How can we help? Call us at 360-455-1569 or email Info@LindaKeithCPA.com.
default-logo

Cash from a trust: Revocable or Irrevocable?

Your question:

Will I be able to get a k-1 from a trust to show the cash distributed to the borrower?

Linda says:

Maybe…and no. Don’t you hate that answer? Maybe to the ability to get the k-1; It depends on whether the trust is revocable or irrevocable. No to the k-1 showing cash distributed.

Revocable trusts

These are commonly used to avoid probate, and may be called a living trust. My Mom has put her home and some of her investments in one. She gets a statement to her as the trustee.

Since it is revocable, it is treated as if the items are owned directly by her. She pays taxes on the interest and dividend income, as well as the capital gains.

There is no k-1. And the cashflow is determined as if she owned it directly. Example: For capital gains you may need to get the brokers statement.

Irrevocable trusts

Commonly created by the wealthy to pass assets to their children or grandchildren, an irrevocable trust is out of the control of the beneficiaries. A 1041 tax return will be filed and beneficiaries will receive a k-1.

Even so, unlike the 1065 or 1120S k-1, the 1041 k-1 does not indicate actual distributions. And even if it did, you cannot tell if the same distributions will continue. The borrower may have been getting $20,000 per semester in a full-time university…and just graduated.

For historical cashflow, it is likely the beneficiary received a year-end statement from the trust with information on income/losses and on distributions. For recurring cashflow, you will need to review trust documents and/or ask for a letter from the trust administrator indicating the expectations for continued distributions.

Do you need it to qualify?

If you do not need the trust income to qualify the borrower, considering leaving it out and adding a note: “If more qualifying income is needed, determine if trust income is recurring cash distributed.”

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.