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
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
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.
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. =============Note that such a trust must be a "complex trust" (see Form 1041 instructions). 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.
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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