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There is also an election that can be made to pass through the gains to the beneficiaries. I was trustee for several trusts so made this election titled, 'Trustee makes a regular practice of distributing capital gains. Pursuant to Reg. 1.643 (A)(B), trustee is making a regular practice of distributing capital gains to the beneficiary as trust instrument permits.' So, as Lion noted, read the trust document and see whether it is permitted and whether the trustee has made a regular practice of distributing the cap gains.

Have you checked Pub. 970? I am looking also at QF Handbook. It shows awards 'given for outstanding educational..winner is selected without any action on his part, winner is not required to perform services, and he assigns the prize (my emphasis) to a government unit or tax-exempt charitable organization.. is not taxable. My bold is wondering if that means giving the prize over or noting that it was received from so not sure. In Pub. 970, it says ' a scholarship or fellowship grant is tax free (excludable from gross income) only if you are a candidate for a degree as an eligible educational institution...... and only to the extent: *it doesn't exceed your qualified educational expenses; and more on page 5 which you should read. I can't imagine that there was no tuition although Box 1 may have been blank because it was not paid by outside funds. Have you seen the account transcript? I have had students with scholarships that, on the transcript, show as offsetting the tuition. It would seem to start there and, if determined to be tax-free, I don't see how it could be subject to Kiddie Tax because it wouldn't be unearned (or earned) income which is taxable interest, divs, cg, taxable ss and pension payments, certain trust distributions, unemployment comp. and tribal gaming revenues (from QF). Maybe someone else will chime in here but Pub. 970 is the place to start and clarify with client any conditions of the scholarship and get an account transcript. I'm guessing the student didn't see any of it but if some was distributed as living expenses, that could be another issue. Pub. 970 has a worksheet to determine what is excludable from gross income. How nice that they give you so much time to do this 2 months after the due date and what, two whole days before kid leaves country. /s I say rush job surcharge is in order!

Start by reading the trust document.