Taxation of trust securities

[Margaret CPA in OH]

The beneficiary of a trust may, according to trust terms, have distributed up to 50% of the adjusted trust assets within the first 5 years of the trust and receive the balance at 5 years. As trustee, I have elected/filed statement annually to have the cap gains thus far incurred in stock sales taxed to the beneficiary.  If stock is distributed (within the allowed amount) to the beneficiary's personal stock account, I am assuming that taxation would occur when she sells it from that account and not at the time of 'distribution' to her personally.  I cannot, however, find any substantiation for taxing either when she sells from her personal account or upon transfer to that account.  It seems very logical that only when sold would any gains be taxed.  Opinions?

[Terry D EA]

What kind or type of trust are you speaking of? Don't know if I can help or not but that is a starting point.

[DANRVAN]

There is no tax on transfer of trust corpus to the beneficiary. 

[Margaret CPA in OH]

Thanks, DANRVAN.  That's what I was thinking.  She will pay tax on the gains when she sells whether in the trust (as I've been electing) or out of the trust after distribution or transfer.  Just wanted a second on that.

The trust is a sub-trust set up by deceased grandparents.  For the first 5 years, bene is permitted to withdraw no more than 50% of assets but does receive all income annually.  This bene, one of 5, wants to take out half now and put into her own non-trust, account so as to minimize contact with me and reduce aggravation and time delays when she wants withdrawals.  She has not been very nice so I am happy to do this but wanted her to know the ramifications.  Thankfully, the five years is up September 2018.

[Lion EA]

Does the basis of the stocks in the trust transfer as basis in the stocks in the hands of the bene?

[Margaret CPA in OH]

I would certainly think so.  I cannot imagine any reason for a change.  The basis was established on the deaths of the grantors, grandparents, as they were transferred into a family trust then distributed to the sub-trusts.  To date, the sales have resulted in some amount of gain but not outrageously so.  The first grandparent passed in 2010, the second in 2013.

[jklcpa]

Beneficiaries do use carryover basis for securities distributed in-kind if no election is made to recognize gain at the trust or estate level. It sounds like there would be no benefit to making that election in the case Margaret describes because the trust has had gains thus far.

The election allows recognition of gain at the trust/estate level at the time of distribution, and it must be applied to all in-kind distributions during the tax year and not be applied on an asset-by-asset basis. If this election is made, then the beneficiary would then use a stepped up basis when the security is ultimately disposed of. This strategy may be beneficial when the trust has unused capital losses that could absorb the gain, but Margaret's client doesn't have this scenario, so this would likely not be advantageous. It's also has no benefit if the beneficiary will incur more tax than the trust, if the beneficiary will hold the security for a long time and thereby deferring gain for that extended period, or if planning to hold it until death at which time it would receive the stepped up basis.

[Margaret CPA in OH]

Thanks for the reply, Judy.  As I have been electing to have gains recognized by the beneficiary, I was fairly certain that the distribution of some of the assets would not trigger any gain until the bene sold with the original carryover basis to the trust.  I just couldn't find a cite on point but likely was not using the correct search terms. 

Bottom line is that the bene has been responsible for cap gains tax on any sales to date and that would continue whether sales were in the trust or distributed to her.

The next issue is processing paperwork with her brokerage firm to get this accomplished.  Oh well, I'll just see what they send and deal with it then. 

[Catherine]

52 minutes ago, Margaret CPA in OH said:

Oh well, I'll just see what they send and deal with it then. 

Even just since 2013 the paperwork burden has gotten substantially heavier.  Good luck with that!  A good broker can be a HUGE help.