Irrevocable trust distributions to beneficiaries to offset trust earnings
Is it ok to write checks to beneficiaries on last day of the year (12/31/24) when trust earnings are known, and does the IRS count such distributions as occurring in 2024 even though the checks may not be received and deposited until 2025? If so, is there any record keeping or documentation recommended?
Answers
-
Hi downeast,
Most taxpayers use the cash method of accounting, which means that in order for the money to be treated as 2024 income, they would need to have actually or constructively received that income during 2024. "Income is constructively received when an amount is credited to your account or made available to you without restriction."
If the taxpayer has not yet received the check, it would typically not be considered received. You will typically want to make sure the taxpayer receives the check in 2024 to avoid any unnecessary complications.
-
Thanks for your reply. However, I was more concerned from the perspective of the trust, or just in general. For a trust, would the IRS consider the date of a check and when it was mailed as determining the distribution year, which can be deducted from trust earnings. To use another example, from an individual return, if one writes and mails a check to pay property taxes on 12/31/24, could they then potentially count those property taxes as a 2024 deduction on their return?
-
Our forum may not be able to assist you with this question as we primarily deal with individual tax return questions. I recommend consulting with a tax professional that specializes in trusts to discuss this situation with them.
-
In general if a check is drawn and mailed on or before the year end, it should be recognized as having been paid by that date. It's best do document the postmark date, one example being a photocopy of the envelope with a postmark, or dated stamp printed by the post office. Certified mail is another option though, not the most economical.
As far as specifically relating to the trust, that requires a different form, Form 1041 and that is outside the scope of your services.
