Recent Feedback
A trust created in 1997, with $100,000, names A and B as beneficiaries. In 2009, the trust is worth $150,000. If the trust is dissolved, and A and B each take one-half ($75,000), how are A and B taxed on the $75,000? Is the $25,000 in capital gains/dividends taxed as long-term capital gains/dividends, or as ordinary income? Similarly, are any taxes owed on the base amount ($50,000 each to A and B)? Or is this fine, provided the appropriate gift taxes were paid in 1997. thanks.
Greetings,
The corpus (base amount) will not be subject to tax when distributed to the beneficiary (unless the property was from a qualfied retirement plan); so the $50,000 each to A and B is not subject to income tax. As you said, gift tax is the responsibility of the donor or the grantor of the trust.
If the 25K distributed to each in 2009 was from income earned in 2009 then the beneficiaries will include that income and report it as the same type of income as was earned by the trust.
If the 25K distributed to each in 2009 was from income earned prior to year 2009 and the trust had reported the income for tax purposes as that income was earned each year; then those amounts become corpus and the beneficiaries will not include it as income in the later year it is distributed.
Of course, it may be that some of the 25K distribution was earnings to be included in income and that some was corpus (prior year earnings which the trust paid income tax) that will not be included in beneficiary income.
I hope this helps for the general rule of how distributions are not taxable for corpus and are taxable if earnings from the current year.
Please ask if you need more clarification.
Best wishes.
Thank you. One quick follow-up: As to the money that can be traced as corpus (i.e., not present-year trust income), provided the trust paid appropriate taxes, then there will also not be capital gains or dividends taxes on that money?
Hello again,
If it is money and not property that is distributed then the trust will have already paid the tax on the gain.
If there are sales of property to convert to cash in the year of distribution then capital gain may have to be reported by the beneficiaries.
Generally the rule is that any current income that is distributed has to be reported by the beneficiary and any corpus distirbuted is not taxable to the beneficiary.
I hope this helps to clarify for you.
Best regards.
Experience: I have prepared individual, trust, partnership, and corporate taxes since 1987.