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My friend had a trust established for her last year. The total value of the trust was to be paid out in four installments, one every six months. She got half the balance in 2013 and will get the rest in 2014. The person who established the trust is paying the gift tax on the amount deposited into the trust so she has no tax liability there.

Yesterday she got a call from the accountant handling the trust saying "due to a change in regulations" she will owe state and federal tax on income earned by the trust. The good news for her is this seems to mean she will ultimately get more than the original amount she was told because she should get the income earned at some point. The bad news is she has already filed her return, paid her accountant, and received her refund. Now she'll have to file amended federal and state returns.

I can understand why she might be given a K-1 and have to pay tax. What we don't understand is what change in regulations occured that prevents the trust from paying taxes on it's income and forces her to pay them? Until yesterday the trust's accountant had been positive she would have no tax liability of any kind. He's got some billionaire clients so she assumed he knew what he was talking about.
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