Who Pays the Capital Gains Tax?

[Successor Trustee]

What is the name of your state? Missouri

Who pays the capital gains tax on an investment account that appreciated during Probate, but not at all after moving to the Trust?

 

[adjusterjack]

The simplest answer, without knowing the plethora of missing facts, is that nobody pays capital gains tax until something is sold and there is a gain.

Whoever owns the asset at the time of sale pays the capital gains tax if there is a gain.

 

[Successor Trustee]

The simplest answer, without knowing the plethora of missing facts, is that nobody pays capital gains tax until something is sold and there is a gain.

Whoever owns the asset at the time of sale pays the capital gains tax if there is a gain.

You're saying what I'm saying, since the financial advisor sold/liquidated the investment account while it was in Probate. It was never title to the Probate Estate or the Trust. His mistake was not putting the proceeds in the Probate Estate account.

The PR should have filed a tax return, and, although he has bent over backwards so that I am not privy to his actions, he did not account for the capital gain. He is taking the statutory minimum compensation, so I know he knows enough to know that!!!!!

But, that involves a not-quite plethora of missing facts, the biggest one being a dysfunctional, highly-questionable, totally unhelpful, credit union and their investment arm. Just to touch on that briefly, I had my Aunt's POA while she was living, and the financial advisor, who also was the one who put together her estate plan and the Trust but never informed me, was way more than evasive and helpful (unless it was to help himself). There were 7 accounts under his umbrella and when I asked if they had beneficiaries, he said they were all TOD to the Trust. He said that in writing, which I have saved: Yeah they are all individual TOD accounts. She has the trust listed as TOD on all of the accounts.

Three accounts did not have beneficiaries, and the guy who said they did was long gone, so $500,000 went to Probate, moving to the Trust through a Pour-Over Will.

The guy who replaced him knows all that, said the guy dropped the ball, and apologized for the firm. He promised to somehow do the right thing, and I believe he believes he did when he liquidated the investment account and deposited $345K in the Trust account before the end of Probate. The PR did not include it in the final Probate accounting.

I sense the attorney for the Trust knows I'm the type of guy who will take care of it.

 

[Successor Trustee]

The simplest answer, without knowing the plethora of missing facts, is that nobody pays capital gains tax until something is sold and there is a gain.

Whoever owns the asset at the time of sale pays the capital gains tax if there is a gain.

Said shorter, the funds from the sale of the investment account should have been deposited to the Probate Estate account, the Personal Representative should have filed a tax return for the Probate Estate account, and the net should have been included in the Probate accounting, with a clean amount pouring-over to the Trust.

But, once my Aunt died, I was not privy to the accounts she held, not anything during Probate.

 

[adjusterjack]

Cross reference:

Does the Trust Have to Pay Capital Gains Tax? | TheLaw.com

 

[Taxing Matters]

What is the name of your state? Missouri

Who pays the capital gains tax on an investment account that appreciated during Probate, but not at all after moving to the Trust?

The answer to that starts with who held the asset at the time the gain is realized (e.g. sold, liquidated, cashed in, etc). If it was held by a decedent estate at the time the gain is realized, then the estate reports the sale on its return, but who actually pays the tax depends on whether the estate distributed to beneficiaries sufficient assets during the tax year so that the gain would end up being paid with the income tax returns of the beneficiaries. That's the same answer for an irrevocable trust. Whether it's an estate or trust, having the estate/trust pay the tax is in most cases going to result in more income paid than if the beneficaries recognize the income and pay the tax. The thing is, if the asset was in the probate estate then the basis of the asset became the fair market value (FMV) on the day the decedent died (or, in some cases six months later, given the right facts and a timely election). As a result, if the estate sold it shortly after the decedent's death, there should be little or no capital gain after taking into account the sale expenses. The exception is in the case where the asset happened to shoot up significantly in value after the decedent died.

The bottom line is that if the estate sold it shortly after the decedent died there is likely little capital gain to start with. If there is any capital gain, whether the trust or the estate ends up paying that tax depends on whether the estate transferred the sale proceeds to the trust in the same tax year. If it did, then the trust would pay it unless it also distributed sufficient assets to the trust beneficiaries during that same tax year to cause the gain to move to the beneficiaries. That result, with the beneficiaries ultimately including the gain their returns and paying the tax, is almost always gives the best tax result. Of course, there are considerations other than just tax that will drive the timing of distributions from the estate and trust, so it's not always possible to get that desired tax outcome.

 

[Successor Trustee]

Mansplaining:

The financial advisor sold an investment account that did not have a beneficiary designation for a gain of $9900 over the Date of Death value of the account. The appreciation occurred while the account was in Probate, or supposed to be in Probate.

However, the financial advisor deposited the entire proceeds into a Trust account (not the Probate Estate account). There has been no appreciation while in the Trust.

The Personal Representative has made it a point not to involve me in his management of Probate. Actually, he has made it a point to disregard my advice regarding the financial institution and the advisor, which I learned from dealing with them as my Aunt's attorney-in-fact (general durable power of attorney) when she was living.

 

[LdiJ]

Mansplaining:

The financial advisor sold an investment account that did not have a beneficiary designation for a gain of $9900 over the Date of Death value of the account. The appreciation occurred while the account was in Probate, or supposed to be in Probate.

However, the financial advisor deposited the entire proceeds into a Trust account (not the Probate Estate account). There has been no appreciation while in the Trust.

The Personal Representative has made it a point not to involve me in his management of Probate. Actually, he has made it a point to disregard my advice regarding the financial institution and the advisor, which I learned from dealing with them as my Aunt's attorney-in-fact (general durable power of attorney) when she was living.

If I understood you correctly, the will stated that everything was to go into the trust. Therefore, why do you think it was inappropriate for the proceeds from the sale of the stock to go into the trust account? I am trying to understand what your main complaint is.

 

[Successor Trustee]

If I understood you correctly, the will stated that everything was to go into the trust. Therefore, why do you think it was inappropriate for the proceeds from the sale of the stock to go into the trust account? I am trying to understand what your main complaint is.

Short answer: Because the financial advisor did not have a Court Order to do what he did when he liquidated the investment account and put the proceeds in a trust account.

As others have said, whoever holds an asset when it appreciates has an obligation to pay the capital gains tax, and the gain occurred between the date of death and the end of probate, which is not over yet. My dilemma now is whether I should point this out to the attorney for the Trust.

Long answer: Despite the lie from the financial advisor who set everything up, then hid it from me (the attorney-in-fact by durable general power of attorney), that all 7 accounts were "TOD to the Trust", three were not, including the investment account I'm talking about. All of them had to go to Probate, and move to the Trust via the Pour-Over Will, by order of the Probate Court. So far, the lie of the original financial advisor, forcing Probate after he set up the plan to avoid it, has delayed distributions to the beneficiaries 20 months and cost over $25,000.

That includes the investment account I'm talking about, Probate is not settled, and there has been no Court Order for any Probate funds to go to the Trust.

The Personal Representative, who did not wish to get any input from me even though I had been working with the financial institution, the attorney for the financial institution, the advisor, other employees, and each of the seven accounts, daily, for about two years, apparently could not get the institution to retitle the investment account to his Probate Estate account. The financial institution refused to do anything the PR asked for, and I worked through my attorney (for the Trust) to explain who to work with at the financial institution. The last I heard is that the financial institution was not going to let the PR deposit what's coming out of Probate into a Trust account, so I gave him, via my attorney for the Trust, deposit slips to do that in person.

It seems the PR rubbed the right people the wrong way, and they refused to work with him.

 

[LdiJ]

Short answer: Because the financial advisor did not have a Court Order to do what he did when he liquidated the investment account and put the proceeds in a trust account.

As others have said, whoever holds an asset when it appreciates has an obligation to pay the capital gains tax, and the gain occurred between the date of death and the end of probate, which is not over yet. My dilemma now is whether I should point this out to the attorney for the Trust.

Long answer: Despite the lie from the financial advisor who set everything up, then hid it from me (the attorney-in-fact by durable general power of attorney), that all 7 accounts were "TOD to the Trust", three were not, including the investment account I'm talking about. All of them had to go to Probate, and move to the Trust via the Pour-Over Will, by order of the Probate Court. So far, the lie of the original financial advisor, forcing Probate after he set up the plan to avoid it, has delayed distributions to the beneficiaries 20 months and cost over $25,000.

That includes the investment account I'm talking about, Probate is not settled, and there has been no Court Order for any Probate funds to go to the Trust.

The Personal Representative, who did not wish to get any input from me even though I had been working with the financial institution, the attorney for the financial institution, the advisor, other employees, and each of the seven accounts, daily, for about two years, apparently could not get the institution to retitle the investment account to his Probate Estate account. The financial institution refused to do anything the PR asked for, and I worked through my attorney (for the Trust) to explain who to work with at the financial institution. The last I heard is that the financial institution was not going to let the PR deposit what's coming out of Probate into a Trust account, so I gave him, via my attorney for the Trust, deposit slips to do that in person.

It seems the PR rubbed the right people the wrong way, and they refused to work with him.

I think that you should get a sit down consult with a local probate attorney regarding the overall situation.

 

[Taxing Matters]

As others have said, whoever holds an asset when it appreciates has an obligation to pay the capital gains tax, and the gain occurred between the date of death and the end of probate, which is not over yet.

That is not what I said. Go back and read it closely. The general rule is the person/entity who holds the asset when it is sold pays the tax on the capital gains, even if all the gain occurred while held by the previous owner. But with trusts and estates it gets a bit more complicated because the trust capital gain passess through to the trust beneficiaries if sufficient distributions were made by the trust in the same tax year.

My dilemma now is whether I should point this out to the attorney for the Trust.

Not yet. If you go to the trust attorney now stating what you did here, the trust attorney will know (if the attorney knows anything about trust taxation) that you don't know about trust taxation. Instead, consult a tax professional (enrolled agent, tax CPA, or tax attorney) and lay out all the facts in detail and get the explanation of exactly which entity or person will pay tax on the gain. Once you have that information, you can plan for how the trust of which you are trustee ought to handle the situation. Chances are, if it's possible, that the best thing to do is distribute proceeds to the beneficiaries of that trust such that they pay the tax on the gain. In general much less tax gets paid on the gain if the beneficiaries pay the tax than if either the trust or estate does.

Not everything the estate executor/administrator does requires a court order. In most states the estate executor or administrator can handle much of the trust assets without having to run to the court for everything. The exception is if supervised probate or a contested estate is involved. The executor/administrator would want to discuss with the estate attorney what things require court approval in that state given the kind of probate involved so that the executor/administrator does things correct and also doesn't run up more court costs than necessary. You may find after talking with a probate attorney that a lot less court approval was needed than you believe.