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Trust Capital Gains ( Irrevocable)




Can a trust pass the capital gains on assets sold so that the beneficiary can pay the taxes on their 1040 return? The trust agreement is silent insofar as gains are concerned. This is a Calif. trust. The trust does allow the beneficiary to withdraw principal if needed although we are only talking about the gain on assets sold. The basis of the asset will remain in the trust.

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Undistributed capital gains are allocated to corpus in CA, unless the trust instrument provides otherwise. If none of the gains were distributed, then I see no hope for passing the gains to the beneficiary.

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I'm new at this trust situation. We created an irrevocable trust for my father last year. All the funds that were put into it are in a balance mutual fund. The mutual fund reported a net change that was positive with zero withdrawals. There is no other asset in the trust. So the question I'm trying to figure out, does that net (postiive) change count as income that I need to put into the 1041?
Thanks, KAS

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ooops... it's been a long night. This is an annuity- not a mutual fund.

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Kas, make sure you look at the rules for trust owned annuities. You may be surprised.

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CA probate code controls what the trust can do if the governing instrument is silent (the trust). In my experience (having prepared trust returns over the last 20 plus years) virtually every trust is silent on trust accounting rules, which forces you to look up the Probate Code rules. These rules are actually more friendly than you would think (considering that they are government rules). In most cases, the trustee can make choices of how he/she wants to treat income (income or corpus) and the Probate Code says the trustee is in charge. Therefore, if the trust wants to consider capital gains as income, they can be distributed (although the basic rule is that capital gains as corpus and stay in the trust until termination). For Kasommer ... the change in asset value is not income (corpus or otherwise) so nothing happens -- until you get a 1099-DIV or 1099-B.

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CE, not necessarily so with annuities owned by non-natural persons.

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Kas, I think you should get professional help at some point.

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If an annuity's earnings have to be recognized as income, then they are like other income, although the probate code is a bit muddy in determining how to allocate earnings between income and corpus. Annuities owned by non-natural persons are not a problem if all beneficiaries are natural persons; the IRS has allowed them to continue to be tax deferred even inside a trust.

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I've never noticed a problem in allocating income and principal inside a tax deferred annuity. They do have account records. If the annuity is in distribution UPIA determines. In NY, for example, the split is 90% principal.