Discussion:1041 trust with an annuity
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Discussion Forum Index --> Tax Questions --> 1041 trust with an annuity
| 20 March 2006 | |
| I have little experience with 1041s (and annuities), but have been doing a lot of researching and learning! My question is, this simple trust has most of its assets in an annuity that was bought in 2005. How do I report this on the 1041, if at all? The contract says that additional interest was "credited to the annuity as of the issue date." Do I assume this is interest earned for the trust and show that as income on the 1041?
Thank you for your help. | |
| 20 March 2006 | |
| You need to be more specific about how the trust was created, how it reads, and under the laws of which state it falls, but it sounds like you have a fiduciary accounting issue. In first year circumstances like this, the credited interest increases the amount of the annuity contributed to the trust. This would be a contribution of principal, the trust would be complex in year one and would pay the tax. Another possibility might be taxable interest to the person who purchased the annuity. If the trust is testamentary there are other possibilities. | |
| 20 March 2006 | |
| This trust was created from a decedent's estate. This is not the first year of the trust. So, if I understand what you are saying the interest credited to the annuity is treated as a contribution to principal and I should not have to report any income.
Or, are you saying that because this annuity was bought, it changed the trust from simple to complex and the trust pays tax on the credited interest. | |
| 20 March 2006 | |
| Income has to be recognized by someone in the year credited. The question is who and when. I'm not clear on how the credited interest situation arose, or whether the terms of the trust would have required it to be paid out, or whether it actually was paid out. For purposes of your research, this type of event is called a trapping distribution. | |
| 22 March 2006 | |
| I discovered that this annuity is an "equity indexed annuity" and therefore, this is why additional interest was credited to it. "Equity-indexed annuities credit interest using a formula based on changes in the index to which the annuity is linked. The formula decides how the additional interest, if any, is calculated and credited. How much additional interest you get and when you get it depends on the features of your particular annuity."
I am still not sure if I need to report this additional interest as trust income. I am thinking that I do. Still researching...... | |
| 22 March 2006 | |
| O.K. So it isn't a trapping distribution.
Next place to look is your state's version of the Uniform Principal and Income Act. (Which won't cover your specific situation, but should give you some guidlines.) Also whether your state has adopted prudent investor type legislation for fiduciaries. (This deals with the trustee's dual responsibility to income beneficiary and remainderman.) The type of annuity you describe is generally a tax deferred vehicle. Not the sort of thing you would ordinarily find in a simple trust. Is it paying out currently? I seem to be rambling, here. Very confusing with minimal information. Have you written up the receipts and disbursements for the year? | |
| 22 March 2006 | |
| No, it is not paying out currently. What I find weird is that the trustee put $10,000 in another account(a money market account) so he can pay out periodic payments to the beneficiary. I am wondering why he couldn't get the annuity to pay to her??? Or...better yet, why he doesn't hire a bank as the trustee of the trust, have them invest the assets and take care of everything for him including paying out to the beneficiary???
I am not familiar with annuities, but the more I learn about them, the more I don't like them! O-k, I am going to do as you say...research the Uniform principal and Income Act and look at the state regs. and no, I have not written up receipts and disbursements. I was only hired to prepare the 1041. I was told the amount of monthly payments to the beneficiary. I doubt he has a formal accounting of the trust. I have statements from the investment company. This year he cashed out of funds,closed out that particular account, and bought this annuity. | |
| 22 March 2006 | |
| You do not have a simple trust. You most likely have some sort of "spendthrift" trust, which may be simple or complex in any given year. Beneficiary sounds like she is getting an allowance unrelated to trust income. There should be a 1099 from the investment company. Report the income on the 1041. Beneficiary is taxed either on the amount of income or the amount of distributions, whichever is lower. | |
| 22 March 2006 | |
| Ah ha! got it! This is the last 1041 I'm going to do! :o)
Thank you so much for your help. | |
