A partnership’s income, losses, deductions, and credit are passed through to the partners for Federal tax purposes and taxed directly to them, regardless of when income is distributed. Since the partners have already paid tax on the income when it is earned, a complex system of rules applies to prevent double taxation when the income is later distributed to the partners.
These rules (a) allocate the partnership’s income, losses, deductions, and credit among the partners and (b) adjust basis to reflect each partner’s allocation of those items.
A "bypass trust" is one that literally passes by the estate tax return at the time of the second death of a married couple.
In the typical bypass trust, when the dad dies (no gender offense intended -- it's just the mortality tables being applied), the dad's estate tax exemption is set aside in a separate "bypass" trust from which the wife can draw income and principal as needed during her lifetime.
The partnership agreement determines the allocation of these items. If the partnership agreement is silent, these items are allocated in accordance with the partnership interests. If the partnership agreement allocates partnership items among the partners, the allocation is respected as long as one of the following is true: If an allocation does not meet one of these requirements, the allocation of income, gain, loss, deduction, or credit is reallocated in accordance with the partner’s interest in the partnership. Special rules apply to allocations of property with built-in gain and loss. Important Note: The rules governing substantial economic effect are complex and must be given special consideration if the partnership agreement or operating agreement provides for allocations other than in accordance with each partner’s interest in the partnership.
A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss.
For instance, say over the years you have made ,000 of nondeductible contributions to an IRA worth ,000 and have a second IRA that never received any nondeductible contributions that is also worth ,000. In future tax years, ,000 is left to use when figuring the taxable amount of withdrawals.There is no further stepup at the time of mom's death.In the typical situation, a generation-skipping trust (from one of your grandparents) would normally not receive a stepup at the time the assets are distributed to you.As with S corporations, the tax consequences of a distribution to a partner are heavily dependent on the partner’s basis in his partnership interest.A partner’s initial basis in his partnership interest depends on how the partner acquired the interest.