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Question:

Dad died in 2021 in Florida. He was the grantor of a revocable trust and I (daughter) was the trustee. My understanding is that upon his death, it became an irrevocable trust. When he died (no longer the trust’s grantor) I applied for an EIN for the trust and now I’m the only trustee. Did the trust go back to being revocable or still irrevocable? Dad’s trust documents indicated the beneficiaries and disbursement amounts and those were carried out per instructions (all trust funds totaled less than $75K–no other items/assets but cash in the trust). Do those individual disbursements get recorded via a 1041 and K-1s such that each beneficiary now has to pay tax on that “income” from the trust? The trust was closed upon disbursement of the monies in the trust and all occurred before the end of 2021.

Response:

You did perfectly right. The trust file a first and final 1041 tax return for the trust to let the IRS know it’s been closed out. It seems quite unlikely that it will have to issue K-1s to the beneficiaries since it only needs to do so if there was net income to the trust after payment of costs, such as legal and accounting fees. The only income would be dividends and interest, which probably were non-existent or quite small given the size of the trust, its short duration as an irrevocable trust, and the current low interest rates. Distributions of principal are not considered income to the beneficiaries and do not need to be reported to the IRS. If the trust were larger and had realized income, the K-1s would report such income as passing through to the beneficiaries on a pro rata basis, with each beneficiary reporting his or her share of the income on his or her tax return.

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