Discussion:Simple Trust with Income but no $$ to distribute
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Discussion Forum Index --> Tax Questions --> Simple Trust with Income but no $$ to distribute
| 8 February 2008 | |
| The only asset in this trust is a very old building with commercial rentals on ground floor and apartments above. Along comes Insurance Co demand to upgrade entire electrical or lose insurance. There is net rental income that would ordinarily be distributed to beneficiaries but all $$ is being invested in this very expensive upgrade. It is being capitalized. (A large loan is also necessary.)
I'm seeing many discussions about the need to distribute DNI every year and I agree. However, what about this situation? What are the ramifications of giving the beneficiaries a K-1 showing income but not actually distributing it? What about keeping the income in the trust & letting it pay the tax? I appreciate any guidance in this situation. Oh, yes. When the electrical is done, Berkeley is requiring Earthquake retrofit, which will require more expense to be capitalized and leaving no cash to distribute on the rental income so this situation will probably span several years. | |
| 9 February 2008 | |
| Bear in mind that the income beneficiary will get the benefit of the depreciation in future years. K-1 carries fiduciary accounting income for a simple trust. Cash is irrelevant. ♫ | |
Jmolliconi (talk|edits) said: | 9 February 2008 |
| If I could only quote the code section or reference..... Even if a trust is labeled a simple trust, if it is a year when no distributions are being made, you can check complex trust on the description. Maybe it's in the instructions.
Or as you mention, you can show the non-distribution on the K-1 for the actual amount that should be distributed. At least this second was the way it was handled way back when I was with a big 8 firm, when there were 8. It depends on the amount and the tax bracket of the beneficiary. This is off the top of my head, someone will show up with name, date & serial no. jm | |
| 9 February 2008 | |
| Dennis has given you the correct answer. A simple trust becomes a complex trust in the year in which it distributes corpus. It does not become a complex trust as a result of a failure to distribute its accounting income as required under the trust instrument. | |
| 9 February 2008 | |
| Note that inability to pay the required distribution in any given year does not relieve the trust of the obligation. You also need to know how your state's Uniform Principal and Income Act treated depreciation in the year the trust was established. It is not necessarily a charge against income for fiduciary accounting purpose. | |
| 9 February 2008 | |
| The depreciation has been staying with the Trust since the initial year.
Can you point me to a source(s) where I can learn more about how to handle not paying now (for several years) and catching up later, when cash may be available (will also probably have to happen over several years)? Since the Trust Document mandates annual distrubutions, I assume there is no way to deviate and have the trust keep the income and pay the taxes for these years when all is being re-invested in the mandated improvements? I think I need accounting as well as tax sources for this. | |
| 9 February 2008 | |
| The odds are pretty good that you have been treating depreciation incorrectly. Do understand that for the most part the IRS defers to state law on matters of fiduciary taxation, so your source material is going to be the California Probate Code. You can find all sorts of information on the internet Here's one. but you really need to understand UPIA to do this kind of work. | |
| 10 February 2008 | |
| Dennis and TaxTips hit it right on the head. Again with Trusts you must know what the Trust Document says and how current it is with State Law. I always start by looking at the date of the Trust Documents, and see what they say about P & I. | |
| 11 February 2008 | |
| Very simple 2-page Trust document drawn up by deceased puts their separate property into the trust many years prior to death. (1988) Stipulates that upon death (2001) surviving spouse shall become trustee for lifetime. At second death the property gets divided between beneficiaries. "All net income actually received over and above expenses of operation and maintenance of the property shall be paid annually to" the beneficiaries (children of prior marriage). | |
| 11 February 2008 | |
| Well, for starters work the basis rules, step up to FMV at DOD in 2001 to your benefit. I know a little bit about community property states, however little about separate property. In Texas I recall the couple shares community property equally, and 50% of each's separate property. I always tell the client to have the help of an attorney, however so many of them will not go to the $500/hour attorneys with $5M minimums (I have three I refer to, however the clients rarely go). This is unfortunate in my view is exactly what they need and money well spent. A good civil attorney with experience can be okay unless material amounts are involved, and there are tricky to value interests and assets. | |
| 11 February 2008 | |
| I cannot overemphasize the necessity to keep a set of books. Essentially the California Probate Code (as of I believe 1999) adds the standard of generally accepted accounting principles to the rule allowing the trustee to transfer from income to principal a reasonable amount of the net cash receipts from a principal asset that is subject to depreciation. [Probate Code Sec. 16372.] It also leaves to the discretion of the trustee whether or not to charge depreciation against income. [Probate Code Section 16372.] Understand that the trustee's obligation is to balance the rights of the principal and income beneficiaries and that in the case of an asset that is appreciating in value the allowance can be limited to compensation for the eventual tax liability on recapture. As far as the step up on first death, that may only be half. | |
| 11 February 2008 | |
| Thanks, Lancemrc and Dennis. Attorney was used at death to settle estate & review Trust. Taxable estate tax return was filed due to appraised building value being $800K with exemption $500K at the time. Full step-up for depreciation (Separate property - Trust existed before time of death.)
Both Trustee and CPA for beneficiaries OK'd keeping depreciation in the Trust. Figured it would leave cash flow for any major maintenance necessary. Anticipated roof but these mandated capital improvements came along later and are way more than ever imagined. Thanks for the probate code references, Dennis. I will learn a lot on the subject this year. Any more pointers/advice are always welcome! | |
