell us more about what the trust document says? Have you talked to the attorney who drafted it?

[AnmarieA]

Yes the 2021 return is due Friday with no extension filed. The beneficiary that all the DNI is reported on the K-1 is 100 years old. The son is the trustee who is responsible for the filings. I have not seen the Trust documents nor spoken to the attorney. When I asked it was discouraged. The Irrevocable Trust was set up at the time the wife of the K-1 beneficiary. I have received all the 1099s from the broker who can not really answer any of my questions  The Trustee gave me his father's 2019 and I saw the K-1 and asked questions and he said he did not realize a return needed to be filed every year and I informed that a return is required to file a Form 1041 annually if it has reportable income. Then we got the 1099s from the broker. It seems like no one is taking responsibility and a am trying to figure out what is going on. I saw on the 1099s significant Sch D trades in both years and asked if distributions we're made and tthat is when I was told that the distributions we're of principal not income. 

I have read that such distributions have no tax consequence but I did not know how to report them in Pro Connect. Any guidance you can connect me to would be helpful. I only do one other irrevocable trust return and the trust pays the taxes and there are no distributions out of the trust.

This has me confused.

[AnmarieA]

Sorry for the tpos, typing from my phone that is making auto corrections....

[sjrcpa]

If no extension was filed, the 2021 trust return was due April 18, 2022.

You're not going to get this figured out by Friday.

You do need the Trust document.

[PhoebeRoberts]

You absolutely cannot prepare an accurate 1041 without having read the trust documents. A trustee who doesn't know that the trust has a filing requirement can't be relied upon to get any aspect of the tax treatment correct.

I agree with Susan - if no extension was filed, there are already two delinquent returns.

It would be one thing if they said, "here's every scrap of paper we have; feel free to talk to the attorney if that's not enough;" anyone can find themselves in a situation where they need a hand out of a hole. But this looks like a hole entirely of the trustee's making, where he's digging downwards as fast as possible.

"Here's your stuff; there's the door" is an entirely reasonable position for you to take. Just because they need a return, that doesn't mean you're the one who has to prepare it.

[AnmarieA]

I have obtained a copy of the Trust Documents and it is a Living Trust that allows distributions from the GST Exempt (Principal) upon discretion of the trustee. This Trust was established in 1988 and states clearly that her spouse as trustee should be distributed the income annually of the trust and the other  named beneficiaries who are children to the deceased at the trustee's discretion get distributions from the principal of the Trust Assets. My original question still stands, is there a place on the K-1 to report TAX Free Distributions?

[sjrcpa]

No.