Discussion:Distributing Trust Capital Gain
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Revision as of 18:07, 8 May 2009 JAD (Talk | contribs) (Trust has LTCG a) Next diff → |
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| You can't pass a cap loss to the bene. That stays with the trust until closed.}} | You can't pass a cap loss to the bene. That stays with the trust until closed.}} | ||
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| + | {{ForumReplyPost|UserID=JAD|Date=8 May 2009|Text=Trust has LTCG and STCL. Gains are allocated to the beneficiary. Losses stay within the trust. The gains become part of the distribution deduction and cause a taxable loss on page one of the return in roughly the amount of the capital losses. | ||
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| + | Lacerte does not carryforward the capital loss. I spoke with tech support, and this is due to their interpretation of Sch D form instructions. This does not make sense to me since trust capital losses do, of course, carryover, and I've never seen anything that says that if you distribute gains to the beneficiary, losses remaining in the trust would be lost without tax benefit. | ||
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| + | Agree? Disagree? How would you handle this? Thank you for any help. }} | ||
Revision as of 18:07, 8 May 2009
Discussion Forum Index --> Advanced Tax Questions --> Distributing Trust Capital Gain
Discussion Forum Index --> Tax Questions --> Distributing Trust Capital Gain
CTurner555 (talk|edits) said: | 14 March 2008 |
| Please advise on whether it is allowable to treat trust capital gain distributions to the beneficiary. I have the trust document. All net income is to be distributed; principal may be distributed as needed. The trust is silent on the treatment of capital gains. The trust has capital gains from dividends; and capital gains from the sale of stock. If the amount distributed to the beneficiary during the year is in excess of net income, including the capital gain, am I allowed to treat the capital gain as being distributed to the beneficiary? I have researched and know the question is tossed around every year; but what if the trust document is silent? | |
| 14 March 2008 | |
| Yes, you allocate the distribution of gains in part III of Schedule D (1041). You must distribute all income first, then gains and then you can distribute corpus (principal). The distributed principal would be included in line 10 Schedule D of 1041. The gains distributions show in box 3 and 4a of the K-1 and the principal distributions should be shown in box 14 for the beneficiary's information (although instructions omit this)
ed | |
| 14 March 2008 | |
| Applicable Reg. is Reg. 1.643(a)-3(b) This is applied in coordination with your state's version of the Uniform Principal and Income Act and version of the Uniform Prudent Investor Act. If, under state law, gains can be considered part of DNI at trustee discretion (Unlikely. NY only allows this in specific situations), the only other requirement is that Trustee establish a consistent procedure. You cannot vary from year to year absent specific language. You must establish a procedure that is fair to both the income and residual beneficiary (Bear in mind that there is no guarantee that the income beneficiary will be alive next year). In NY the law would allow mutual fund capital gains distributions to be considered current income to the extent that they do not exceed a 6% return. Gain from the stock sale would be taxable at the trust level. | |
CTurner555 (talk|edits) said: | 14 March 2008 |
| Thank you all for your help. The beneficiary of this trust has dementia; and expenses for her care will be increasing. This is Ohio law; I would like to be able to include the stock sale as an income allocation to the beneficiary also. If distributions exceed income; why can't the stock sale capital gain also pass through? | |
| 15 March 2008 | |
| If you look at the examples in the cited reg, 1-5 show what you can do when trustee is given the discretion to allocate and 6,9 and 10 show what happens when there is a direct relationship between asset sale and distribution. In your case you have neither. What you probably can do, since most UPIA statutes allocate the tax imposed on gains to corpus is take the position that gain can be allocated in proportion to principal distributed. If you are distributing 10% of the corpus, distribute 10% of the gain. Or you can take Ed's advice. | |
| 15 March 2008 | |
| Ed's advice is Example #2 to shift the capital gains tax burden to the beneficiary presuming he/she has a lower LTCG tax bracket than the trust (i.e. a larger 15% ordinary tax bracket amount). Example #1 is the alternative to shift the capital gains tax burden to the trust that might have a slight advantage (max $230) if the beneficiary is in a higher than 15% ordinary tax bracket. Once made the method can't be changed so I favor #2 for ongoing situations and you seem to be looking for justification of this.
ed | |
| 15 March 2008 | |
| For those who might think there is the slightest possibility that Ed has a clue:
Example 1. Under the terms of Trust's governing instrument, all income is to be paid to A for life. Trustee is given discretionary powers to invade principal for A's benefit and to deem discretionary distributions to be made from capital gains realized during the year. Example 2. The facts are the same as in Example 1 Trusts can be written such that the income shifting Ed describes can be utilized. However when there is no explicit direction, you are left with the law. There is no irrevocable election to do one thing or another. | |
| 15 March 2008 | |
| I dissagree with Dennis who doesn't consider the true meaning of Trustee's powers the lack of specific direction, and the law-makers trying to regulate human behavior. The *law* in this case is Ohio's UPIA which after specifying that gains are to be added to principal, not income, allows complete discretion to the trustee to do otherwise should he desire.
In short lacking "explicit direction" the law usually leaves you with the tustee's discretion. ed | |
| 15 March 2008 | |
| Basically trustee's discretionary power to adjust has to to with integration with the Prudent Investor Act. The object of the discretion to to be fair to both income and corpus beneficiaries.
Sec. 1340.42 5812.03. (A) A trustee may adjust between principal and income to the extent the trustee considers necessary if the trustee invests and manages the trust assets as a prudent investor, the terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust's income, and the trustee determines, after applying division (A) of section 1340.41 5812.02 of the Revised Code, that the trustee is unable to comply with division (B) of that section. There is no real application when principal distribution is also discretionary. On the other hand, you can believe Ed. ♫ | |
| 16 March 2008 | |
| Thank God you're not my trustee, 5812.47(A)(1) if all else fails. Anyway,who's watching?
ed | |
| 16 March 2008 | |
| Totally clueless. This guy is an obvious DIY-er giving incompetent advice.
(A) A fiduciary may make adjustments between principal and income to offset the shifting of economic interests or tax benefits between income beneficiaries and remainder beneficiaries that arise from any of the following: (1) Elections and decisions, other than those described in division (B) of this section, that the fiduciary makes from time to time regarding tax matters; This is essentially the provision that allows the Trustee to take the position that an amount can be subtracted from accounting income to reflect the tax burden imposed on corpus because the law requires all of the gain to be recognized at the trust level. Note: This only effects accounting income and has nothing to do with allocating capital gains on a K-1. The rules regarding the allocation of capital gains are called "ordering rules". They have the specific application only to unitrust reformation. Some states have them. New York specifically does not, leaving that direction explicitly to document language. In any event, Since poor Ed has expressed his opinion on my competence, and as he does point out, no one else seems interested, I leave you with him. See you, guys.♫ | |
Michaelstar (talk|edits) said: | 16 March 2008 |
| Dennis - another great example of your depth of knowledge in this area. Totally Outstanding! Thanks. Where can I take your course on line since I live in San Diego??? | |
| 17 March 2008 | |
| Edscoft's advice would violate Reg. 1.643(b)-1. His concept of trustee powers results in non-recognition of the trust entity. Dennis is wrong about the possibility of allocating a percentage of the gain. There has to be a direct relationship between distribution and asset sold, not an indirect relationship. He is right about everything else. Edscoft's position is tax fraud, and it is apparent that this forum is useless for fiduciary taxation. | |
| 17 March 2008 | |
| Linda, we welcome your contributions to help us tax professionals. Most of us are willing to learn. Thanks (in advance) for teaching us and sharing your insight. | |
Michaelstar (talk|edits) said: | 17 March 2008 |
| Linda124 - I second Kevin's comments. Fiduciary taxation is not usually one of the strong areas of most tax practioners.
Do you recommend another public forum from which to read and learn from? | |
CTurner555 (talk|edits) said: | 19 March 2008 |
| I agree fiduciary taxation is not one of the strong areas; thus my initial question. Reading regs makes my eyes cross sometimes; I tend to read into the words; my first boss taught me to read before asking questions. I did in this case; and am still reading. I am trying to do the correct thing, and while doing so, am also thinking about the beneficiary; who is incapacitated and using funds for care. While respecting all comments, I would appreciate additional comments.. Reg 1.643(a)-3(b) states that capital gains are included in DNI to the extent they are, pursuant to the terms of the governing instrument and applicable local law; or pursuant to a reasonable and consistent exercise of discretion by the fiduciary allocated to income. In this particular case, the beneficiary was distributed funds which included the capital gain income for her direct care. Not trying to commit tax fraud; trying to legally do what is best for the beneficiary.
Along the same lines; when mutual funds pay capital gain distributions, and distributions to beneficiaries exceed these distributions and all other income; can't these distributions be treated as being distributed to the beneficiary instead of added to corpus? This is the year of tax research for almost every return; exhaustion is setting in; and advice could be to not prepare trust returns......I am going to contemplate that thought for next year! But for this year; finishing a project would be wonderful! | |
| 19 March 2008 | |
| CTurner: No. Contiutors to this thread have pretty well determined that the trustee needs a specific direction allowing him to allocate gains to income rather than corpus. The trustee's notrmal discretionary powers are insufficient, at least in Ohio. The quotation in your last post SEEMS to allow it,but evidently falls short due to no specific direction in the trust.
I suggest you re-read the trust document and find the clause, probably under Trustee's Powers, allowing the trustee to allocate receipts and disbusements to either income or corpus, or more specifically allocate gains to either income or corpus. This claus satisfies the statute requirement for specific direction and is in virtualy every trust drawn by an astute lawyer. Let us know if you find the trustee power I mention. ed | |
CTurner555 (talk|edits) said: | 20 March 2008 |
| Ed, I did find under Trustee Powers, under the clause titled "Distribution" On any partial or final distribution of the trust estate, to apportion and allocate the assets of the trust estate in cash or in kind, partly in cash and partly in kind, or in undivided interest in the manner deemed advisable at the discretion of the Trustee and to sell any property deemed necessary by the Trustee to make the distribution.
Additional paragraph "Allocation of Income and Principal" stating that the Trustee shall determine what is income and what is principal.... Your thoughts? | |
| 20 March 2008 | |
| What is exact wording of the "Additinal paragraph "Allocation------- cause that's it. YOur first paragraph is not it.
ed | |
CTurner555 (talk|edits) said: | 20 March 2008 |
| Allocation of Income and Principal: The Trustee shall determine what is income and what is principal of each trust created under this Trust Agreement, and what expenses, costs, taxes, and charges of any kind whatsoever shall be charged against income and what shall be charged against principal in accordance with the applicable statues of the State of Ohio as they now exist and may from time to time be enacted, amended, or repealed. Your thoughts now? | |
| 20 March 2008 | |
| My personal opinion is that this is sufficient to establish the discretionary power required by the Ohio statute 5812.02(A)(2). Perhaps Cindy the lawyer, or the CPAs and other experts who were so critical of my efforts to assist you can say something definitive to keep you out of jail.
ed | |
| 20 March 2008 | |
| IMO, what is terrible is this: on this thread alone, at least two valued contributors must have been offended by the tone of responses received to their posts. This is totally unnecessary. Anything that can be said with attitude can be said nicely with just an additional 1/2 second of time and a tiny bit of compassion.
I have only been here a year, yet I personally know of 2 people who have left this forum - 1 entirely due to the negativity, and the 2nd I believe due in large part to the negativity. How is this possible in this group? Clear to me is that it comes back to the basics that I continuously try to instill in my kids re kindness and respect. | |
Michaelstar (talk|edits) said: | 20 March 2008 |
| JAD - The individual who slammed this post, the site and another post was here for a total of one day! She came on, displayed an unprofessional attitude without even a hint of providing any advice and has yet to come back when asked to follow up with her version of a real answer. Maybe because she is an attorney, she believes she has the right to behave in this manner but that is also why most people tend to stay clear of attorneys. There are attorneys on this site who act professional and are kind like most others who stick around and do their best to assist others with answers to posts. It is not my desire to slam attorneys no more than I appreciate others slamming CPA's or EA's. But when people think they are better than anyone else - well that can be a tad bit offensive.
None of us have answered every question 100% correctly - okay - so what! We fall down and then pick ourselves up again. Someone else will hopefully come along and point out where that answer is wrong and why based on additional knowledge or a different way to look at the situation. And guess what - We all learn from it. Now that is a bonus and what makes this site good for the whole. | |
CTurner555 (talk|edits) said: | 20 March 2008 |
| Ed, thank you for taking the extra time to help out. I will look up the Ohio stutute you refer to, to help with my final decision. This board is an invaluable source of information; I agree with Michaelstar and JAD. | |
| 20 March 2008 | |
| If princ can be distributed, the cap gain can go to the bene. the tax w/b less. The sched d for the 1041 asks you to break down how much is the bene and how much is the trusts.
You can't pass a cap loss to the bene. That stays with the trust until closed. | |
| 8 May 2009 | |
| Trust has LTCG and STCL. Gains are allocated to the beneficiary. Losses stay within the trust. The gains become part of the distribution deduction and cause a taxable loss on page one of the return in roughly the amount of the capital losses.
Lacerte does not carryforward the capital loss. I spoke with tech support, and this is due to their interpretation of Sch D form instructions. This does not make sense to me since trust capital losses do, of course, carryover, and I've never seen anything that says that if you distribute gains to the beneficiary, losses remaining in the trust would be lost without tax benefit. Agree? Disagree? How would you handle this? Thank you for any help. | |
