Discussion:Trust distribution

A revocable trust was estabalished in 1985. The trustors were named as trustees. I was named as successor trustee in the event of the husband's death. Upon the husband's death in 1986, the trust was divided into three trusts. I separated the trust assets between the survivors,the exemption and the marital trusts. The wife took distribution of the survivors and I took possesion of the exemption and the marital. So far pretty typical story! From 1986 until September 2004, I distributed the income from both the exemption and marital trusts to the wife. To make matters a little more complex, I also distributed some principal from the marital trust from April 2001 to June 2004 when the income was not sufficient for the wife to "maintain the same standard of living". The principal distribution was made at my sole discretion. the wife had no right to demand principal.

On October 29, 2004, I received a levy from the Internal Revenue Service for all property owed to the income beneficiary. I took the position that the only "property owned by the income beneficiary was earned income and did not include the principal. I did not honor their claim for the principal. Whether the lien includes princpal as well as income is a very involved case and is not the subject of my question. Hopefuly, the Service will sue me and the courts will decide. At that time, I will do as the Judge decides. Until then, I continue to hold on to the assets. For some reason, The IRS has not taken any aggressive action to collect the lien.

From the date of the lien through the end of 2004, there was no taxable income and thererfor none required to be distributed. Easy so far! The wife died in early 2005. There was some net income during the portion 2005 that she was alive and I offered to distribute it to the IRS. They told me to hold on to it until we settled the case. I did prepare a K-1 for the income and mailed it to her accountant who pepared her final 1040 showing the income. I did not distribute any money.

The Trust provisions require me to distribute the income to her daughter after the wife's death, but I elected not to as the lien was still in effect. 2006 showed a healty income and this brings me to the question..... Who gets the K-1? If I send it to the daughter how can she pay the tax as she has not received any money due to the lien. Is the money still due the wife? Should I send her estate the K-1? Or should I pay the tax as trustee?

Since her estate does not have any money as the IRS took all of her assets they could to partially satisy the lien, I would prefer to take this action. Any tax due would have to be written off.

Can I send her estate the K-1 or must I send it to her daughter? Or must I send it to myself as trustee?

CONFUSING? You bet. Can you help?

The question about the discretionary payments opening the door to the IRS will be settled by the Court when I am sued. My question was about the 2006 income and who is entitled to it.

The liability is hers - not the Trusts. I was hoping for a easy answer where none is available. As to seeking "professional help", so far three attorneys have given me three different answers. One said the K-1 goes to the wife, one said the K-1 goes to the daughter and one said the Trust should pay any tax due. Barring anything specific in the regulations, I intend to send the K-1 to the wife's estate. They gave me equally different answers as to whether or not the principal belongs to the wife (and therefore the IRS takes it due to the lien). They, of course, all wanted $10,000 reatainer to do more research on the matter.

Dennis, Thanks for you responding.

paid by the beneficiaries. I vote the 2006 K-1 should go to the daughter. I also vote that the principal and the income after the wife's death, now held by the trust, belongs to the daughter and is not subject to the lien. I would not distribute any of the principal until a solution is found/litgated.

I resent Dennis' comments that I have screwed up.  He failed to take into consideration that I have consulted with three attorneys and several fellow CPAs.  Their responses have been in conflict with each other.  I have already spent over $15,000 in fees to try to resolve this matter so Dennis' comments that I have not requested help is in error.  The time spent so far was related to the ability of the IRS to attach the principal and a little on the K -1 issue.  I was using this WEB page to get some ideas on the K- 1 issue.  The main issue  of principal will have to wait until the courts take a look at it.

Bbla, the Trust does require that the principal has to be distributed to daughter, but I am prevented by the lien. Bbla would send the K- 1 should go to the daughter, but I should not do this as she did not receive the distribution yet would have to pay tax on it. I do feel that the lien is transferrable to the assets and therefore I can not distribute any money to the daughter. This is a real catch 22.

Thank you both for your comments. It has only convinced me that this is not a "black or white" question and will only be resolved by a judge.

Enjoy your tax season

Dennis, How can I bring an action? The three attorneys (all well thought of) indicate that I have no standing to force the IRS to do anything. I must wait for the Service to sue me for collection.

Again, I was not asking for help on the issue of who owns the trust assets. My question was how to report the 2006 income.

This thread could go on and on so I will say thank you again for all of your input. I will promise all that once I hear from the Service I will let you know. Is there a way I can bring Dennis, Bbla and Bengoshi up to date withour going through the question and answer routine. That is can I somehow limit my remarks to you three good people. Is it appropriate to let you know by e-mail?

My e-mail is dean@greatbeerco.com. I am a co-founder and president of a micro brewery in Los Angeles. I can always drink my beer when the IRS is getting too difficult.

I wonder if you could somehow distinguish the "principal" of the marital trust which is subject to the lien from the post-death "income" which may or may not be subject...? Unless that income gets allocated to the marital trust principal too?

The collection agent called me and told me that their attorneys are still undecided on the applicability on their lien and agree with me that is should be resolved in court. He also agreed that he did not have the power to negotiate, but his boss did and recommended we get together in the next six to eight weeks to talk. They apparently are in no hurry to settle this issue. It has been going on for nearly two years.

I reminded him that I had income from the Trust and asked again if he wanted the money. He said that he did not as a judge may misinterpret that action to the Service's disadvantage. I told him that I would prepare a K-1 for the estate of the income beneficiary. He agreed that that made sense to him. This would mean that since the estate does not have any money, he would have to add it to the lien and we would have to postpone the court action even longer....What a mess. Will continue to keep you informed.

The IRS legal staff has agreed to my recommendation to send the K-I to the decedent's estate as oppossed to me paying the tax as trustee. He told me that he did not know how the courts would rule, but this was a simple solution and was minor compared with the larger issue as to if the Service had the right to the principal of the marital trust. Apparently when under negotiation prior to going to court, the Service has a lot of discretion in interpreting law.

The collection agent will contact me in a few weeks to set up a meeting with me, the income beneficiary, him, and his boss for settlement discussions on the whole issue of lien rights as to the trust principal.

Will keep everyone informed. Or -- Is this forum appropriate for my case? Is it only for questions and not for results?

Dennis, your responses to my posts are appreciated. I may not agree with them, but do not take offense to your comments. Hopefully, this case will be resolved soon and we will both learn from the experience.

I disagreed with his interpreation and asked for another meeting after I obtained my own council to review the probate code that the IRS was relying upon.  I talked to an ex-IRS attorney with experience in this area. He will review and get back to me with his thoughts.  

Hopefully, this whole issue will go away as it is crucial that estate plans can be made with some assurance that the QTIP trusts can operate as our clients want --the assets go to their children not to the spouses creditors.

The issue regarding the income from the subject principal and who was to receive the K-1 was not resolved. I will probably pay the tax myself as trustee as any other option only extends the disagreement with the service.

Thanks K12meter

I am one of the beneficiaries and am wondering why I didn't get a K-1 for the 2005 capital gains income distributed in early 2006. The accountant the trustee hired gave us just last month a K-1 reflecting some treasury bill interest income on undistributed trust cash earned in 2006 along with an amount for each beneficiary's "share of the distributable AMT income." Nothing was actually distributed with respect to this 2006 interest income.

My question is if we received a K-1 for undistributed 2006 interest income, why didn't we get a K-1 for the 2005 capital gains that were subsequently distributed in early 2006 pursuant to the stipulation? The stipulation itself is only a couple of sentences long and doesn't answer the question. The trustee is shielding the accountant from us and won't answer the question. The rest of the trust beneficiaries are assuming no harm no foul - didn't get a K-1, don't need to report the big distribution. I'm thinking we should report but then explain the tax was already paid by the trust.

Thanks for the help.

Dave

I can't shed much light on the 2006 issue without more facts (other than to say that as a beneficiary of the trust you probably are entitled to an accounting of its assets, income and expenses and that accounting might help you understand the tax issues better). I would suggest that you ask for copies of the trust's 2005 and 2006 1041s for a start; you may find that the 2006 interest income was distributed at the same time that the cottage proceeds were distributed or that the 2006 expenses of the trust exceeded its 2006 income and that's why you didn't get extra cash in 2006.

I may be able to help on the 2005 question, however.

In a nutshell, your post says the trust paid the taxes on whatever taxable income the trust had during 2005. As a consequence, you wouldn't get a K-1 for the 2005 income because when you received your share of the sale proceeds they already had been taxed and what you received was a share of the trust principal and not taxable income. If the trust documents allowed it, the trust could have passed the proceeds to all the beneficiaries, given them K-1s for the gain portion of the proceeds (price-expenses-basis) and let all of you pay tax on the gain, but it apparently paid the tax itself; you're off the hook, no additional explanations to the IRS necessary (the Trust's 2005 and 2006 1041s already explained it to them).

On a side note: That must be one really amazing "cottage" (or it was in the trust for a very long time), if the trust had a capital gain of $5 million when it sold the property. For example, if this is a post-mortem trust set up when the owner of the cottage died, then when the trust received the cottage, it would have received it with a stepped up basis (normally the market value of the property on the date of the owner's death). The taxable gain on the cottage sale would have been the sum of the sale price less sale expenses less the value of the cottage on the date of the owner's death. Unless there was a long delay or a really hot real estate market between the owner's death and the date the property was sold, there was probably very little capital gain to tax and perhaps even a loss. For example, If the value of the cottage was $5 million when the owner died, there would only be taxable gain to the extent the net sale price of the cottage (after subtracting broker's commissions, taxes, settlement costs, etc.) exceeded $5 million.