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Trust taxes

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radpad321

Junior Member
What is the name of your state (only U.S. law)? FL
A trust tax question. If a trust is inherited, that has the terms of paying out 10% of principle every year (adjusted annually), for 15 years, after which the trust is dissolved and the remainder is paid to the inheritor; would the amount distributed above the initial value of the trust be taxable as capital gains?
 


davew128

Senior Member
Trusts are not inherited. That said, there is no taxable event associated with the distribution of corpus in the manner you're suggesting. A trust interest is not a capital asset like a partnership interest or s-corp stock.
 

LdiJ

Senior Member
What is the name of your state (only U.S. law)? FL
A trust tax question. If a trust is inherited, that has the terms of paying out 10% of principle every year (adjusted annually), for 15 years, after which the trust is dissolved and the remainder is paid to the inheritor; would the amount distributed above the initial value of the trust be taxable as capital gains?
No. Depending on how the trust is set up, either the trust will pay taxes on any annual earnings of the trust, or the income will pass through to the beneficiaries of the trust, again annually.

Some of those annual earnings might end up being capital gain, but they would be taxed based on whatever kind of earnings they are.
 

radpad321

Junior Member
You seem to be saying yes and no, let me try with some example numbers and more detail.
Trust value at time of testator's death $2 million. Year of death 2006, $2 million was the federal tax limit at the time.
Trust is composed of investments, mostly stocks, held by a financial company.
10% of the value of the trust is distributed annually to the beneficiary. Distribution is based on the value of the trust at the beginning of each year.
All income (interest, dividends, etc.) goes to the beneficiary. Value of the trust is only effected by the distribution and any loss or gain in the investments.
So lets say to make it easy, that over the fifteen years, the trust distributes exactly $2 million and is still worth $1 million. Obviously the trust is only worth that much because of the gains of the investment instruments. The government is going to let me walk away with a million dollar gain?
 

davew128

Senior Member
Fine let me repeat myself: THERE IS NO CAPITAL GAIN RECOGNIZED BY VIRTUE OF THE DISTRIBUTION OF TRUST PROPERTY TO ITS BENEFICIARIES.
 

Kiawah

Senior Member
Dave, let me ask a clarifying question, to make sure the answer is clear.

The assets in the trust, have a cost basis. At some point down the road, in order to make a distribution, the trust will sell those 1000 shares of Walmart stock. There will be capital gains on that stock sale, which the trust will have to pay 1041 income/gains taxes on, correct? You're not suggesting that there are no capital gains taxes due, are you?

Trust then has remaining cash, to make the annual distribution.

I think your point is the beneficiary won't have to pay capital gains after he/she receives the final distribution, but unless I'm mistaken, the trust is still on the hook to pay the capital gains tax.

I guess alternatively, the trust could distribute/transfer the 1000 shares of stock. In that scenario, whenever the beneficiary sold that Walmart stock, the original trust cost basis would be used to calculate the then capital gains due. Correct?
 
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davew128

Senior Member
Dave, let me ask a clarifying question, to make sure the answer is clear.

The assets in the trust, have a cost basis. At some point down the road, in order to make a distribution, the trust will sell those 1000 shares of Walmart stock. There will be capital gains on that stock sale, which the trust will have to pay 1041 income/gains taxes on, correct? You're not suggesting that there are no capital gains taxes due, are you?
I said nothing of the sort. My comment should be taken quite literally.

I think your point is the beneficiary won't have to pay capital gains after he/she receives the final distribution, but unless I'm mistaken, the trust is still on the hook to pay the capital gains tax.
Not on a final trust return. But that still has absolutely nothing to do with the OP's question.

I guess alternatively, the trust could distribute/transfer the 1000 shares of stock. In that scenario, whenever the beneficiary sold that Walmart stock, the original trust cost basis would be used to calculate the then capital gains due. Correct?
Yes.
 

radpad321

Junior Member
First, thanks for the responses. Second, I didn't mean to be insulting, trusts are not my thing and tax law as it applies to them can get confusing.
 

Kiawah

Senior Member
I think the bottom line is......there are no free capital gains that won't get taxed.

Capital gains tax will eventually be paid either by the trust, or by the beneficiary, depending upon where/when/how the assets are sold.
 

LdiJ

Senior Member
I think the bottom line is......there are no free capital gains that won't get taxed.

Capital gains tax will eventually be paid either by the trust, or by the beneficiary, depending upon where/when/how the assets are sold.
Yes, that is correct. Any earnings of the trust will be taxed to either the trust or the beneficiary (however the trust is set up) in the year that income is earned.
 

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