ira distribution to a qtip trust with tax free income
The RMD for an IRA is $50,000 which is distributed to a QTIP Trust. The income portion of that RMD is $25,000 and the qtip has $15,000 in tax free income. Can the 1041 tax return show on the K-1 $40,000 in taxable income distributed to the beneficiary and no tax free income being distributed because of the substitution of the additional $15,000 taxable income from the RMD, so the $15,000 tax free income remains in the trust?
Permalink Submitted by mk foss on Thu, 2010-03-18 02:56
I’m not sure that I understand your question.
The basic way that a trust return works is that you deduct from the taxable income the amount of a distribution attributable to the taxable income. If there was $25,000 of taxable income and $15,000 of tax exempt income 25/40ths of each distribution would be treated as taxable income.
Normally a QTIP trust distributes all of its income (both taxable and tax exempt) to the surviving spouse. You can’t ignore the tax exempt income in calculating the distribution deduction or actually making distributions.
Permalink Submitted by Harold Porter on Thu, 2010-03-18 05:00
Thank you for your prompt reply. Based on your response It appears I can’t do the “substitution”. I thought that since the QTIP is distributing all of the IRA rmd, which is an amount in excess of the income portion that the IRA has earned and is required to be distributed to the beneficiary, this principal portion, which of course is fully taxable, can be “substituted” for the tax free income that I’d like to keep in the QTIP. This particular scenerio is one in which the beneficiary needs more income than is being generated from the income portion of the IRA so she is presently getting the whole rmd. I’d rather leave the tax free income in the QTIP instead of the taxable “principal” part of the IRA distribution because of the trusts higher tax rate. Hope this makes sense!