Distribution From Trust Taxable?


B

Bill Brenner

A trust has sold its only asset and will pay the appropriate capital gain tax
from the proceeds.

Is it correct that a partial distribution of the remaining corpus to a trust
beneficiary would be tax free to the recipient?

Thank you
 
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S

Stuart A. Bronstein

Bill Brenner said:
A trust has sold its only asset and will pay the appropriate
capital gain tax from the proceeds.

Is it correct that a partial distribution of the remaining
corpus to a trust beneficiary would be tax free to the
recipient?
I don't do returns, so I may not know all the nuances. But my
understanding is that (assuming this is an irrevocable trust) when a
trust distributes income in the same year it is earned, the trust has
the option to pay the tax itself and distribute to the beneficiary
tax free, or to deduct the distribution and have the beneficiary
recognize the income as taxable (via 1099). Normally a beneficary
will be in a lower bracket than the trust.

___
Stu
http://DownToEarthLawyer.com
 
A

Alan

A trust has sold its only asset and will pay the appropriate capital gain tax
from the proceeds.

Is it correct that a partial distribution of the remaining corpus to a trust
beneficiary would be tax free to the recipient?

Thank you
Assuming the trust agreement does not trump state law that almost always
(possibly always but I have not read all the probate laws in every
state) excludes capital gains and losses from accounting income, the
trust would pay the tax on the capital gain. The gain can not be taxed
twice. Therefore, any distribution to the beneficiaries would be
considered a distribution of principal and not taxable income.
 
A

Alan

A "simple trust" must distribute current income and therefore not
accumulate corpus.
I see nothing in the law that says a simple trust must distribute
capital gains. It says that it must distribute 100% of its income to the
beneficiaries. Capital gains are typically not part of accounting income
and the simple trust would not pay out those gains to the beneficiaries
unless the trust agreement says otherwise.
 
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A

Alan

I see nothing in the law that says a simple trust must distribute
capital gains. It says that it must distribute 100% of its income to the
beneficiaries. Capital gains are typically not part of accounting income
and the simple trust would not pay out those gains to the beneficiaries
unless the trust agreement says otherwise.
For clarity... here's the definition of a simple trust from the 1041
instructions:

The trust instrument must require that all income be distributed
currently (i.e., in the tax year in which it is earned;
The trust instrument must provide that no amounts are to be paid,
permanently set aside, or used for charitable purposes; and,
The trust must not distribute any amounts that are allocated to the
corpus (principal) of the trust.
 

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