If a trust has capital gains, the trust pays the tax except in the final year when the trust is closed.
In any other year, if beneficiaries receive a distribution, they are taxed on any ordinary income over and above deductible expenses. If there is not a distribution, the trust pays the tax on the ordinary income.
Not all costs paid by a trust are deductible. Often people think, well, the trust earned this much but I spent this much so there is no gain….. very often that is incorrect. Best example, the deceased creates a trust at death. The trust pays for the funeral. That is not a deduction. It is a deduction if the estate is worth more than $5m (varies by year of death) on a separate one time tax return Form 706. But, the trust itself reports on Form 1041 and here it is not a deduction.
We believe by not filing the Form 1041 correctly, the tax is probably not paid correctly or the beneficiaries are not receiving their proper loss allocation. Good example, deceased leaves a home valued at $100k. It sells for $100k. Most beneficiaries do not realize they have a loss based on the closing costs at sale and the non-deductible costs they’ve incurred managing/carrying this ‘investment’.
Additionally, by having an outside firm actually prepare this return, it takes some of the questions away from the beneficiaries.. the person in charge of the estate/trust has hired an independent person so we don’t have as many questions.
Gets complicated quickly.