ALBUQUERQUE, N.M. — Q: I am a beneficiary of my mother’s estate with my brother and sister. My brother is a lawyer and convinced my mother to make him the executor of the estate and trustee of her trust. I have not talked to my brother in years and we agree on virtually nothing. I just received a form K-1 from my mother’s irrevocable trust for the 2018 tax year. This form shows the following: line 1 interest income $7,544, line 10 estate deductions $25,692, box 14E and box 14H are also completed with the same $7,544. I have attached a pdf version of this form. I do not understand the form because I have never received any distributions including in 2018. I would like to send an e-mail to my brother and need to formulate what to ask. From what I have found on the web I should not have any income to report unless I received distributions. Is the box 14 or 10 numbers something that would in effect allow me to disregard reporting anything?
A: Looking at the K-1 form that you forwarded I noticed the form is checked to be the final one. If accurate this explains one of the numbers reported to you, but not why you have received no distributions.
Let’s start with basics. A trust either pays tax on its income or claims a deduction for distributions made to the beneficiaries. If distributions are made the trust avoids paying tax but the beneficiaries must report the income.
There can be some twists in this basic result. First the trust’s deduction is limited to a special computation for something called “distributable net income.” Second, the trust may claim a distribution deduction if the income is required to be distributed, even if it is not actually distributed.