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satisfaction of a pecuniary bequest, is distributions will typically be treated as
treated as a fully taxable transaction, and States widely will principal. Actual distributions from a
therefore the suspended passive activity trust, even if not required, will result in
losses will be deductible by the estate. follow the revised the trust beneficiary being taxed on a
Gain or loss will be recognized by the Uniform Principal and portion or all of the trust’s income and
estate as a result of the deemed sale or in some cases capital gains.
exchange.32 The gain or loss recognized Income Act of 1997.
will either increase or decrease the Plan now
amount at risk, potentially allowing for This article has explored the tax impli-
the possible use of part of or all of the cations, both on an entity and individual
at-risk suspended losses by the estate.33 When a trust holds a business inter- level, of a shareholder’s or partner’s
A distribution by a trust (for which est, classification of the cash and proper- death. Benjamin Franklin once famously
an election to be treated as part of the ty distributions as “income” or “principal” said there are two certainties in life:
estate34 was not made) in satisfaction of are important accounting concepts that death and taxes. Passthrough entities
a pecuniary bequest will be treated as can significantly affect the beneficiaries. and their owners should take prudent
a disposition involving a related party. If classified as principal, the distributions steps to plan for the former to help miti-
Gain will be recognized by the trust as can become trapped at the trust level, gate the latter. Failure to do so can have
a result of the deemed sale or exchange. but, if classified as income, that amount a high financial cost. ■
However, any loss will be subject to the will be allocated to the trust beneficiaries
related-party rules under Sec. 267 and of a simple trust. The determination
Sec. 469. of income and principal should be
analyzed by looking to the terms of the
Trust accounting income: trust agreement and applicable local law
Simple trusts under which the trust was created. Contributors
Entities generally make distributions States widely will follow the revised
Carol Warley, CPA/PFS, J.D., Ed
that are less than the taxable income Uniform Principal and Income Act of
Decker, CPA, MBA, and Nick Passini,
of that entity for the tax year. There 1997 (RUPIA).35 Under RUPIA, the
CPA, MST, are partners, Mike Laier,
is often an assumption that all of an income component for a trust’s interest
CPA, Brittany Pierson, CPA, MST,
entity’s income and deductions should is based upon the cash distributions to
and Rebecca Warren, CPA, are senior
be passed out to the beneficiaries of the trust from that entity. An exception
managers, and Michael Reeves, CPA,
a simple trust (a trust that is required to the general rule of the RUPIA will be
MST, is a manager at RSM US LLP.
to distribute all of its trust accounting if the distribution is greater than 20% of
Ms. Warley is a member of the AICPA
income). However, that is not the correct the interest’s gross assets or is a liquidat-
Trust, Estate, and Gift Tax Technical
analysis. The required distribution from ing distribution. In this case, an interest’s
Resource Panel, and Mr. Passini is
a simple trust will be based on the trust’s cash distributions will then be classified
a member of the AICPA Partnership
accounting income. as principal and not income. Property
Taxation Technical Resource Panel.
For more information about this article,
32. Regs. Sec. 1.1014-4(a)(3) and Secs. 469(g)(1) 35. National Conference of Commissioners on contact thetaxadviser@aicpa.org.
and 267(b)(13). Uniform State Laws, Uniform Principal and
33. Regs. Sec. 1.465-22(c). Income Act (revised 1997).
34. Sec. 645.
AICPA RESOURCES
CPE self-study Reviewing Partnership Returns
Closely Held Business Estate Planning Reviewing S-Corp Returns
Estate Planning Certificate Program For more information or to make a purchase,
visit aicpa.org/cpe-learning or call the Institute at 888-777-7077.

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