Understanding Elder Law Estate Planning – Trusts and Tax Reporting


If you are the beneficiary of a trust, there are a number of considerations you should be making when filing your taxes. When filing taxes each year, you should determine how much of your trust distributions made throughout the year will be taxable. In the event that a trust retains income after the calendar year has ended, they will be subject to taxation on that leftover income, thus, it is important to communicate to your trustee, whether that is an individual or a corporate entity, your tax status and what you would like to maintain.

A trust consists of both income and principal. Principal is the corpus of the trust, being any trust property owned by the grantor and now the trust, as well as stocks and investments that have funded the trust. Income is the monetary amount made off of the investments or other products attributed to principal. Based on what distributions were made from principal and what were made from income, the trust must file a K-1 and a 1041.

The 1041 is the tax document important to the trust and trustee because it provides the trust’s deductions from its taxable income distributions made to beneficiaries. The K-1 is given to the beneficiary and gives them a breakdown of the distribution and what their tax liability is to be reported by outlining what distributions were made from income and what came from principal.

Additionally, it must be determined whether the trust is subject to taxation due to property transfers or beneficiary distributions, triggering gift taxes, as well as whether charitable contributions are required as part of the taxation of the trust. It should also be noted whether the trust is irrevocable or revocable. If a property transfer occurs to an irrevocable trust, the transfer is subject to gift tax, however, revocable trusts do not get taxed on property transfers until the trust become irrevocable or until the property is transferred to a beneficiary.
If the trust distributes out all of the income by the end of the year and does not reserve a set amount for charitable contributions, it is considered a simple trust. A complex trust allocates funds throughout the year to gift to a charity. When the trust distributes taxable income to the beneficiary, it is then deductible by the trust, and then the beneficiary will pay taxes on the income they received, avoiding the issue of double taxation.

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