Trust Distribution / Capital Gain

Hi all -
I have another tax preparation type question that I haven't been able to find the answer to.
Say an irrevocable trust sells real property, and there is a long term capital gain. When the trust distributes the money it beneficiaries it gets a deduction and the beneficiaries recognize income. But is that income ordinary income or long term capital gain?
Thanks for any insight.
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Stu  
http://DownToEarthLawyer.com
Reply to
Stuart O. Bronstein

If it's the final year of the trust, capital gains are "carried out" as such by distributions to the beneficiaries.
If not the final year, it depends. Normally the trust would responsible for taxes on capital gains ("principal"). However, IIRC, the trust can "elect" to pass out the capital gains to beneficiaries.
Naturally, YMMV ;-)
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Reply to
MTW

I have an irrevocable trust set up for my daughter. Started when she was born, with the intention of funding college, and the concern that the estate exemption was under $1M at the time.
I've never had the trust keep any realized gains, dividends or interest.
Whatever happens in the trust is disbursed at tax time via K-1 to my daughter. The K-1 pretty much reflects long or short term gains (lines 3 or 4a) interest (line 1), etc....
See form 1041 Schedule K-1.
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Reply to
JoeTaxpayer

trust document and see what discretion is granted to the trustee for distribution of principal. If the document is silent on this point, then you must look to state law. Most states have adopted the federal statute (Uniform Principal & Income Act) and allow for distributions of principal if the trust document is silent. The character of the gain does not change when it is distributed to a beneficiary.
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Reply to
Alan

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