Method of attributing certain modifications among trust or estate and beneficiaries

(a) General.

(1) Where the Connecticut fiduciary adjustment consists of or relates to items of income, gain, loss, or deduction which are charged or credited to corpus or principal for probate or trust accounting purposes, under local law or the governing instrument, as described in subdivision (2) of this subsection, or items in which income beneficiaries do not share pro rata, as described in subdivision (3) of this subsection, the fiduciary shall, in lieu of determining the share of the fiduciary adjustment under § 12-716(a)-1 of this Part, attribute the respective shares of a trust or estate and its beneficiaries in such fiduciary adjustment:

(A) by attributing the modifications described in §§ 12-701(a)(10)-2 and 12-701(a)(10)-3 of this Part to the trust, estate, or beneficiaries, as the case may be, in the same manner in which the items of income, gain, loss, or deduction which gave rise to such modifications are attributed to the trust, estate, or beneficiaries under local law or the governing instrument, and

(B) by allocating the remainder of the modifications which comprise the fiduciary adjustment in accordance with subsections (a) or (b) of § 12-716(a)-1 of this Part.

(2) Items of income, gain, loss or deduction charged or credited to corpus or principal for probate or trust accounting purposes include, but are not limited to:

(A) nondistributable capital gains and losses from the sale or exchange of bonds issued by the State of Connecticut or its political subdivisions;

(B) income in respect of a decedent under section 691 of the Internal Revenue Code, e.g., the portion of any interest income on obligations of the United States, or of states other than Connecticut or their instrumentalities, which became payable after death but accrued before death; and

(C) Connecticut income tax paid or incurred during the taxable year, to the extent allowed as a deduction for federal income tax purposes and attributable either to nondistributable capital gains or to income in respect of a decedent.

(3) Items in which income beneficiaries do not share pro rata include, but are not limited to, amounts with respect to which the governing instrument provides:

(A) that all interest income received from tax-exempt state or municipal bonds, including bonds of states other than Connecticut and their instrumentalities, be paid to a designated beneficiary, with all other income to be divided equally among the designated beneficiary and the other beneficiaries;

(B) that all dividends and interest be paid to a designated beneficiary, with all capital gains distributable to a different beneficiary;

(C) that a fixed annuity be paid out of the income to a designated beneficiary, with the remainder of the income to be accumulated or distributed to other beneficiaries; or

(D) any combination of the foregoing.

(4) Where a modification is subject in part to the method described in subdivision (1)(A) of this subsection, and in part to the provisions of subdivision (1)(B) of this subsection, the amount to be allocated in accordance with subdivision (1)(A) is the proportion of the total modification which the amount of income, gain, loss or deduction attributable to corpus or principal, or to a specially designated beneficiary under local law or governing instrument, bears to the total amount of such income, gain, loss or deduction.

(5) If a modification allocable in accordance with subdivision (1)(A) and subdivision (1)(B) of this subsection applies to two or more beneficiaries, the amount attributed to each is the proportion of the modification which the related item of income, gain, loss or deduction allocated to each beneficiary bears to the total amount of income, gain, loss or deduction attributable to all beneficiaries who share therein.

(b) Schedule to be attached. (1) A fiduciary required to use the method prescribed by this section shall file a schedule as part of the Connecticut fiduciary income tax return (Form CT-1041) setting forth the following information:

(1) A statement that the fiduciary is required to use the method prescribed in this section, rather than the method prescribed in § 12-716(a)-1, in determining to whom the items of modification comprising the Connecticut fiduciary adjustment shall be attributed;

(2) The amount of each modification relating to an item of income, gain, loss or deduction of the trust or estate;

(3) The amount of the Connecticut fiduciary adjustment as determined pursuant to § 12-701(a)(10)-1 of this Part, and of the respective shares therein of the trust or estate and each of its beneficiaries as determined under § 12-716(a)-1 of this Part;

(4) The respective shares of the trust or estate and each of its beneficiaries in the Connecticut fiduciary adjustment as determined under this section;

(5) The name and address of each beneficiary, if not otherwise set forth in the Form CT-1041, who is or would be required to report a share of one or more items of modification, or a portion thereof, either pursuant to the method provided in this section or as a component of the Connecticut fiduciary adjustment allocated pursuant to § 12-716(a)-1 of this Part;

(6) A statement that each beneficiary, whether or not otherwise identified in the Form CT-1041, was furnished with a copy of the schedule filed by the fiduciary pursuant to this section; and

(7) A statement setting forth the provisions of the will or trust, one of the consequences of which is that the fiduciary is required to use the method prescribed in this section in determining to whom the items of modification comprising the Connecticut fiduciary adjustment are to be attributed.

(c) The following example illustrates the application of this section: Example: The 1992 federal fiduciary income tax return of a trust consists of the following items of income which constitute modifications required by §§ 12-701(a)(10)-2 and 12-701(a)(10)-3 of this Part:

United States bond interest (decrease). . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000 California bond interest (increase). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 Connecticut fiduciary adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(5,000)

The trust has two beneficiaries (A and B). Under the trust agreement, beneficiary A receives all the interest on the United States bonds. Beneficiary B receives all the California bond interest. Pursuant to § 12-716(a)-1 of this Part, the Connecticut fiduciary adjustment is allocated on the basis of the federal distributable net income (which is $25,000). This results in attributing ($3,000) of the net Connecticut fiduciary adjustment of ($5,000) to A [15,000/25,000 X (5,000) = (3,000)] and ($2,000) to B [10,000/25,000 X (5,000) = (2,000)].

The method required by this section decreases A’s Connecticut adjusted gross income by $15,000, and increases B’s Connecticut adjusted gross income by $10,000.