The final year of a trust or estate requires some consideration of the different tax treatment of all items of income and deduction. Here are some important things to keep in mind:
- All income is passed out (via K-1) to the beneficiaries in the final year of a trust or estate. This includes capital gains (which are generally taxed within the trust).
- All income items (including these capital gains) are passed out net of allowed deductions.
- Capital losses and excess deductions pass out, and are deductible by the beneficiaries.
- Passive losses are not passed out, but adjust the basis of interests now held by beneficiaries.