Does the Trust Have to Pay Capital Gains Tax?

A

Adverse

Member
Jurisdiction
Missouri
First and foremost, of course, I do have an attorney representing the Trust, and he will be weighing in on this. I'm just trying to get a jump on it.

I am the Successor Trustee for my deceased Aunt's Living Trust. Through the shortcomings of her financial advisor and her credit union, some of her accounts had to go to Probate because they did not have a designated beneficiary. Those funds are coming to the Trust via her Pour-Over Will.

I don't anticipate any of the funds held by the Trust will appreciate. But, one of her investment accounts appreciated from the Date of Death value to the amount that was moved to the Trust. I'm 99.99999% certain the Personal Representative did not pay a tax on the gain.

Will the Trust have to?

Thanks
 
Tax isn't payable until an asset is sold or money is earned.

What was in the investment account?

Was there anything sold in 2023?

Was there and interest or dividends earned in 2023?
 
It's hard to address these questions in the abstract. When I was trustee for my sister's trust many years ago, I had an attorney representing me, and I hired a CPA to assist with filing tax returns for both the estate and the trust. I encourage you to do likewise (especially since there may be a question whether certain tax liability may fall on the estate or the trust.
 
By all means, hire a CPA or tax attorney. But I think that any investments that are not in retirement accounts will have to pay capital gains tax whether they are in individual ownership or in a trust, or part of an estate.
 
Adverse said:
But, one of her investment accounts appreciated from the Date of Death value to the amount that was moved to the Trust. I'm 99.99999% certain the Personal Representative did not pay a tax on the gain.

Will the Trust have to?
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I assume the trust is getting the appreciated asset, not the funds from the sale of it. The gain on the asset is only taxable income in the tax year in which it is sold, transferred or otherwise disposed of. If the trust sells the asset, it will have to report the gain on the trust income tax return, Form 1041. But whether the trust actually pays the tax depends on exactly what the terms of the trust are and whether the trust paid out distributions to beneficiaries sufficient to at least equal the gain on the asset. If sufficient distributions are made, then the capital gain income will end up as the beneficiaries taxable income and they pay the tax on the gain.

That's by far the better outcome because the trust tax rate schedules are much more progressive than for individuals, which means if the trust has to pay the tax, the tax will be significantly more than if the gain is transferred to the beneficiaries. This is something that trustee must pay attention to, because if the trustee was allowed under the terms of the trust to make the distributions to avoid the higher tax bite and fails to do so, the trustee may be on the hook to pay the beneficiaries the amount of the extra tax paid as that reduces the assets they'll get from the trust.

The other option is to simply distribute the asset and let the beneficiaries sell it. Then they have the capital gain and pay the tax, and the trust doesn't have any income from that to report on its return.

welkin said:
By all means, hire a CPA or tax attorney. But I think that any investments that are not in retirement accounts will have to pay capital gains tax whether they are in individual ownership or in a trust, or part of an estate.
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True enough. But the amount of tax will vary significantly depending on whether the trust pays it, or the beneficiaries do. By the way, the fees paid to a tax CPA or tax attorney for tax advice for the trust are deductible by the trust on its income tax return, Form 1041.
 
Let me be less abstract, using factual facts.

My Aunt died 8/21/22. The Date of Death value of the investment account was $335,108.99. That account did not have a designated beneficiary (the financial advisor lied about that, but that's not the question here), so it went to Probate. Probate is still open, winding down.

For whatever reason, the financial advisor who replaced the original one liquidated the account and moved the proceeds to the Trust checking account on 1/16/24, $345,008.66, ($9899.67 gain). (Yes, I see that he did that without an order from the Probate Court might be an issue.)

So, the capital gain occurred during Probate, but the proceeds of that gain went directly to the Trust. Those funds have not appreciated in the Trust.

The instructions of the Trust are to make distributions to the beneficiaries, which I have done twice, and the Trust has not had a taxable gain.

Here's why I'm asking, why I want to get on top of this. The Trust has not incurred a taxable event and I am managing it that way. I think the Probate Estate had a taxable Capital Gain. My crystal ball sees my (Trust) attorney saying someone has to pay it, which I understand.

I see that being a problem with the work I have left to do with the Trust.

It's always something.
 
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FWIW, here's my guess.

It does not matter that the gain occurred during probate. The Trust received the gain. The Trust needs to pay Capital Gains tax. It looks like for 2024 that's 15%.

If that's what the Trust's attorney says, OK.
 
While a little messy, this doesn't sound bad. The tax is going to have to come from the trust or the estate, probably the same either way.
 
Adverse said:
So, the capital gain occurred during Probate, but the proceeds of that gain went directly to the Trust. Those funds have not appreciated in the Trust.
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As I explained on the other forum where you asked this, if the probate estate sold the asset and in the same tax year transferred the sale proceeds to the trust, the capital gain flows through the estate to the trust, and the trust then includes the capital gain and pays the tax on it unless it also, in the same tax year, distributed sufficient assets from the trust to cause the gain to then flow through to the beneficiaries and they pay the tax.

From a tax perspective, having the beneficiaries as the persons who ultimately pay the tax is the best outcome because the capital gains tax rates are significantly lower for individuals than they are for trusts and estates. I suggest you see a tax professional who has experience with trust and estate income tax for assistance in getting it right and, within the terms of the trust, doing what you can to get the best tax outcome by timely distributing trust proceeds to the beneficiaries. If the trust attorney you consult understands the tax law for trusts, he or she will tell you the same thing. If the trust attorney is not also a etate and trust tax expert then you need to see a tax professional (enrolled agent, tax CPA, or tax attorney) who has experience with trust and estate income tax returns.
 
Tax Counsel said:
As I explained on the other forum where you asked this, if the probate estate sold the asset and in the same tax year transferred the sale proceeds to the trust,
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You may have read two forums, but you did not read that "the probate estate sold the asset and in the same tax year transferred the sale proceeds to the trust" on any forum.

I do it myself sometimes . . . read what I think I am reading, not what it actually says.
 
Adverse said:
You may have read two forums, but you did not read that "the probate estate sold the asset and in the same tax year transferred the sale proceeds to the trust" on any forum.

I do it myself sometimes . . . read what I think I am reading, not what it actually says.
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No, I did not read that. But I also did not read the exact details of what the estate actually did because you haven't provided all that, and those details are important. That is why I put the word IF right before what you quoted, and evidently you missed that word...perhaps reading what you think I said rather than what I actually said?
 
Tax Counsel said:
No, I did not read that. But I also did not read the exact details of what the estate actually did because you haven't provided all that, and those details are important. That is why I put the word IF right before what you quoted, and evidently you missed that word...perhaps reading what you think I said rather than what I actually said?
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I do not know what "The Estate" did or didn't do, other than hearsay that he had problems getting the financial institution to do anything. That is the same institution, the same legal counsel, the same financial advisor and assistant, and the same accounts I had been dealing with, and had a good working relationship with, as attorney-in-fact via a Durable General Power of Attorney. The Personal Representative disregarded my advice about the nature of the accounts and who to go to to get things done.

I generally agree that as Successor Trustee I will have to do what the Personal Representative did not do, but I hate to have to do a Trust tax return when no Trust assets appreciated to a taxable level while in the Trust.

It is what it is.
 
Adverse said:
I generally agree that as Successor Trustee I will have to do what the Personal Representative did not do, but I hate to have to do a Trust tax return when no Trust assets appreciated to a taxable level while in the Trust.

It is what it is.
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You need do nothing, if you have no association with the trust. In some cases, its wise to refuse any and all "gifts/benefits" certain trusts APPEAR to promise.

You can't miss what you've never accepted or relied upon.

Most of what some call "attractive choices" offered during our lives aren't advantageous to us, they're TRAPS.
 
Adverse said:
I generally agree that as Successor Trustee I will have to do what the Personal Representative did not do, but I hate to have to do a Trust tax return when no Trust assets appreciated to a taxable level while in the Trust.

It is what it is.
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Once you are trustee you'll have to file the trust income tax return (Form 1041) if the trust realizes gross income of $600 or more. So even if the trust did not have any taxable income, the filing of the Form 1041 may still be required. Gross income is a term that is very broad in federal tax law. Thus, if the property sold for $600 or more, the return would be required to be filed even if the basis was high enough that there was no capital gain.

Whether the trust actually pays tax will depend on the details of the income and the details of its distributions to beneficiaries.

Filing tax returns is just one of the obligations of being a trustee. As you say, it is what it is. Generally the trustee may pay a tax professional to prepare the return with trust assets, relieving the trustee of having to tackle that job.
 

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