Trust/Tax question

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Steady59
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Trust/Tax question

Post by Steady59 »

If a trust suffers an investment loss, will that show up as a loss on the K1 and can it be included as a loss on the beneficiary's personal return?
ghost1
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Re: Trust/Tax question

Post by ghost1 »

Depends on whether it is a capital loss, and whether capital gains and losses pass through to the Beneficiaries according to the Trust document. In most trusts, capital gains and losses are retained in the trust but not always
toddthebod
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Re: Trust/Tax question

Post by toddthebod »

Steady59 wrote: Thu Oct 06, 2022 5:34 pm If a trust suffers an investment loss, will that show up as a loss on the K1 and can it be included as a loss on the beneficiary's personal return?
Trusts can only distribute losses to beneficiaries in their final year. Prior to that the trust can carry it forward and apply it to future trust income.
ghost1
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Re: Trust/Tax question

Post by ghost1 »

toddthebod wrote: Thu Oct 06, 2022 5:40 pm
Steady59 wrote: Thu Oct 06, 2022 5:34 pm If a trust suffers an investment loss, will that show up as a loss on the K1 and can it be included as a loss on the beneficiary's personal return?
Trusts can only distribute losses to beneficiaries in their final year. Prior to that the trust can carry it forward and apply it to future trust income.
Not always true. The trust document spells out the rules. I’ve dealt with lots of trusts that pass cap gains and losses through every year
bsteiner
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Re: Trust/Tax question

Post by bsteiner »

ghost1 wrote: Thu Oct 06, 2022 5:53 pm
toddthebod wrote: Thu Oct 06, 2022 5:40 pm
Steady59 wrote: Thu Oct 06, 2022 5:34 pm If a trust suffers an investment loss, will that show up as a loss on the K1 and can it be included as a loss on the beneficiary's personal return?
Trusts can only distribute losses to beneficiaries in their final year. Prior to that the trust can carry it forward and apply it to future trust income.
Not always true. The trust document spells out the rules. I’ve dealt with lots of trusts that pass cap gains and losses through every year
How?
ghost1
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Re: Trust/Tax question

Post by ghost1 »

On the K1. Some trusts call for corpus distributions each year and gains/losses to pass through along with dividends and interest.
bsteiner
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Re: Trust/Tax question

Post by bsteiner »

ghost1 wrote: Fri Oct 07, 2022 8:46 am On the K1. Some trusts call for corpus distributions each year and gains/losses to pass through along with dividends and interest.
I wasn't asking about the mechanics, but about the authority.
ghost1
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Re: Trust/Tax question

Post by ghost1 »

bsteiner wrote: Fri Oct 07, 2022 9:13 am
ghost1 wrote: Fri Oct 07, 2022 8:46 am On the K1. Some trusts call for corpus distributions each year and gains/losses to pass through along with dividends and interest.
I wasn't asking about the mechanics, but about the authority.
Per the trust document. Authority of the trust
Gill
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Re: Trust/Tax question

Post by Gill »

ghost1 wrote: Fri Oct 07, 2022 9:28 am
bsteiner wrote: Fri Oct 07, 2022 9:13 am
ghost1 wrote: Fri Oct 07, 2022 8:46 am On the K1. Some trusts call for corpus distributions each year and gains/losses to pass through along with dividends and interest.
I wasn't asking about the mechanics, but about the authority.
Per the trust document. Authority of the trust
In other words, the trust instrument can negate the general tax rule?
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal
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Lee_WSP
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Re: Trust/Tax question

Post by Lee_WSP »

ghost1 wrote: Fri Oct 07, 2022 8:46 am On the K1. Some trusts call for corpus distributions each year and gains/losses to pass through along with dividends and interest.
We're asking you for the authority within the tax code which allows for losses to be passed through absent the final year.
Nutmeg
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Re: Trust/Tax question

Post by Nutmeg »

I believe that this is the relevant regulation:

https://www.law.cornell.edu/cfr/text/26/1.643(a)-3

The section on capital losses states:
(d) Capital losses. Losses from the sale or exchange of capital assets shall first be netted at the trust level against any gains from the sale or exchange of capital assets, except for a capital gain that is utilized under paragraph (b)(3) of this section in determining the amount that is distributed or required to be distributed to a particular beneficiary. See § 1.642(h)-1 with respect to capital loss carryovers in the year of final termination of an estate or trust.
One would need to read the entire regulation to get a fuller understanding of the rule, but note that the phrase “the terms of the governing instrument and applicable local law” appears several times.
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Lee_WSP
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Re: Trust/Tax question

Post by Lee_WSP »

Nutmeg wrote: Fri Oct 07, 2022 9:57 am I believe that this is the relevant regulation:

https://www.law.cornell.edu/cfr/text/26/1.643(a)-3

The section on capital losses states:
(d) Capital losses. Losses from the sale or exchange of capital assets shall first be netted at the trust level against any gains from the sale or exchange of capital assets, except for a capital gain that is utilized under paragraph (b)(3) of this section in determining the amount that is distributed or required to be distributed to a particular beneficiary. See § 1.642(h)-1 with respect to capital loss carryovers in the year of final termination of an estate or trust.
One would need to read the entire regulation to get a fuller understanding of the rule, but note that the phrase “the terms of the governing instrument and applicable local law” appears several times.
I bolded the important part.

1.642(h)1 deals with carryover loss in the final year of the trust. Not intervening years.
https://www.law.cornell.edu/cfr/text/26/1.642(h)-1
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Re: Trust/Tax question

Post by Nutmeg »

Lee_WSP wrote: Fri Oct 07, 2022 10:14 am
Nutmeg wrote: Fri Oct 07, 2022 9:57 am I believe that this is the relevant regulation:

https://www.law.cornell.edu/cfr/text/26/1.643(a)-3

The section on capital losses states:
(d) Capital losses. Losses from the sale or exchange of capital assets shall first be netted at the trust level against any gains from the sale or exchange of capital assets, except for a capital gain that is utilized under paragraph (b)(3) of this section in determining the amount that is distributed or required to be distributed to a particular beneficiary. See § 1.642(h)-1 with respect to capital loss carryovers in the year of final termination of an estate or trust.
One would need to read the entire regulation to get a fuller understanding of the rule, but note that the phrase “the terms of the governing instrument and applicable local law” appears several times.
I bolded the important part.

1.642(h)1 deals with carryover loss in the final year of the trust. Not intervening years.
https://www.law.cornell.edu/cfr/text/26/1.642(h)-1
You are correct that the part you bolded refers to the final year. The part that deals with intervening years is (with boldface that I added for emphasis):
d) Capital losses. Losses from the sale or exchange of capital assets shall first be netted at the trust level against any gains from the sale or exchange of capital assets, except for a capital gain that is utilized under paragraph (b)(3) of this section in determining the amount that is distributed or required to be distributed to a particular beneficiary. See § 1.642(h)-1 with respect to capital loss carryovers in the year of final termination of an estate or trust.
[/quote]

Paragraph (b)(3) says:
(3) Allocated to corpus but actually distributed to the beneficiary or utilized by the fiduciary in determining the amount that is distributed or required to be distributed to a beneficiary.
But someone who is interested in this topic should read the whole regulation for a more complete understanding.
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Lee_WSP
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Re: Trust/Tax question

Post by Lee_WSP »

Nutmeg wrote: Fri Oct 07, 2022 10:58 am
You are correct that the part you bolded refers to the final year. The part that deals with intervening years is (with boldface that I added for emphasis):
d) Capital losses. Losses from the sale or exchange of capital assets shall first be netted at the trust level against any gains from the sale or exchange of capital assets, except for a capital gain that is utilized under paragraph (b)(3) of this section in determining the amount that is distributed or required to be distributed to a particular beneficiary. See § 1.642(h)-1 with respect to capital loss carryovers in the year of final termination of an estate or trust.
Paragraph (b)(3) says:
(3) Allocated to corpus but actually distributed to the beneficiary or utilized by the fiduciary in determining the amount that is distributed or required to be distributed to a beneficiary.
But someone who is interested in this topic should read the whole regulation for a more complete understanding.
It doesn’t say what you think it says. All losses are able to offset gains and some income. They can’t be passed through though.
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Re: Trust/Tax question

Post by Nutmeg »

Lee_WSP wrote: Fri Oct 07, 2022 11:04 am
Nutmeg wrote: Fri Oct 07, 2022 10:58 am
You are correct that the part you bolded refers to the final year. The part that deals with intervening years is (with boldface that I added for emphasis):
d) Capital losses. Losses from the sale or exchange of capital assets shall first be netted at the trust level against any gains from the sale or exchange of capital assets, except for a capital gain that is utilized under paragraph (b)(3) of this section in determining the amount that is distributed or required to be distributed to a particular beneficiary. See § 1.642(h)-1 with respect to capital loss carryovers in the year of final termination of an estate or trust.
Paragraph (b)(3) says:
(3) Allocated to corpus but actually distributed to the beneficiary or utilized by the fiduciary in determining the amount that is distributed or required to be distributed to a beneficiary.
But someone who is interested in this topic should read the whole regulation for a more complete understanding.
It doesn’t say what you think it says. All losses are able to offset gains and some income. They can’t be passed through though.
I have done further research and now agree with your point. Thank you for setting me straight!

It seems to me that a beneficiary would rather have the trust take the capital losses than take any losses herself, because trusts have compressed tax brackets, are taxed at the highest rates (as if single), and are subject to AMT just as individuals are.
ghost1
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Re: Trust/Tax question

Post by ghost1 »

Gill wrote: Fri Oct 07, 2022 9:37 am
ghost1 wrote: Fri Oct 07, 2022 9:28 am
bsteiner wrote: Fri Oct 07, 2022 9:13 am
ghost1 wrote: Fri Oct 07, 2022 8:46 am On the K1. Some trusts call for corpus distributions each year and gains/losses to pass through along with dividends and interest.
I wasn't asking about the mechanics, but about the authority.
Per the trust document. Authority of the trust
In other words, the trust instrument can negate the general tax rule?
Gill
Yes
ghost1
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Re: Trust/Tax question

Post by ghost1 »

Lee_WSP wrote: Fri Oct 07, 2022 9:48 am
ghost1 wrote: Fri Oct 07, 2022 8:46 am On the K1. Some trusts call for corpus distributions each year and gains/losses to pass through along with dividends and interest.
We're asking you for the authority within the tax code which allows for losses to be passed through absent the final year.
Maybe I’m wrong, but I did a tax return just last week that had a K1 from two family trusts that had capital losses on it. Last year had capital gains. I see several like that every year. Not final returns. I am not a trust expert though so you may be right and these CPAs are just doing them wrong. Don’t know.
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Lee_WSP
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Re: Trust/Tax question

Post by Lee_WSP »

ghost1 wrote: Fri Oct 07, 2022 4:14 pm
Lee_WSP wrote: Fri Oct 07, 2022 9:48 am
ghost1 wrote: Fri Oct 07, 2022 8:46 am On the K1. Some trusts call for corpus distributions each year and gains/losses to pass through along with dividends and interest.
We're asking you for the authority within the tax code which allows for losses to be passed through absent the final year.
Maybe I’m wrong, but I did a tax return just last week that had a K1 from two family trusts that had capital losses on it. Last year had capital gains. I see several like that every year. Not final returns. I am not a trust expert though so you may be right and these CPAs are just doing them wrong. Don’t know.
Just like a person, the trust is able to carry over any losses up until the final year at which point see below.
Last edited by Lee_WSP on Sat Oct 08, 2022 11:17 am, edited 1 time in total.
bsteiner
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Re: Trust/Tax question

Post by bsteiner »

ghost1 wrote: Fri Oct 07, 2022 4:14 pm
Lee_WSP wrote: Fri Oct 07, 2022 9:48 am
ghost1 wrote: Fri Oct 07, 2022 8:46 am On the K1. Some trusts call for corpus distributions each year and gains/losses to pass through along with dividends and interest.
We're asking you for the authority within the tax code which allows for losses to be passed through absent the final year.
Maybe I’m wrong, but I did a tax return just last week that had a K1 from two family trusts that had capital losses on it. Last year had capital gains. I see several like that every year. Not final returns. I am not a trust expert though so you may be right and these CPAs are just doing them wrong. Don’t know.
Not very many accountants are familiar with fiduciary income tax returns. We've picked up several clients whose accountants never filed income tax returns for trusts.
MarkNYC
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Re: Trust/Tax question

Post by MarkNYC »

ghost1 wrote: Fri Oct 07, 2022 4:14 pm
Lee_WSP wrote: Fri Oct 07, 2022 9:48 am
ghost1 wrote: Fri Oct 07, 2022 8:46 am On the K1. Some trusts call for corpus distributions each year and gains/losses to pass through along with dividends and interest.
We're asking you for the authority within the tax code which allows for losses to be passed through absent the final year.
Maybe I’m wrong, but I did a tax return just last week that had a K1 from two family trusts that had capital losses on it. Last year had capital gains. I see several like that every year. Not final returns. I am not a trust expert though so you may be right and these CPAs are just doing them wrong. Don’t know.
The character and amount of trust income that can be passed through and taxed to a beneficiary is determined by, and limited to, Distributable Net Income (DNI). Per IRC Section 643(a)(3), capital losses are excluded from DNI except to the extent they are used to offset capital gains. Since net capital losses are not included in DNI, the losses cannot be passed through to the beneficiary, except in the final year where the rules are different.

Language in a trust document does not override the law. But since the IRS rarely audits trust income tax returns, it's not uncommon for trust income tax returns to be prepared incorrectly with impunity.
MarkNYC
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Re: Trust/Tax question

Post by MarkNYC »

Lee_WSP wrote: Fri Oct 07, 2022 4:34 pm
ghost1 wrote: Fri Oct 07, 2022 4:14 pm
Lee_WSP wrote: Fri Oct 07, 2022 9:48 am
ghost1 wrote: Fri Oct 07, 2022 8:46 am On the K1. Some trusts call for corpus distributions each year and gains/losses to pass through along with dividends and interest.
We're asking you for the authority within the tax code which allows for losses to be passed through absent the final year.
Maybe I’m wrong, but I did a tax return just last week that had a K1 from two family trusts that had capital losses on it. Last year had capital gains. I see several like that every year. Not final returns. I am not a trust expert though so you may be right and these CPAs are just doing them wrong. Don’t know.
Just like a person, the trust is able to carry over any losses up until the final year at which point they’re lost.
That's not correct. Capital losses in a trust are not lost after the final year of the trust. Instead, any unused capital losses in the final year are passed through to the trust beneficiary along with the final-year distribution of trust principal.
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Steady59
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Re: Trust/Tax question

Post by Steady59 »

Thanks for all of the replies.
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Lee_WSP
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Re: Trust/Tax question

Post by Lee_WSP »

MarkNYC wrote: Fri Oct 07, 2022 6:21 pm
Lee_WSP wrote: Fri Oct 07, 2022 4:34 pm
ghost1 wrote: Fri Oct 07, 2022 4:14 pm
Lee_WSP wrote: Fri Oct 07, 2022 9:48 am
ghost1 wrote: Fri Oct 07, 2022 8:46 am On the K1. Some trusts call for corpus distributions each year and gains/losses to pass through along with dividends and interest.
We're asking you for the authority within the tax code which allows for losses to be passed through absent the final year.
Maybe I’m wrong, but I did a tax return just last week that had a K1 from two family trusts that had capital losses on it. Last year had capital gains. I see several like that every year. Not final returns. I am not a trust expert though so you may be right and these CPAs are just doing them wrong. Don’t know.
Just like a person, the trust is able to carry over any losses up until the final year at which point they’re lost.
That's not correct. Capital losses in a trust are not lost after the final year of the trust. Instead, any unused capital losses in the final year are passed through to the trust beneficiary along with the final-year distribution of trust principal.
Thanks for weighing in. I wasn’t able to quickly find authority definitively saying one way or the other.
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Re: Trust/Tax question

Post by bsteiner »

Lee_WSP wrote: Fri Oct 07, 2022 8:41 pm
MarkNYC wrote: Fri Oct 07, 2022 6:21 pm
Lee_WSP wrote: Fri Oct 07, 2022 4:34 pm
ghost1 wrote: Fri Oct 07, 2022 4:14 pm
Lee_WSP wrote: Fri Oct 07, 2022 9:48 am

We're asking you for the authority within the tax code which allows for losses to be passed through absent the final year.
Maybe I’m wrong, but I did a tax return just last week that had a K1 from two family trusts that had capital losses on it. Last year had capital gains. I see several like that every year. Not final returns. I am not a trust expert though so you may be right and these CPAs are just doing them wrong. Don’t know.
Just like a person, the trust is able to carry over any losses up until the final year at which point they’re lost.
That's not correct. Capital losses in a trust are not lost after the final year of the trust. Instead, any unused capital losses in the final year are passed through to the trust beneficiary along with the final-year distribution of trust principal.
Thanks for weighing in. I wasn’t able to quickly find authority definitively saying one way or the other.
Excess capital losses pass through in the final year of an estate or trust under Section 642(h)(1): https://www.law.cornell.edu/uscode/text/26/642.
Theseus
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Re: Trust/Tax question

Post by Theseus »

Thank you to all the experts that are weighing in here.

A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?

Not sure I am clear in my question, but if it is unclear please let me know.
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Re: Trust/Tax question

Post by Lee_WSP »

Theseus wrote: Sat Oct 08, 2022 11:38 am Thank you to all the experts that are weighing in here.

A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?

Not sure I am clear in my question, but if it is unclear please let me know.
Grantor trusts are taxed to the grantor, they do not file a 1041, they are not treated as separate taxpaying entities, they are not affected by the special trust tax rules until the grantor status is terminated.
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Re: Trust/Tax question

Post by Theseus »

Lee_WSP wrote: Sat Oct 08, 2022 12:14 pm
Theseus wrote: Sat Oct 08, 2022 11:38 am Thank you to all the experts that are weighing in here.

A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?

Not sure I am clear in my question, but if it is unclear please let me know.
Grantor trusts are taxed to the grantor, they do not file a 1041, they are not treated as separate taxpaying entities, they are not affected by the special trust tax rules until the grantor status is terminated.
Based on some recommendation we got the EIN. And the CPA then filed 1041 for the trust - but with 0 income and a statement that this is a grantor trust and all income is reported to the grantor. This was the first year and we just followed CPA's recommendation. Is this something we shouldn't do going forward? Is there a downside to filing 1041 except $500 that CPA charges?
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Lee_WSP
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Re: Trust/Tax question

Post by Lee_WSP »

Theseus wrote: Sat Oct 08, 2022 12:43 pm
Lee_WSP wrote: Sat Oct 08, 2022 12:14 pm
Theseus wrote: Sat Oct 08, 2022 11:38 am Thank you to all the experts that are weighing in here.

A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?

Not sure I am clear in my question, but if it is unclear please let me know.
Grantor trusts are taxed to the grantor, they do not file a 1041, they are not treated as separate taxpaying entities, they are not affected by the special trust tax rules until the grantor status is terminated.
Based on some recommendation we got the EIN. And the CPA then filed 1041 for the trust - but with 0 income and a statement that this is a grantor trust and all income is reported to the grantor. This was the first year and we just followed CPA's recommendation. Is this something we shouldn't do going forward? Is there a downside to filing 1041 except $500 that CPA charges?
No downside.
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Re: Trust/Tax question

Post by Theseus »

Lee_WSP wrote: Sat Oct 08, 2022 12:45 pm
Theseus wrote: Sat Oct 08, 2022 12:43 pm
Lee_WSP wrote: Sat Oct 08, 2022 12:14 pm
Theseus wrote: Sat Oct 08, 2022 11:38 am Thank you to all the experts that are weighing in here.

A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?

Not sure I am clear in my question, but if it is unclear please let me know.
Grantor trusts are taxed to the grantor, they do not file a 1041, they are not treated as separate taxpaying entities, they are not affected by the special trust tax rules until the grantor status is terminated.
Based on some recommendation we got the EIN. And the CPA then filed 1041 for the trust - but with 0 income and a statement that this is a grantor trust and all income is reported to the grantor. This was the first year and we just followed CPA's recommendation. Is this something we shouldn't do going forward? Is there a downside to filing 1041 except $500 that CPA charges?
No downside.
Thank you. If we stop filing 1041 going forward is there a downside to that? I rather not pay $500 for basically an empty form.
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Lee_WSP
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Re: Trust/Tax question

Post by Lee_WSP »

Theseus wrote: Sat Oct 08, 2022 12:47 pm
Lee_WSP wrote: Sat Oct 08, 2022 12:45 pm
Theseus wrote: Sat Oct 08, 2022 12:43 pm
Lee_WSP wrote: Sat Oct 08, 2022 12:14 pm
Theseus wrote: Sat Oct 08, 2022 11:38 am Thank you to all the experts that are weighing in here.

A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?

Not sure I am clear in my question, but if it is unclear please let me know.
Grantor trusts are taxed to the grantor, they do not file a 1041, they are not treated as separate taxpaying entities, they are not affected by the special trust tax rules until the grantor status is terminated.
Based on some recommendation we got the EIN. And the CPA then filed 1041 for the trust - but with 0 income and a statement that this is a grantor trust and all income is reported to the grantor. This was the first year and we just followed CPA's recommendation. Is this something we shouldn't do going forward? Is there a downside to filing 1041 except $500 that CPA charges?
No downside.
Thank you. If we stop filing 1041 going forward is there a downside to that? I rather not pay $500 for basically an empty form.
You could just do it yourself.

If there is any income associated with that ein, you’d want to file. I’ll defer to the tax experts as to other potential issues.
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celia
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Re: Trust/Tax question

Post by celia »

MarkNYC wrote: Fri Oct 07, 2022 5:26 pm The character and amount of trust income that can be passed through and taxed to a beneficiary is determined by, and limited to, Distributable Net Income (DNI). Per IRC Section 643(a)(3), capital losses are excluded from DNI except to the extent they are used to offset capital gains.
Why wouldn’t the trust tax return cancel out the gains and losses to the extent possible instead of putting them on a K-1?

If there is another trust for the same beneficiary, can excess losses be passed to the beneficiary and cancel the gains from the other trust’s K-1?
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Re: Trust/Tax question

Post by toddthebod »

celia wrote: Sat Oct 08, 2022 2:31 pm
MarkNYC wrote: Fri Oct 07, 2022 5:26 pm The character and amount of trust income that can be passed through and taxed to a beneficiary is determined by, and limited to, Distributable Net Income (DNI). Per IRC Section 643(a)(3), capital losses are excluded from DNI except to the extent they are used to offset capital gains.
Why wouldn’t the trust tax return cancel out the gains and losses to the extent possible instead of putting them on a K-1?

If there is another trust for the same beneficiary, can excess losses be passed to the beneficiary and cancel the gains from the other trust’s K-1?
That's literally what it says. Losses can be used to offset gains, but excess losses are excluded from DNI.
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Re: Trust/Tax question

Post by MarkNYC »

Theseus wrote: Sat Oct 08, 2022 12:47 pm
Lee_WSP wrote: Sat Oct 08, 2022 12:45 pm
Theseus wrote: Sat Oct 08, 2022 12:43 pm
Lee_WSP wrote: Sat Oct 08, 2022 12:14 pm
Theseus wrote: Sat Oct 08, 2022 11:38 am Thank you to all the experts that are weighing in here.

A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?

Not sure I am clear in my question, but if it is unclear please let me know.
Grantor trusts are taxed to the grantor, they do not file a 1041, they are not treated as separate taxpaying entities, they are not affected by the special trust tax rules until the grantor status is terminated.
Based on some recommendation we got the EIN. And the CPA then filed 1041 for the trust - but with 0 income and a statement that this is a grantor trust and all income is reported to the grantor. This was the first year and we just followed CPA's recommendation. Is this something we shouldn't do going forward? Is there a downside to filing 1041 except $500 that CPA charges?
No downside.
Thank you. If we stop filing 1041 going forward is there a downside to that? I rather not pay $500 for basically an empty form.
The General Method for grantor trust income tax reporting is obtaining a trust EIN and filing Form 1041 that is otherwise blank except for an attached Grantor Tax Information Letter that details the amounts of income, loss, deductions and credits directly taxable to the grantor. This is the method your CPA chose.

There are two alternative reporting methods. The first and most common is to not obtain a trust EIN and have all trust income items reported under the SSN of the grantor. Then no 1041 is required.

The second alternative method can be used with a trust EIN, but it imposes additional reporting requirements on the trustee. After receiving 1099s in the name and EIN of the trust, the trustee must file with the IRS (and grantor) similar 1099s for income and gross proceeds listing the name and SSN of the grantor as payee. If the trustee is not the same person as the grantor, the trustee must still provide the grantor with a tax information letter or similar statement detailing the items and amounts taxable to the grantor. Sometimes this involves as much or more work as filing the 1041 itself.

After filing a grantor trust 1041 for one or more years under the general method, if the decision is made to switch to the second alternative method, a "final year" 1041 must be filed and on the top of page one of the form should be written "Pursuant to Treas. Reg. 1.671-4(g) this is the final Form 1041 for this grantor trust."
Theseus
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Re: Trust/Tax question

Post by Theseus »

MarkNYC wrote: Sat Oct 08, 2022 5:30 pm
Theseus wrote: Sat Oct 08, 2022 12:47 pm
Lee_WSP wrote: Sat Oct 08, 2022 12:45 pm
Theseus wrote: Sat Oct 08, 2022 12:43 pm
Lee_WSP wrote: Sat Oct 08, 2022 12:14 pm

Grantor trusts are taxed to the grantor, they do not file a 1041, they are not treated as separate taxpaying entities, they are not affected by the special trust tax rules until the grantor status is terminated.
Based on some recommendation we got the EIN. And the CPA then filed 1041 for the trust - but with 0 income and a statement that this is a grantor trust and all income is reported to the grantor. This was the first year and we just followed CPA's recommendation. Is this something we shouldn't do going forward? Is there a downside to filing 1041 except $500 that CPA charges?
No downside.
Thank you. If we stop filing 1041 going forward is there a downside to that? I rather not pay $500 for basically an empty form.
The General Method for grantor trust income tax reporting is obtaining a trust EIN and filing Form 1041 that is otherwise blank except for an attached Grantor Tax Information Letter that details the amounts of income, loss, deductions and credits directly taxable to the grantor. This is the method your CPA chose.

There are two alternative reporting methods. The first and most common is to not obtain a trust EIN and have all trust income items reported under the SSN of the grantor. Then no 1041 is required.

The second alternative method can be used with a trust EIN, but it imposes additional reporting requirements on the trustee. After receiving 1099s in the name and EIN of the trust, the trustee must file with the IRS (and grantor) similar 1099s for income and gross proceeds listing the name and SSN of the grantor as payee. If the trustee is not the same person as the grantor, the trustee must still provide the grantor with a tax information letter or similar statement detailing the items and amounts taxable to the grantor. Sometimes this involves as much or more work as filing the 1041 itself.

After filing a grantor trust 1041 for one or more years under the general method, if the decision is made to switch to the second alternative method, a "final year" 1041 must be filed and on the top of page one of the form should be written "Pursuant to Treas. Reg. 1.671-4(g) this is the final Form 1041 for this grantor trust."
Thank you for such a crystal clear answer. This is SO helpful !! The way you described in the very first paragraph is exactly what our CPA has done and I will just continue that.
MarkNYC
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Re: Trust/Tax question

Post by MarkNYC »

celia wrote: Sat Oct 08, 2022 2:31 pm
MarkNYC wrote: Fri Oct 07, 2022 5:26 pm The character and amount of trust income that can be passed through and taxed to a beneficiary is determined by, and limited to, Distributable Net Income (DNI). Per IRC Section 643(a)(3), capital losses are excluded from DNI except to the extent they are used to offset capital gains.
Why wouldn’t the trust tax return cancel out the gains and losses to the extent possible instead of putting them on a K-1?

If there is another trust for the same beneficiary, can excess losses be passed to the beneficiary and cancel the gains from the other trust’s K-1?
Not sure I understand the first question, specifically, what is meant by having "the trust tax return cancel out the gains and losses"? In any case, the relevant bottom line is that net capital losses in the trust cannot be passed out to the beneficiary, except in the final year of the trust.

The answer to your second question is --- No.
bsteiner
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Re: Trust/Tax question

Post by bsteiner »

Theseus wrote: Sat Oct 08, 2022 11:38 am Thank you to all the experts that are weighing in here.

A question from a lay person. If we have a grantor trust (irrevocable), then the income from the trust is taxed to the grantor. But you are saying that if the trust has a loss, then the loss can not be passed to the grantor to offset grantor's other gains?

Not sure I am clear in my question, but if it is unclear please let me know.
If it's a grantor trust, nothing "passes." The grantor is treated as the owner for income tax purposes, as if the trust did not exist. The income, deductions, gains, losses and credits are the grantor's.
Theseus wrote: Sat Oct 08, 2022 12:43 pm ...
Based on some recommendation we got the EIN. And the CPA then filed 1041 for the trust - but with 0 income and a statement that this is a grantor trust and all income is reported to the grantor. This was the first year and we just followed CPA's recommendation. Is this something we shouldn't do going forward? Is there a downside to filing 1041 except $500 that CPA charges?
Most grantor trusts use the grantor's social security number since it's simpler. This has been allowed for most grantor trusts since 1995. However, some grantor trusts do it the way you did it. Some clients and some accountants prefer that method; and some accountants aren't aware of the 1995 change in the regulations.
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celia
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Re: Trust/Tax question

Post by celia »

MarkNYC wrote: Sat Oct 08, 2022 7:57 pm
celia wrote: Sat Oct 08, 2022 2:31 pm
MarkNYC wrote: Fri Oct 07, 2022 5:26 pm The character and amount of trust income that can be passed through and taxed to a beneficiary is determined by, and limited to, Distributable Net Income (DNI). Per IRC Section 643(a)(3), capital losses are excluded from DNI except to the extent they are used to offset capital gains.
Why wouldn’t the trust tax return cancel out the gains and losses to the extent possible instead of putting them on a K-1?
Not sure I understand the first question, specifically, what is meant by having "the trust tax return cancel out the gains and losses"? In any case, the relevant bottom line is that net capital losses in the trust cannot be passed out to the beneficiary, except in the final year of the trust.
Suppose the trust had $4,000 of losses and $5,000 of gains. It sounds like the trust’s tax preparer can either use the losses to cancel out part of the gain and just put a $1,000 gain (minus a small deduction???) on the K-1. Or she could put the full losses and gains (minus the same deduction) on the K-1. But why would someone do the latter choice other than that’s an option?

I wonder if I’m missing some concept here.
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Lee_WSP
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Re: Trust/Tax question

Post by Lee_WSP »

celia wrote: Sat Oct 08, 2022 10:59 pm
MarkNYC wrote: Sat Oct 08, 2022 7:57 pm
celia wrote: Sat Oct 08, 2022 2:31 pm
MarkNYC wrote: Fri Oct 07, 2022 5:26 pm The character and amount of trust income that can be passed through and taxed to a beneficiary is determined by, and limited to, Distributable Net Income (DNI). Per IRC Section 643(a)(3), capital losses are excluded from DNI except to the extent they are used to offset capital gains.
Why wouldn’t the trust tax return cancel out the gains and losses to the extent possible instead of putting them on a K-1?
Not sure I understand the first question, specifically, what is meant by having "the trust tax return cancel out the gains and losses"? In any case, the relevant bottom line is that net capital losses in the trust cannot be passed out to the beneficiary, except in the final year of the trust.
Suppose the trust had $4,000 of losses and $5,000 of gains. It sounds like the trust’s tax preparer can either use the losses to cancel out part of the gain and just put a $1,000 gain (minus a small deduction???) on the K-1. Or she could put the full losses and gains (minus the same deduction) on the K-1. But why would someone do the latter choice other than that’s an option?

I wonder if I’m missing some concept here.
It’s the same concept for individuals. You have to use the loss to offset any gains first. You cannot just keep carrying over losses if you realize any gains in the tax year.
bsteiner
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Re: Trust/Tax question

Post by bsteiner »

celia wrote: Sat Oct 08, 2022 10:59 pm ...
Suppose the trust had $4,000 of losses and $5,000 of gains. It sounds like the trust’s tax preparer can either use the losses to cancel out part of the gain and just put a $1,000 gain (minus a small deduction???) on the K-1. Or she could put the full losses and gains (minus the same deduction) on the K-1. But why would someone do the latter choice other than that’s an option?
...
It's sometimes possible to pass the capital gains through to the beneficiaries but that's complicated. In most cases, except in the final year, capital gains (net of capital losses) are taxable at the trust level.
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