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Max W

Trust Distribution

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Decedent Irrevocable trust specified a 1/3rd distribution to the three beneficiaries.   The Executor, one of the beneficiaries decided to distribute his share to one of the others.  He had the consent, not written of the other two.  Effectively he changed the terms of the trust.  In some states, if not most, any change has to be approved by a probate judge.  The state in this case is CA.

I prepped the 1041 using the 1/3rd distribution, even though one got no money and another got 2/3rd's and they want the K-1's to reflect that.  Since I have to go by what the trust dictates, I don't think I should change it.  Am I right on this position?

TIA

 

 

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I'm going to shoot from the hip and say you're ok to do that because he had constructive receipt of the money and gave it to the other bene. I'd advise him to actually take the distribution next time and write a personal check for the gift. And I'd have him file a gift tax return this time if it's over the limit.

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2 hours ago, Abby Normal said:

I'm going to shoot from the hip and say you're ok to do that because he had constructive receipt of the money and gave it to the other bene. I'd advise him to actually take the distribution next time and write a personal check for the gift. And I'd have him file a gift tax return this time if it's over the limit.

I agree, it was a gift.  Distribution taxable to him under constructive income doctrine.

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Thanks, for your opinions.  There more of a screwup than this which will post in another thread.

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A beneficiary can refuse acceptance of their portion. They can't then dictate who gets their portion.

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On 4/16/2018 at 6:44 AM, Roberts said:

A beneficiary can refuse acceptance of their portion. They can't then dictate who gets their portion.

If they refuse to accept, what happens to the money?  Does it get reapportioned to the other beneficiaries, or does it stay in the trust?

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That would be a legal question of whether it is appointed to the other beneficiaries and or your own beneficiaries. The only time I've seen it done was with an only child and their kids were next in line. On trusts it isn't staying in the trust, someone is getting it.

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On ‎4‎/‎14‎/‎2018 at 1:08 AM, Max W said:

Decedent Irrevocable trust specified a 1/3rd distribution to the three beneficiaries.   The Executor, one of the beneficiaries decided to distribute his share to one of the others.  He had the consent, not written of the other two.  Effectively he changed the terms of the trust.  In some states, if not most, any change has to be approved by a probate judge.  The state in this case is CA.

I prepped the 1041 using the 1/3rd distribution, even though one got no money and another got 2/3rd's and they want the K-1's to reflect that.  Since I have to go by what the trust dictates, I don't think I should change it.  Am I right on this position?

TIA

 

 

I think you handled it correctly.  Sometimes people try to pull shenanigans to shift income to another party to avoid taxes, increase government benefits, avoid losing Medicaid, etc. etc.  It's illegal.  It is treated as though he got it, then gifted it to another person.   He could have reduced the gift by the tax he had to pay, which was his prerogative.  There is such a thing as a disclaimer, but it applies to estates. In that case it goes to the contingent beneficiaries.   I never heard of it applying to trusts.  You need to research state law on this to see if it is available in your state.

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14 minutes ago, Burke said:

I think you handled it correctly.  Sometimes people try to pull shenanigans to shift income to another party to avoid taxes, increase government benefits, avoid losing Medicaid, etc. etc.  It's illegal.  It is treated as though he got it, then gifted it to another person.   He could have reduced the gift by the tax he had to pay, which was his prerogative.  There is such a thing as a disclaimer, but it applies to estates. In that case it goes to the contingent beneficiaries.   I never heard of it applying to trusts.  You need to research state law on this to see if it is available in your state.

Burke, you bring up some good points.  The executor who gave his share to his sibling is in a much higher tax bracket.  However, I doubt that was a consideration.  The total amount distributed was only $36K .

Contingent beneficiaries only become beneficiaries if another bene dies and the former takes its place.

 

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1 minute ago, Max W said:

Burke, you bring up some good points.  The executor who gave his share to his sibling is in a much higher tax bracket.  However, I doubt that was a consideration.  The total amount distributed was only $36K .

Contingent beneficiaries only become beneficiaries if another bene dies and the former takes its place.

 

In the state of Virginia, under a will, a contingent beneficiary(ies) can wind up inheriting if the primary beneficiary disclaims all or part of the inheritance.  I don't know if it is the same in other states.  But I do know that works in Virginia, and you can disclaim all or part of an inheritance. I don't know if it works for a trust, or for a named beneficiary on an IRA or life insurance. 

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There is a way to avoid the distribution via disclaimer, and as Roberts says, you can't 'choose' who gets the money.  Without seeing the document, if the 3 were equal beneficiaries with no other qualifiers, it would have gone to the Trustee's (who disclaimed) heir if the wording was 'per stirpes' and not designated by class, or most likely equally to the remaining to beneficiaries if no per stirpes or heirs.

There could have been a beneficiary settlement agreement changing the terms as your Trustee desired, but it would have needed to be approved by the Court.  Both of these options would have avoided the trustee receiving a K1.

However, it sounds like he just 'gifted' his share, as others suggest, so assuming that's the case, he receives a k1 and does a gift tax return.

 

Eeegads.  Why do peeps expect us to fix things AFTER the fact?!?

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I just did some checking.  There IS such a thing as a disclaimed interest in a trust.  But it can get tricky.  Note that a disclaimed interest in an estate is treated as though the beneficiary predeceased the deceased.  Therefore, the executor follows the terms of the will as to where the assets go as a result which is why I said "contingent" beneficiaries.  Also, disclaimers must be in writing, delivered to the executor/trustee, and cannot specify what to do with the money.  The other beneficiaries do not have anything to say in the matter.    Again, these things are covered by state law and that needs to be reviewed. 

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