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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12690
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Husband's will created irrevocable trust. Income to

Customer Question

Husband's will created irrevocable trust. Income to surviving wife for her life. Upon death of wife, corpus of trust to children. Husband and wife have now both died, and the Court has ordered the farm ground in the trust to be sold. there is considerable capital gain.
Is the capital gains tax paid by the trust, or by the children beneficiaries individually?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi, I can help here.

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Whether the trustee of an existing trust can distribute capital gains to its beneficiaries depends on the terms of the trust agreement.

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If the trust agreement specifies that the trustee may distribute principal as he or she sees fit or must distribute principal if income is insufficient to fund the required distribution for the year, capital gains may be distributed to the beneficiaries.

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If the trust agreement is completely silent on the topic of the distribution of principal the trustee is able to rely on the Uniform Principal and Income Act (UPIA), which gives the trustee the discretion to distribute capital gains as he or she sees fit.

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Here's IRS' position:

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The Internal Revenue Code provides that capital gains may be passed out to the beneficiary and be taxed at the beneficiary level if:

  1. Under the trust agreement or local law, capital gains are considered trust income;
  2. The trust agreement or local law allocates capital gains to principal, but they are consistently treated as part of distributions to the beneficiaries on the trust's books, records, and tax returns; or
  3. The trust agreement or local law allocates capital gains to principal, but they are actually distributed to the beneficiaries or utilized by the trustee in determining the beneficiaries' distributions.

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Capital gains can ALWAYS be passed out via K-1 in the final year of a trust.

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Finally, bear in mind that in order to pass out capital gains, you must pass out cash or property to the beneficiaries

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Likely stating the obvious, but depending on the size of the gain, and the fact that trust gets to 39.6 (hence 23.8% capitl gains rate) at 12,000 - the beneficiary should want the capital gains paid by the individual.

Expert:  Lane replied 1 year ago.

Please let me know if you have any questions at all.

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If this HAS helped, and you DON’T have other questions … I'd appreciate a positive rating (using the stars or faces on your screen, and then clicking “submit")

Otherwise I’m working for no crediting at all here

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Thank you!

Lane

I hold a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.

Expert:  Lane replied 1 year ago.

Your citation:

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26USCode 643(a)(3)

Customer: replied 1 year ago.
Thanks Lane:The farm ground was sold in 2015 by the trust at auction per court order. The will creating the testamentary trust was silent regarding distribution of principal during the life of the trust: the only provision for distribution of principal was upon termination of the trust.The court ordered the land sold in 2015, and it was. A beneficiary then appealed the decision, and a decision on that appeal was not received until 2016. I am now preparing the 2015 return. No distribution of any kind was made to a beneficiary in 2015. The final year of the trust will be 2016.It appears to me that the trust should pay the tax. With this additional information, do you concur?Thanks,J. C.
Expert:  Lane replied 1 year ago.

I concur.

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Not being the final year, no discretion to distribute in the terms, and no prior practice of distributing gains (along with some implicit guidance from the provision TO distribute upon termination) make this clear.

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Trust pays the taxes.

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Lane

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