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Trust and Estate tax issues

Hi,

We have a Credit Shelter/Family Trust (Trust B) where my mother has become trustee after my father's passing. A simple scenario is Trust B with $10,000 comprised of 2 stocks each worth $5,000, and each with original basis of $5,000.

Say we sell 1 of the stock for exactly $5,000 which results in $0 gain/ loss.

The proceeds from the sale is $5,000 which are distributed to my mother, the trustee.

- Would she be taxed on her personal return on the proceeds from the sale even though there was no gain?

- Would the trust (Trust B) be taxed?

- Is this transaction reported in the K1? And, if so, how is it reported?

To me, it seems that the original $5,000 used to purchase the stock (say from salary income) was already taxed. If there's no gain/loss, there should be no tax.

Thanks, Gene

Reply to
Gene
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There are two returns to discuss: Trust B return, which should zero out as you should first distribute any gains to the trust beneficiaries along with any principal due them. It issues a K-1 to pass along those gains. Mom's return, where she shows the K-1 income (but not distributed principal, which the $5K in your example is.)

I like an example better where you offer a $5000 sale on $4900 basis - Now I tell you the trust has a $100 gain which it distributes to mom along with a K-1 where mom picks up $100 in (long term?) capital gain. Make sense?

Joe

Reply to
JoeTaxpayer

Original basis is irrevelant. The value listed on Form 706 is all that counts.

If Trust "B" is the credit/bypass trust, that makes Trust "A" the marital trust. By allowing your mother access to Trust "B", haven't you just blown the whole purpose of having the split trust arrangement? The surviving spouse is supposed to draw from the marital trust, not the credit/bypass trust. By having the spouse draw from the credit/bypass trust as beneficiary, you've just wasted your father's estate unified credit.

No gain on sale => no income.

If it's the bypass trust, she should not be the beneficiary, so it shouldn't be taxable to her. Presumedly, as a child of the couple, you're a beneficiary, so you should be receiving the proceeds (or a share thereof) and paying the tax on it as it passes through to you via a Form 1041 Schedule K-1.

Form 1041.

The credit/bypass trust should distribute all its income except for $100 (its exemption) plus the cost of preparing its Form 1041.

Reply to
D. Stussy

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