We have an attorney looking at this anyway but I’m trying to understand if I’m generally correct.
I’m in California. My husband is part of a trust that inherited and sold a piece of property. My understanding is that we (the trust) will be responsible to pay capital gains tax relative to the stepped-up value of the property.
But when the funds are disbursed to members of the trust, are there additional tax implications? I thought once you pay the capital gains tax, that’s the end of it. Our attorney hinted that we should put a reasonably sizable portion of the money aside to account for additional taxes, but… what additional taxes?
It would seem crazy to me for the trust to pay taxes and then members of the trust to pay taxes on the same thing. Seems like double-dipping.
Either each member of the trust takes their piece of the pie and then deals with the IRS individually or the trust pays taxes as a single-entity and then each person gets their piece.
I am not asserting anything here. I am curious too.
My WAG, from dealing with inheriting stuff from trusts. Otherwise, IANA tax expert either. What gets disbursed from the trust to you may be taxable income for you.
Also not an expert. The money disbursed to the beneficiaries consists of two parts: the original value of the property, which should be considered part of the original estate for tax purposes, and could be subject to inheritance tax (although not for most people, the limit is pretty high I think); and the profit from the sale, for which capital gains taxes have already been paid, and so should not generate any additional taxes for the beneficiaries. The trust should issue appropriate tax documents to the beneficiaries, which would be included with their income tax returns for the year (even if no additional tax is generated).
As I said, I’m no expert but I have been through some of these issues myself as the trustee for my father’s estate.
Welcome to California. Breathe wrong, and get taxed for it. Every time you touch your money, it can be considered a taxable event.
I’m not an accountant. I’ve just dealt with this before.
In this case, first, you have your inheritance. Since thats in a trust, its a separate entity from you, so you’ll be taxed there. Next. the trust causes an event - the selling of the house - Which is another taxable event. A disbursement is a change to the trust amount, so you’ll be taxed on the withdrawal, depending on the terms of the trust. It can either be a tax on the incoming funds to you (as regular income), OR a tax on the trust, again, depending on the terms of the trust.
However, unlike Canada, as I understand it the US taxes gifts (where daddy outright gives Junior a few hundred thousand for his lifestyle). Why would you be surprised if they also tax disbursement from an already taxed trust revenue?
After all, wouldn’t all trusts be like that? Unless you are digging into the capital, basically a trust is buying and selling stocks and bonds and generating income. It would I assume pay taxes for capital gains with that income. Then, I would be extremely surprised if the resulting if unlike a private individual, it could then hand the money to another individual without additional taxes due.
I know for example, Canadian dividends from Canadian companies are of course profits and taxed as corporate income before being distributed. Thus, Canadians receiving that dividend income can claim a lower tax rate (less than regular income) on it following the presumption it has already been taxed once.
So I too am curious what the situation is for this USA situation as described by the OP? The cynic in me thinks that since a trust is is an income scheme typically for the rich, there have been allowances in it to minimize taxes.