B Trust, 1041, and Capital Loss

[GraceNY]

I am not proficient in this so please allow some leeway in my description.

Taxpayer moved from Florida to NY in 2010.

Original AB Trust drawn up under Florida law back in the 80's. Spouse has been deceased for several years. Prior preparer has been preparing Trust B 1041 as a simple trust.

In tax year 2010, mutual funds are sold and result is a net loss of $7,519.

How to handle on the 1041?

I read:

For Allocation of Income & Principal ALWAYS look to governing instrument first, even before State Law. If Fiduciary is granted discretion in instrument, discetion trumps state law.

I look at trust agreement and find: "TRUST B. Disposition of Income and Corpus: the Co-Trustees of Trust B are to distribute the net income derived from Trust B in quarterly installments, to the Grantor's Spouse, Jane Doe, or apply the same for her benefit, so long as she shall live. If the income payable to Jane Doe, supplemented by income (other than capital gains) available from other sources, to her shall not be sufficient to meet her reasonable needs, then and in that event, the Grantor authorizes the Co-Trustee to pay to or apply for the benefit of the Grantor's Spouse, Jane Doe, so much of the principal of this trust as the Co-Trustee, in her sole discretion, shall from time to time deem necessary or desirable to meet the reasonable needs of the Grantor's Spouse, Jane Doe, even to the full extent of the entire principal of this trust."

Yet, I read Sch D 1041 instructions and find: "If the losses from the sale or exchange of capital assets are more than the gains, the net loss must be alllocated to the estate or trust and not to the beneficiaries."

In my search for an answer, I come across a multitude of tax-question-posting websites debating this issue with no clear answer.

Also, for NY Preparers: Since this is a Florida Trust am I correct in only preparing just a 1041 and not a NYS IT-205?

Your input would be geatly appreciated.

Grace

[michaelmars]

IF the trustee is in NY, its now a ny trust-makes no sense

[schirallicpa]

income items such as dividends and interest may be distributed. But capital losses stay with the trust until the final year. The income distribution calculation on line 18 will "jump" you to the schedules you need to sort out distributable income. The program works nicely.