Advice on Trust Capital Gains Tax

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Q: Do we pay capital gains tax if Mom’s house is in the trust we she dies?
6 Months before Mom passed away the Family Trust was funded with her house. Do we pay capital gain taxes on the original cost of the house?

A: What year did mom die?

If she died in 2010, it’s capital gains tax when you sell.
If she died in any other year,it’s reset to the date of death value.

Q: Simple Trust: Are dividends and capital gains taxed as ordinary income?
I am filling out form 1041 for a simple trust (which only contains 3 mutual funds).

This year, there were approximately $1500 in dividends and $4500 in capital gains.

Using the form, it looks like everything is being taxed as ordinary income (vs. 15% max capital gains rate).

Is this correct?

Also, if the trust were to be dissolved and mutual funds transferred to person who trust was set up for (without selling any mutual funds), would the IRS still view this as a sale and repurchase and expect taxes based on those “sales” next year?

A: Michael, I had the same question with respect to form 1040, and the answer is beyond Schedule D. The IRS downloadable forms now download the form separately from the instructions. You are correct, Schedule D gives no indication of what you should do with the numbers you calculate. I am not a tax professional, but I went to the last page of the Schedule D instructions http://www.irs.gov/pub/irs-pdf/i1040sd.pdf and found the Schedule D tax worksheet. This is where it starts to break down your ordinary income from dividends and capital gains and losses. It may or may not be applicable to form 1041 that you are filling out, but there will probably be another worksheet that you can use. I, like you, saw that the form 1040 was simply calculating the sum of ordinary income as well as dividends and capital gains. By the time you finish the worksheet, I believe you will then see how they are being calculated differently and where you should put those numbers.

Q: How do you calculate capital gains tax on a house sold?
If I sell the house I own w/ no mortgage @465,000, its small(1284 sq.’)3bdrms,1 bath, currently its a rental. I inherited it 10 years ago though a living trust. How high is a capital gains tax in that situation? I would put the proceeds on another property right away. SJCNLA

A: 20% federal

then whatever your state income tax rate is.

Q: How can we reduce the capital gains tax on an inheritance without receipts?
We are the beneficiary’s of a home sale left in Trust. The home was purchased for only $35,000 and sold for $146,500. There are no receipts for any of the improvements, but there are 3, very obvious improvements made: the old asbestos siding was removed and vinyl installed, a 2nd full bath was added and the garage was completely rebuilt. Is there any way to obtain an estimated cost of these improvements and use them as deductions against the capital gains tax without showing receipts?

A: When you inherit property, you receive a “stepped up” basis in the property. That means that your basis cost is the value of the property on the date of the death of the benefactor. If the benefactor paid $35K for the house but the house is worth $150K on their date of death then your stepped up basis is $150K. Generally, if the property is sold within 6 months of the death then the IRS says that their is no Capital Gain and therefore no Capital Gains Tax. You don’t need any receipts and the money from the sale is not liable for any income tax since it is inheritance (non Federal taxable) and not income (which is Federal taxable). You will need to check if you will owe state Inheritance Tax on the money. Some states, like New Jersey, have an Inheritance Tax while most states, like California, do not. Check with your tax advisor in your state.

Q: does one pay capital gains tax on inheritance from a trust set up more than 7 years before death of legator?

A: Depends – what type of trust (discretionary or interest in possession are most common), what assets (and where), have the assets now come directly to you?
Too many variables to answer your question – but I would say, it is the trustees’ and executors’ issue rather than yours if you are just a beneficiary. Either way, specialist advice defintely needed on this one!

Q: Obama supporters: Do you understand why Obama’s capital gains tax is bad?
People talk about trust and change – while you should be looking at his ACTUAL plans. Those speak louder than anything.

Raising capital gains tax to 28% is excessive and will hurt all Americans – either directly or indirectly.
“Sayusa..”: no offense but your answer makes you sound like a typical Liberal and is why Republicans think some Democrats have no brains.
Big difference between raising them “if necessary” up to 18% like Clinton, versus planning to purposely raise them to 28% like Obama.

A: No we don’t. We are unaware that tax revenues actually increase when the capital gains tax rate goes down.

Even if we knew that, which again we don’t, we think that only rich people own stock.

Even though we’re wrong about that because about 100 million Americans own stock, we think that the fact that some rich people own stock makes it unfair to poor people that they should pay a lower rate on capital gains than…well than the top rate of the income tax.

And even though poor people don’t pay the top rate on the income tax, but pay somewhere between 0 and 15%, we think it’s all unfair anyway.

So there.

Q: What is my tax responsibility as a 2nd-generation beneficiary on the capital gains of a GST-exempt trust?
While alive, my grandfather created two trusts – one in his name and one in his spouse’s name. After both grandparents had died, to my understanding their two children received the income of the trust, but could not liquidate the assets. When my aunt recently died the stocks in the trusts “For the benefit” of her were transferred to an account in my name and subsequently liquidated per my request. All of these stocks were acquired after both grandparents had died. What is my responibility, if any, for the capital gains of these stocks?

Thank you!

A: Complicated question. You need to contact the trustee and request a statement of the book value of the stocks as distributed to you. This will allow you to compute any gain realized when you sold the stocks in your name.

Q: How do you show disbursment of capital gains of a trust?
My father in law passed away last April. I just remembered a couple of days ago that I need to file his last tax return to notify the gov’t that he has died. He had almost $400k in stocks that were liquified a few months after his death and distributed equally to the beneficiaries of his trust.

He didn’t earn enough income that year before his death to owe taxes after the standard deduction, but from what I understand, his trust nor the beneficiaries shouldn’t have to pay taxes on the capital gains of his stock since his total estate was worth less the $1 million (if I’m remembering the figure correctly).

The beneficiaries paid taxes on his IRA, but will they owe taxes on their shares of the rest of the estate? I’ve completed the Schedule D showing the gains and losses, but how do I show disbursment since he didn’t actually benefit from the gains before he died?

A: There’s a lot going on here. I’ll try to cover it all:

First, when you file your father-in-law’s final return, you are NOT going to report any activity that occurred after his death. The 1040 form is only for income and deductions that occurred while he was alive. If the stock was sold after his death, you don’t report a sale that hadn’t occurred yet. His death is the cut-off for the 1040.

At the time of his death, reporting on 1040 ended, and reporting on his estate began. At the time of his death, he had a list of assets, and the stocks would have among them. (They should have been included in the estate value you got from probate.)

When a person dies, everything that they own passes to their estate at a locked in value (whatever the fair market value is on that date). Add up everything that he owns, and subtract out all of his debts, and you have the value of his estate. If the estate is worth less than $3.5 million at time of death (for 2006), there is no estate tax, and you are not required to file. (Probate will assist in valuing the estate.)

(The legal definition of “fair market value” is whatever value a reasonable seller and reasonable buyer will agree to. That means if you can’t offload it at a yard sale, it’s worthless–don’t list it. Estate sales usually set a value for household stuff, if you have one. Other bigger items can be assessed, and you can use KBB.com for cars.)

After all the properties and debts pass from the person to the estate, the executor of the estate is required to pay off all the debts out of the estate’s value and then liquidate the estate per the decedents will or per probate order, whichever applies.

When you sell anything in the estate in the months following death, something magical happens: you FIX the fair market value at time of death, even if you sell a short time after. Your sale price becomes the most reliable estimate of value of the item because you just met the true legal definition.

When the property passes from the estate to the people who are inheriting, the estate passes at FAIR MARKET VALUE into their hands. That means that you pay no gain on the liquidation of the estate, including the sale of the stock. The reason for this is because all of the gain on the stock legally belongs to the decedent, not to you. All of that taxable capital gain occurred while he was still alive and passed to his estate, and so it’s included in the value of the estate and is taxed to the estate (if it crosses the $3.5 million mark).

This is true of all the property. The only thing that the beneficiaries will pay taxes on are the incomes generated (rent paid on property, interest on accounts, dividends on the stock). And if I remember, you’re not going to pay taxes on these if they’re paid into the estate before probate closes. You’re only responsible for the items that are above and beyond what is included in probate’s final account.

Q: Capital gains tax on two properties plus a Deed of trust house, please read all of my question.?
Thankyou for all your advise. But I have one property at the moment which I rent out, the other is in my Grandfathers name at the moment, he has died also, which I will inherit by Deed of trust and my father died three months ago leaving us a property after probate has taken place, I have two siblings that will need their share of inheritance, as niether of them want the house, by selling my property I will be able to pay them out. Selling the one property in my name, which has a mortgage on it still, how do I stand? I am the only one who has the means to buy them out. which is what they want. Do I sell my mortgaged house which is rented out at the moment, before I inherit by Deed of trust my grandfathers property? I am confused.

A: Valerie,

There are three elements to your question. The first is the legal status of the houses and what you can do. I am not sure about it as it is not clear what is the status of the house you inherited from your father. It seems it is shared with your siblings. If so, to sell the house, all three have to agree, assuming all legal matters have been resolved (e.g. no probate). It is also not clear what is the status of the one you inherited from your grandfather. Are you the sole heir?

The second issue is tax. Again, tax implications depend on how you inherited the properties (will, estate, etc.) and their status at the time.

The third element is what is your best course of action. It depends, of course, on the answers to the above. However, don’t be quick to sell your house to buy them out. Firstly it is not, as you know, a good market to sell. Secondly, you can probably (I’d have to check the numbers and your specifics, such as income, tax situation, etc. to know) refinancing to get the money to buy them out. Given the lower rate, and smart approach, you’d be better of. Alternatively, and that again depends on the situation (tax base of your houses, your income, etc.), you might want to do a 1031 (exchange to another property) so you don’t pay capital gains tax.

In short, the answer is not trivial. Feel free to contact me at info@LifeGroupLLC.com and I’ll see what I can tell you and whether I can help you.

Q: tax differences from individual and a irrevocable trust? for capital gains on a residence and stocks thanks!

A: Individuals and non-grantor trusts are subject to the same income tax brackets, except that trusts reach the highest brackets much faster than individuals (i.e. at lower income levels). A trust cannot claim the 250k/500k residence gain exclusion. Otherwise, taxation of capital gains is identical.

Note that a trust gets a deduction for any income that it distributes to its beneficiaries. That income is then taxed to the beneficiaries.

Q: Capital Gains Tax Query?
Introduction

My questions are in preparation for a capital Gains Tax calculation.
The asset is a ¼ share in river fishing rights (the fishing) previously held in a trust but now transferred out to the beneficiary (deemed a disposal in the UK).

The fishing was settled into the trust by transfer (Father to Son) in July 1995 and transferred out of the trust, to the beneficiary, in December 2009. The trust was then closed down. As the settlement was by gift so no money changed hands and therefore no monetary value of the asset was considered or recorded.

The value of the asset on disposal date has increased over its value as at the settlement date. Therefore the trust has incurred a Taxable Capital Gain Charge.

The exercise firstly is to calculate the value of the asset at the relevant dates i.e. date of settlement (July1995) and date of disposal (December2009). With this information I can then later calculate the tax payable on the gain.

To calculate the value of the asset at relevant dates:-

I do not have the value of the asset, as at July 1995, however, prior to 1990 the fishery comprised 5 shareholders; 2 shareholders owned ¼ share each and 3 shareholders owned 1/6 share each. In February 1990 a 1/6 shareholder died and the value of his share was agreed by the Inland Revenue for probate at £18000.

On this basis it is logical to value a ¼ share at February 1990 as £18000 x 6/4 = £27000

However, I require a value of the ¼ share as at the date of settlement i.e. 5 years hence at July 1995

so

Question 1.
Accepting that the value of the asset has increased over the 5 years, would it be equally logical to establish the value at July 1995 by relating the dates to the corresponding RPI factors (indices?) on those dates and ‘indexing up’ from the known value on February 1990 to an interpolated value at July 1995. For example, if the RPI factor has increased by (say) 30% over the 5 years would it be logical to say that the market value has also increased by 30% over that period?
Otherwise, using the RPI Index, would you please recommend what method or formula of indexation should be used to achieve the required unknown values?

For information:- RPI February 1990 = 120, RPI July 1995 = 150, RPI December 2009 = 218

Question 2

If we are successful in calculating the value at July 1995(settlement date), could the same method or formula be used to establish the unknown value at December 2009 (disposal date). However, in this case, in order to achieve a closer relation of asset values, we would use the Halifax House Price index. Again, if not, what method or formula would you recommend?
For information:- Halifax House Price Index for July 1995=197.3
and December 2009 = 546.2

In a ‘nut shell’, we know the value of the asset at February 1990 so by the application of various price indexes (or any other arithmetical method) what is the value of the asset projected to July 1995 and December 2009?

A: Fengirl is correct. The only acceptable method of valuation would be to use a professional valuer.

In any case, I am not sure of your logic in using one index to calculate the growth from 1990 to 1995, and another one to calculate that growth from 1995 to 2009.

But why was there no valuation in 1995? Was the transfer into the trust not a chargeable transfer? In which case the deemed value of the transfer would have been the market value at that date. It may be that the gain was “rolled over”, in which case the chargeable gain now may be based on the original acquistion by the father, and not on the transfer into the trust.

Either way, the values seem high, so it is probably best to speak to an accountant.

Q: what are the capital gains tax rate for estates and trusts?

A: If the trust/estate doesn’t distribute the income, use the rates shown in the 1041 instructions. The LTCG rate applies to any asset owned on the date of death. Just like an individual, there is currently a 0%/15% rate breakdown, but the tax brackets are much smaller.

If the trust/estate does distribute the income, the beneficiaries use their own tax rates.

Q: If a 2nd home in a family trust is sold, do I have to pay tax on the gain from when it was bought, or when?
This is in reference to a second home that is used for a vacation home and the title is in a family trust. If it is sold the capital gain tax would be substantial if the basis is from when the house was originally bought. It was put into the family trust in 2004, and an appraisal was made at that time.

A: I would contact a tax professional.

You might have to pay capital gains tax if it is not your primary residence, but I DO NOT KNOW. I would contact a tax professional.

Q: Family Inheritance Trust Fund Tax Question?
My wife and 3 other siblings inherited a home in california 4 years ago, when their mother died. The mother, however had the house in a living trust, so the home is now in the name of the trust. i have a few questions, and am hoping an accountant or real estate professional is on here and can steer me in the right direction. The house only had a 50,000 mortgage on it, and we have been paying that these last 4 years. The house was worth about 290,000 when she died, it is worth 500,000 now. Here are my questions:

1. Do we need to notify the IRS, and if so, are there any taxes involved (or as long as it is in the trust, we are okay)

2. If there is capital gains taxes involved, are they split evenly among the siblings.

3. What are the amounts of capitol gains taxes we might be looking at.?

Thanks in advance, and only knowlegable people in this subject answer. Thanks
One more question. Do we pay the taxes on the amount the home was worth when she died, or what it is worth now?

A: http://www.irs.gov/faqs/faq-kw91.html
Frequently Asked Tax Questions And Answers
Keyword: Inheritance

4.7 Interest/Dividends/Other Types of Income: Gifts & Inheritances

Is the money received from the sale of inherited property considered taxable income?

This will answer what you may need to know. And for your question on the paying the amount on the home etc. your last one. Read that which is provided and you may wish to also check http://www.irs.gov and type in search for Basis because this my good person is what this is called. But read the other first.

PS: Form 1041 does royally suck. You like paperwork? and you will have to fill it out maybe? Well I hope you love long forms.

and Yes, we are an accounting firm.

BC Business Services, Inc.

http://www.bcbsinc.com

Q: An income tax and estate tax question for a grantor trust?
In an “intentionally defective grantor trust” in which the grantor
retained the power to substitute assets….may the grantor substitute
cash for appreciated stocks owned by the trust so that the appreciated
stocks end up back in his estate and eligible for a step-up in basis
upon his death? (Obviously, the question assums that no capital gains tax is
triggered by substitution itself…if this is a false assumption
please explain.)
If the answer is yes….does it make any difference if the
intentionally defective grantor trust owns the appreciated stocks in
an LLC entity.

A: You could make a substitution of cash for the stocks. I’m not sure you can do the substitution of cash for stock that is owned by an LLC. I think that this would be considered a sale by the LLC of the stock for the cash. You could probably get around this by distributing the stocks from the LLC to the members and do the substitution. The distribution of stock by the LLC to each member should not trigger a tax. The members would take the LLC basis in the stock.
This is a fairly complex transaction so I would recommend a session with a CPA or tax attorney to verify the answer.

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