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Ask Lane Your Own Question
Category: Tax
Satisfied Customers: 11804
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I have a house that is in my deceased wife's trust. If we sell

Customer Question

I have a house that is in my deceased wife's trust. If we sell the house but keep the money in the trust, do we have to pay capital gain tax at the time o0f the sale?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.
Hi,Based on the assumption that this is now an irrevocable trust, you will not ... but the trust will
Expert:  Lane replied 1 year ago.
The trust WILL get the step up in basis, however, to the Fair Market Value as of the date of death.
Expert:  Lane replied 1 year ago.
And, probably stating the obvious, the tax would be paid on the 1041 (trusts's income tax return) for the tax year that the sale occurred
Expert:  Lane replied 1 year ago.
Under the traditional definition of fiduciary accounting income (FAI), capital gains are typically excluded from distributable net income (DNI) and, thus, are taxed at the trust level ...
Expert:  Lane replied 1 year ago.
BUT, given the tax brackets for trusts, If possible, it may make more sense to pass the income out to the beneficiaries
Expert:  Lane replied 1 year ago.
The implementation of the Uniform Principal and Income Act of 1997 (UPAIA) and the 2004 revisions to the regulations under Sec. 643 have provided fiduciaries with some flexibility in making distributions of capital gains to beneficiaries.
Expert:  Lane replied 1 year ago.
Questions at this point?
Expert:  Lane replied 1 year ago.
OK, looks like you're in California, and CA has adopted the revised code ... so generally, capital gains are excluded from DNI to the extent they are allocated to corpus and are not paid, credited, or required to be distributed to any beneficiary during the tax year (Sec. 643(a)(3)). BUT the regulations Regs. Sec. 1.643(a)-3(b) allow capital gains to be included in DNI (so distributed to the beneficiary and taxed at the MUCH lower individual rates) to the extent authorized by the governing instrument and local law or pursuant to a reasonable and impartial exercise of discretion by the fiduciary if one of three exceptions applies:
Expert:  Lane replied 1 year ago.
Section 104 of the UPAIA provides the fiduciary with the "power to adjust" between income and principal to ensure a fair result for all beneficiaries.Secondly, capital gains may also be included in DNI when they are allocated to corpus but actually distributed to the beneficiary (BUT as the regulation examples focus solely on mandatory principal distributions and situations when the proceeds of a specific asset are to be distributed to a beneficiary. The IRS has noted that in this circumstance, "the inclusion of capital gains in [DNI] applies only where there is a distribution required by the terms of the governing instrument upon the happening of a specified event" (Rev. Rul. 68-392). Furthermore, the exception in the regulation does not seem to apply when the trust has sufficient cash to fund its required principal distribution.Third, Capital gains allocated to corpus but treated consistently by the fiduciary on the trust's books, records, and tax returns as part of a distribution to a beneficiary may be included in DNI (Regs. Sec. 1.643(a)-3(b)(2)). For example in an A trust Done for surviving spouse's benefirt abd credit shelter reasons, the trustee has discretionary power to distribute principal to B for health, maintenance, and support (the HEMS standard)
Expert:  Lane replied 1 year ago.
So, to recap ...Yes, if there IS a gain (sales price - selling costs - FMV as of date of death of decedent) that gain is taxable to the trust ... BUT if the trust allows, CAN be distributed to beneficiaries and taxed - typically, based on how MUCH gain - at MUCH lower rates by the trust taking a distribution deduction on the return, and passing the gain out to the beneficiary.In California this should be doable unde one of the three exceptions above.
Expert:  Lane replied 1 year ago.
Let me know what questions you have.If this HAS helped, I'd appreciate a positive rating, using the smiley faces or stars on your screen ... that's the ONLY WAY I'm credited for the work here..Lane