This is a question that is impossible to answer correctly without knowing the trust provisions. Most likely it is not a simple trust because those require all ordinary income to be distributed each year which apparently has not been done. On the other hand, a complex trust does not require these annual distributions. However, it's not possible without reading the trust provisions to determine if the distribution is of income or corpus. If of income it's taxable to the beneficiary. If corpus the trust pays the tax on the income. To further complicate things is the taxation of any capital gains realized. It's possible for that the trust provisions would have the trust pay the taxes on capital gains, but the beneficiary pays the tax on ordinary income. Then there is IRC code section 663(b) for complex trusts and estates
The 65-Day Rule. According to Section 663(b), if a trustee makes a distribution within the first 65 days of the tax year, the trust can elect to treat this distribution as if it were made during the previous tax year.
Important provisions of the 65-Day Rule
Election Requirement: The trustee must make an election for each taxable year they wish to apply the 65-Day Rule. This election is made by filing a statement with the IRS, typically as part of the trust’s tax return. Actually there a box to check.
Amount to Distribute within 65 days: The amount that can be treated as distributed in the prior year is limited to the lesser of the trust’s fiduciary accounting income for the prior year or its DNI, reduced by any amounts already distributed during that year.
Effect of Election: Once the election is made, the distribution is treated as having been made on the last day of the preceding tax year. The complex trust (or estate) will get the deduction, and the beneficiary will pick up the income reported to them on Schedule K-1 from the trust
What if the distribution for a complex trust was after the 65 days. then the distribution would be treated as a current year rather than a previous year distribution.
