Navigating trust tax consequences: A line-by-line guide to Form 1041 deductions

Forming a trust can be complicated on its own, but actually operating a trust has its own set of tax consequences. The best way to dive into this topic is through examples detailing Form 1041 deductions for Lines 10 through 21.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you’ll have access to the full recording and the entire list of Q&As.   

Q: Who determines whether the trust is simple or complex?

A: The terms of the trust document determine whether it is a simple or complex trust.

Q: Does every trust have to file a tax return every year?

A: No, there’s only a filing requirement if the trust (1) has any taxable income for the tax year; (2) has gross income of $600 or more (regardless of taxable income); (3) has a beneficiary who is a nonresident alien; or (4) held a qualified investment in a qualified opportunity fund (QOF) at any time during the year.

Q: Who signs Form 5495, Request for Discharge from Personal Liability Under I.R. Code Sec. 2204 or 6905?

A: The executor representing a decedent’s estate or a fiduciary of a decedent’s trust may request a discharge from personal liability for the decedent’s income, gift and estate taxes.

Q: If a complex trust makes a distribution, is it net of the tax? If so, is the Schedule K-1 issued to the beneficiary also net of the tax?

A: No, any distribution comes from income first and is taxable to the beneficiary. The trust cannot pay tax on income that it distributed in that year.

To learn more about operating a trust, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial at natptax.com/explore.