What If I Don't Issue a K-1 for a Distribution to Beneficiary of a Trust?

By Cindy DeRuyter, J.D.

What If I Don't Issue a K-1 for a Distribution to Beneficiary of a Trust?

By Cindy DeRuyter, J.D.

If you are the trustee of a trust from which you made distributions of income to beneficiaries, you must issue a Beneficiary's Share of Income, Deductions, Credits, etc. (Form 1041, Schedule K-1) to each such recipient. Schedule K-1 is an Internal Revenue Service (IRS) form that documents the beneficiary's share of the trust's income, deductions, and credits, making it simple for the beneficiary to report taxable income on his or her own tax return. If you fail to issue Schedule K-1 forms to a beneficiary, both of you could face IRS fines and penalties.

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Trustee Responsibilities for Tax Matters

As trustee for either a revocable or an irrevocable trust, you have many responsibilities. In addition to keeping accurate records for the trust, you are responsible for preparing and filing tax returns with the IRS and, if applicable, state tax authorities.

When a living trust or an irrevocable trust distributes income to beneficiaries, the individual recipients are the ones responsible for any tax consequences, not the trust itself. The IRS Schedule K-1 is the tax form trustees must complete and give to beneficiaries and the IRS to document anything the beneficiary has received from the trust. Beneficiaries cannot meet their tax filing obligations until they receive a Schedule K-1 from the trustee.

Schedule K-1 Requirements

To complete Schedule K-1, you need certain information, including:

  • The trust's tax identification number
  • The name of the trust
  • The trustee's name and address
  • The date you filed U.S. Income Tax Return for Estates and Trusts (Form 1041) with the IRS and, if applicable, whether this is the final Form 1041 filing for the trust
  • The beneficiary's Social Security number
  • The beneficiary's name and address
  • Whether the beneficiary is domestic or foreign
  • The beneficiary's share of the trust's income in several categories, including interest income, ordinary dividends, qualified dividends, short-term capital gains, long-term capital gains, unrecaptured section 1250 gain, rental income, and more

As with any tax form, Schedule K-1 is complex. Talk to a tax professional to ensure you complete trust income tax and Schedule K-1 forms completely and accurately.

Penalties for Late Schedule K-1 Distribution

If you fail to file Schedule K-1 forms with the IRS and distribute copies to beneficiaries for their own tax purposes, you face penalties for each beneficiary unless you are able to give the IRS reasonable cause why you missed your filing requirements.

In addition, individual beneficiaries face penalties and tax liability for any taxable income they received from the trust but failed to report because they didn't receive their Schedule K-1 forms. A beneficiary could seek to hold a trustee liable for such penalties claiming the trustee breached his or her fiduciary duty.

If you are the trustee or one of several co-trustees for an irrevocable trust or for a revocable trust that has become irrevocable due to the trust creator's death, it is important that you understand your responsibilities and meet tax filing deadlines. Many trustees rely on tax professionals to ensure they complete forms and filing requirements, including Schedule K-1 forms, on time.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

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