- When an irrevocable trust terminates, the beneficiaries of the trust have the option to take the assets of the trust, known as in-kind distribution, or to have asset liquidated and receive cash. If a beneficiary elects to receive a cash distribution, normal capital gains tax or loss tax to the beneficiary for inclusion in his personal income tax return. The beneficiary will also have to pay tax on any interest and dividends earned during the current year not taxed on a previous trust tax return. No tax incurred is death tax, as it is normal income tax attributable to investment activity.
- If the trust beneficiary elects to receive assets such as stocks and bonds instead of cash, the beneficiary will have no capital gains tax or loss to report until the beneficiary sells the assets. Assets retain the same cost basis the trust had, and will pass through to the beneficiary. For example, if there is a stock with a very low cost basis, the beneficiary may be better off to take the asset, rather than incur the large capital gains tax incurred from selling the stock. The beneficiary will also have to pay tax on any interest and dividends received during the current tax year that were not taxed by a previous trust tax return. As with a cash termination, any tax incurred is normal income tax, not a death tax.
- The beneficiary of a trust termination will receive a tax letter Form K-1, which generates from the final tax return prepared for the trust. The beneficiary is required to report amounts shown on Form K-1 on his personal income tax return Form 1040. The Form K-1 amounts are normal income taxes, not death tax.
- Every state is different with regard to death tax on the distribution of property. While most states do not require payment of any tax outside of the normal income taxes attributable to terminating the trust, it is prudent to check with a tax professional from the state of residence to ensure that state tax reporting is proper.
previous post
next post