Trust Taxation for Beneficiary Account Closure

[parvitstax]

My client is part of a 3 beneficiary trust that closes once they reach age 35. My client has never received a K1 which implies the trust has been paying the taxes on any income/gains then distributing to the beneficiaries. 

Now, in the year of the trust closing for 1 of the 3 beneficiaries the trust has sold assets to close 1 account. My client was given a 1099B with the final gains+dividends and told to report this on their tax return. The 1099B is issued to the Trust with the Trust's TAX ID (though the form does say FBO "my client" name). 

Can someone explain if my client should be reporting the 1099B or the trust? I don't understand why my client would have to report this on their tax return. Unless this is a special Trust scenario. 

[Skylane]

i assume you’ve seen the trust document. I’d have a conversation with the trustee and/or the accountant who prepared the 1041. 

[BobKamman]

"My client was given ... and told ... "

Passive voice usually indicates a reluctance to tell us what we need to know to evaluate the situation.  Who did the giving and telling?  Is the trustee a family member or friend who has been clueless about tax responsibilities?  Has you client been receiving annual distributions, with no K-1, while happily ignorant that the trust can't pay the tax if it distributed income?  Does your client want to open Pandora's box just to find a can of worms?  

[parvitstax]

I am receiving the instructions to claim the 1099B assigned to the Trust on personal taxes from the beneficiary who is repeating what the trust accountant has told them.
I have only been shown the estimated tax payments due from each beneficiary and portfolio summaries from the wealth manager but no 1041 or communication from the trust accountant. 

It appears the trust is paying taxes on the income and then distributing funds in prior years (this method doesn't require a K1 to be issued from my understanding).

I will reach out to the trust accountant and trustee because I don't see how 1099B assigned to the trust ID can be passed off to the beneficiary without a K1. 

[BobKamman]

"estimated tax payments due from each beneficiary"

What alternate universe are they living in?

Are the payments for the beneficiary's 1040, or for the trust's 1041?

Sometimes a trustee will make part of a required income distribution in the form of an ES payment to cover the tax the beneficiary will owe when they report K-1 income.  But that doesn't seem to be what's happening here.

Sounds like another case of "I don't care what the law says, I'm going to have the trust pay the tax (at higher rates) and just let the beneficiary keep the rest, so there is no K-1."

Is your client the first to reach 35?  So the other two (probably siblings) are being screwed over for another few years?  

[parvitstax]

I will have a call with the Trust CPA tomorrow to clarify.

My understanding so far is the ES payments were calculated by the same CPA and calculated for each beneficiaries account so the account closure and gains should have all taxes paid (hard to tell without 1041). I still have no clarity on the 1041 and lack of K1's issued which I hope to have more information tomorrow. 10 years of preparation and filings this way for the trust and no IRS inquiries I assumed meant it was done correctly.

[Skylane]

Chatting with the ‘Trust CPA’ is good… I like to listen and ask questions… I always follow up with an email, “per our conversation, you advised….” and include further questions or criticisms. If you don’t have. A copy of the trust document, the CPA certainly “should’ be able to provide it… @BobKamman voiced some concerns and  possibilities 

[BobKamman]

10 years of preparation and filings this way for the trust and no IRS inquiries I assumed meant it was done correctly.

What makes you assume that?   When was the last time you heard of an IRS 1041 audit?  No, there is no short little man at IRS with a green eyeshade looking at each 1041 as the mail is opened and asking, "why are there no K-1s here?"  When was the last time you heard of a 1041 K-1 being matched to a 1040 and generating a CP-2000?  

If the client has cashed out, I'd suggest a Form 211, if it didn't jeopardize the funds remaining for the other two beneficiaries.  

How many posts have we seen here, just this year, from preparers who think they can just let the trust pay the tax even if there is a deduction for DNI and a requirement for K-1s?  

[parvitstax]

If a trust pays all the current year taxes and then distributes to beneficiaries is a K1 required? I thought the answer was 'no'. 

[BobKamman]

If it pays all the tax on 2024 income and then does not make a distribution until 2025, that's fine. 

If it distributes 2025 income in 2025 and doesn't pass the income through to beneficiaries on a K-1, that's tax evasion. Also, a common practice among preparers who don't know any better.  

To repeat my unanswered question, what kind of estimated tax payments are they asking your client to make?  1041 or 1040?  

[parvitstax]

The estimated tax payment instructs the client to pay via check and to enter the Trust's Tax ID. So must be for the 1041. 

[BobKamman]

They're not even giving the client a 1041-ES with an IRS mailing address?  If this were my client, I'd tell him to find a good lawyer.  

You haven't even mentioned what states are involved here, but here's an example of tax evasion:  Income is $5,000, state tax (California or New York) is $500, trust pays it and then deducts it.  If it were done correctly, $5,000 income would be passed through to the beneficiary who pays state tax on it but might not be able to deduct it because of SALT limits.

I wouldn't be surprised if the trust return was also deducting investment advisory fees, probably not allowed even for a 1041 but IRS isn't looking, the beneficiary would not be able to claim them.  

[parvitstax]

There is a trustee involved also so I just need to figure out why there are no K1s issued. 

Are there any scenarios where a K1 does not have to be issued but beneficiaries can still receive money for living expense / education?

[sjrcpa]

If the overall trust income is a net loss.

[parvitstax]

After speaking to all parties involved (Beneficiaries, Trustee, and Trust CPA):

1. A trust tax return is completed every year. California based. 
2. Taxes are paid by the trust (how the grantor designed it)
3. A 1041 is issued to each beneficiary (they just never had to open the CPA packet so they never seen a form 1041-ES since the trustee handled all the taxes before funds were disbursed)
4. K1 is NOT issued since trust pays the taxes due on the income (unfortunately at higher tax rates). 
5. Final disbursements were handled the same as every other disbursement over the last X years (trust calculates taxes due and will be paid lump sum via voucher for 2025)

[BobKamman]

Taxes are paid by the trust (how the grantor designed it)🤔 😂😂😂

[sjrcpa]

Then why is the beneficiary supposed to write checks? And why using the trust's EIN?

None of this makes sense.

[parvitstax]

The trust is calculating taxes due and instead of automatically paying from it's account it is send the payment vouchers to the beneficiary to make the payment on the trust's behalf.

The beneficiary is making the payment in the final year of disbursement but in all the 9 prior years the trustee mailed checks on the beneficiaries behalf. 

Older CPA that might just prefer the paper + check method.