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  • Home>Practice Management>Retiring With Natalie Choate>Tax Reporting: Spousal Rollover Through Trust

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    Tax Reporting: Spousal Rollover Through Trust

    The ins and outs of who reports the receipt of income, and how to do it.

    Natalie Choate, 03/10/2017

    Question: Paul Popper died, leaving his 401(k) plan benefits to a trust as beneficiary. Under the terms of the trust, Paul's spouse, Sarah, has the absolute right to withdraw the benefits. The plan paid the entire benefit to the trust in one lump sum distribution on June 1, 2016. The trustee received the check and deposited it in the trust’s bank account. Sarah then exercised her right to withdraw the payment, and (within less than 60 days after June 1, 2016) she deposited the funds into a rollover IRA she created in her name.

    The 401(k) plan will issue a 1099-R showing a distribution to the trust, coded as “death benefit.” How does the trust report this payment and the distribution out to Sarah? What does Sarah report on her return?

    Answer: Sarah is treated as the "owner" (for income tax purposes) of the retirement plan benefits payable to the trust because she has the absolute right to withdraw such benefits from the trust. The Internal Revenue Code (IRC) provides that "A person other than the grantor shall be treated as the owner of any portion of a trust with respect to which … such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself."

    Because Sarah is already deemed to own this asset, even when it is in the trust’s bank account and even though the check was payable to the trust, Sarah (not the trust) is the one who reports the receipt of this income: "Items of income, deduction, and credit attributable to that portion of a trust that is treated as owned by the grantor or another person are not reported by the trust on Form 1041 … but are shown on a separate statement to be attached to that form."

    There are alternative procedures available if the entire trust is treated as owned by the grantor or another person, basically allowing the trustee to arrange for such items to be reportable directly as paid to the "deemed owner." The alternative procedures are not applicable with respect to the retirement plan distribution here, which has already been paid by the plan into the trust and will be so reported by the plan administrator.

    Accordingly, the trustee should do the following:

    >Prepare and file federal income tax return, Form 1041, for the trust for 2016.

    >Report on the Form 1041 all other income and deductions that it may have for 2016, if any, in the normal fashion as required for such other income and deductions.

    Natalie Choate practices law in Boston with Nutter McClennen & Fish LLP, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is a leading resource for professionals in this field.

    The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.