Trust and Estate tax issues

Posted by Gene on April 5, 2009, 6:26 pm

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Hi,

We have a Credit Shelter/Family Trust (Trust B) where my mother has
become trustee after my father's passing. A simple scenario is Trust B
with $10,000 comprised of 2 stocks each worth $5,000, and each with
original basis of $5,000.

Say we sell 1 of the stock for exactly $5,000 which results in $0 gain/
loss.

The proceeds from the sale is $5,000 which are distributed to my
mother, the trustee.

- Would she be taxed on her personal return on the proceeds from the
sale even though there was no gain?
- Would the trust (Trust B) be taxed?
- Is this transaction reported in the K1? And, if so, how is it
reported?

To me, it seems that the original $5,000 used to purchase the stock
(say from salary income) was already taxed. If there's no gain/loss,
there should be no tax.

Thanks,
Gene

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Posted by JoeTaxpayer on April 6, 2009, 10:15 am

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Gene wrote:

> Hi,

> We have a Credit Shelter/Family Trust (Trust B) where my mother has

> become trustee after my father's passing. A simple scenario is Trust B

> with $10,000 comprised of 2 stocks each worth $5,000, and each with

> original basis of $5,000.

> Say we sell 1 of the stock for exactly $5,000 which results in $0 gain/

> loss.

> The proceeds from the sale is $5,000 which are distributed to my

> mother, the trustee.

> - Would she be taxed on her personal return on the proceeds from the

> sale even though there was no gain?

> - Would the trust (Trust B) be taxed?

> - Is this transaction reported in the K1? And, if so, how is it

> reported?

> To me, it seems that the original $5,000 used to purchase the stock

> (say from salary income) was already taxed. If there's no gain/loss,

> there should be no tax.

There are two returns to discuss:
Trust B return, which should zero out as you should first distribute any
gains to the trust beneficiaries along with any principal due them. It
issues a K-1 to pass along those gains.
Mom's return, where she shows the K-1 income (but not distributed
principal, which the $5K in your example is.)

I like an example better where you offer a $5000 sale on $4900 basis -
Now I tell you the trust has a $100 gain which it distributes to mom
along with a K-1 where mom picks up $100 in (long term?) capital gain.
Make sense?

Joe

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Posted by D. Stussy on April 6, 2009, 4:42 pm

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> We have a Credit Shelter/Family Trust (Trust B) where my mother has

> become trustee after my father's passing. A simple scenario is Trust B

> with $10,000 comprised of 2 stocks each worth $5,000, and each with

> original basis of $5,000.

Original basis is irrevelant. The value listed on Form 706 is all that
counts.

> Say we sell 1 of the stock for exactly $5,000 which results in $0 gain/

> loss.

> The proceeds from the sale is $5,000 which are distributed to my

> mother, the trustee.

If Trust "B" is the credit/bypass trust, that makes Trust "A" the marital
trust. By allowing your mother access to Trust "B", haven't you just blown
the whole purpose of having the split trust arrangement? The surviving
spouse is supposed to draw from the marital trust, not the credit/bypass
trust. By having the spouse draw from the credit/bypass trust as
beneficiary, you've just wasted your father's estate unified credit.

> - Would she be taxed on her personal return on the proceeds from the

> sale even though there was no gain?

No gain on sale => no income.

If it's the bypass trust, she should not be the beneficiary, so it
shouldn't be taxable to her. Presumedly, as a child of the couple, you're
a beneficiary, so you should be receiving the proceeds (or a share thereof)
and paying the tax on it as it passes through to you via a Form 1041
Schedule K-1.

> - Would the trust (Trust B) be taxed?

> - Is this transaction reported in the K1? And, if so, how is it

> reported?

Form 1041.

> To me, it seems that the original $5,000 used to purchase the stock

> (say from salary income) was already taxed. If there's no gain/loss,

> there should be no tax.

The credit/bypass trust should distribute all its income except for $100
(its exemption) plus the cost of preparing its Form 1041.

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<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
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