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Suppose hypothetically that a revocable trust sells a lot…

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Suppose hypothetically that a...

Suppose hypothetically that a revocable trust sells a lot for more than $500,000. Per the testamentary declarations in the trust by the trustor, now deceased, the proceeds of the sale, after capital gains tax is paid by the trust, are distributed to trust beneficiaries. Are those distributions to beneficiaries taxable as income to them?

Accountant's Assistant: What are the assets or property for this capital gain?

In this hypothetical, it is an undeveloped lot with timber on it.

Submitted: 30 days ago.Category: Tax
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Answered in 33 minutes by:
5/25/2018
Tax Professional: Lev, Tax Advisor replied 30 days ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 32,985
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Several issues...
First of all when the grantor passed away = the trust became irrevocable - and is treated as separate taxing entity.
Second - we need to relay on the tax law - and may not override the tax law by the testamentary declarations...
So these testamentary declarations will be only valid when not contradicting the law.
.

Now - when the trust sells assets - these selling transactions are reported ion trust's tax return - form 1041 - and depending on circumstances - the gain or loss is realized - and that is calculated on the tax return.

If there is NO distribution - the gain is taxed for the trust.

If there are actual distributions OR if trust's documents require distribution - in this case distribution first is allocated to taxable gain and the rest is allocated to assets.

If there are distributions allocated to taxable gain - it is reported on K1 statements to trust's beneficiaries - and will be taxable for them.

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Tax Professional: Lev, Tax Advisor replied 30 days ago

Some additional notes...

-- assets hold in the revocable grantor trust are normally considered as inherited - and as such will have so-called stepped up basis equals to the FMV at the time the grantor died.

-- as a result - if inherited assets are sold shortly after - there is no taxable gain.

-- tax rates for the trust are normally higher compare to individual beneficiaries - so when the gain is taxed to the trust - total tax liability could be larger.

-- but for proper tax planning - you might want to estimate both ways and compare.

Please elaborate.

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Tax Professional: Lev, Tax Advisor replied 29 days ago

I appreciate if you take a moment to rate the answer.

Experts are ONLY credited when answers are rated positively.If you still have any doubts, need clarification - please be sure to ask.I am here to help you with all Social Security / Tax related issues.
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