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You are here: Experts > Business > Corporate Law > Tax Law (Questions About Taxes) > 1041 K-1 distributions
Expert: John Kirk, CPA
Date: 10/4/2008
Subject: 1041 K-1 distributions
Question
Hello,
My sister died in 1999. I was the successor trustee of her living trust. In her trust, she left my two then-minor children about $32,000 each. She specified that these funds be placed in trust for the children. I established a simple trust for each child, complete with EINs. The trusts were invested in mutual funds, and sustained huge losses when the market imploded in 2000. The losses are still being carried forward on the 1041s each year.
Both children are now adults, and are full-time students. I want to distribute these funds to them soon and dissolve the trusts. How can this be done without causing them a huge tax hit? I know I will have to prepare K-1 forms for the distributions. Will this be taxed as ordinary income to them? If I give it to them in $10,000/year increments, will they be able to avoid taxes? Can this money be considered to be gifts to them, since it was left to them by my late sister?
Thanks for your help.
Answer
It really depends on the trust agreement as to whether the trust or the beneficiaries pay the tax on the trust income. We cannot advise you without reading the trust agreement, so we advise you to have your local CPA answer those questions.
John Kirk, CPA
www.johnkirkcpa.com
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