Transfer from Trust Question

[Snaggletooth]

Stocks of General Electric have been held in a trust for a number of years, awaiting the beneficiary to attain the age of 24. Today's value of the stocks is $40,000.

The trust (by design) will terminate and the stocks are NOT being sold. They are being transferred to the beneficiary in the current quantities and values as they exist upon termination of the trust. The basis of the stocks within the trust is only $17,000, meaning there is $23,000 in untaxed gains as the trust ends.

The trust will need to file a final 1041 and Sch K-1 to the beneficiary.

Question: Will the trust be required to show the $23,000 in gains upon transfer to the beneficiary?
If so, how would this be reported on the K-1 (assume no other income/loss for the trust during the year)?
I am assuming the beneficiary will have a basis of $40,000 if the trust is required to show income, and only
$17,000 if not.

[appelman]

I would think it would be distribution of corpus.

And therefore it would not be shown on the K-1, or on the 1041, either, for that matter. The basis, and, I believe, the acquisition date as well, would carry over to the beneficiary. Obviously, the trust needs to provide an information statement to the beneficiary.

[S T]

Found this interesting article cost basis - Trust Distributions

http://www.costbasis.com/stocks/trustdistributions.html

We might need more info

Sandy

[Burke]

Question: Will the trust be required to show the $23,000 in gains upon transfer to the beneficiary?
If so, how would this be reported on the K-1 (assume no other income/loss for the trust during the year)?
I am assuming the beneficiary will have a basis of $40,000 if the trust is required to show income, and only
$17,000 if not.

The trust does not show any gains on the tax return when terminating and distribution of principal to the beneficiary occurs. It is a distribution of corpus, as Appelman said, and the beneficiary takes the original basis. If the stocks were gifted to the trust during the lifetime of the giftor and this was NOT a Revocable Living Trust, then that basis is the grantor's basis. If the stocks were put in an irrevocable trust or testamentary trust under the will at the death of the original owner, the basis would be the FMV at that time. The trust will file a tax return showing "Final," showing any income, which I assume it will have due to the dividends, and it will be on Page 2 under DNI. These would pass through to the beneficiary retaining the same character, i.e, income taxed at the div rate in effect in that year. (You do not indicate how the dividends were treated in past years.) I usually attach a statement to the final K-1 giving the basis of any stocks for the beneficiary(ies) use when they are sold at a future date. Or you can do a cover letter with the K-1 including that information.

[Roland Slugg]

Will the trust be required to show the $23,000 in gains upon transfer to the beneficiary?

That depends. The trustee can make an election, under Code §643(e), to recognize the gain on the shares distributed. If this election is not made, there is no gain recognized on the distributed shares.

If so, how would this be reported on the K-1?

If the §643(e) election is made, the gain should be reported on the Trust's income tax return on Schedule D (Form 1041).

I am assuming the beneficiary will have a basis of $40,000 if the trust is required to show income, and only $17,000 if not.

If your question is re-worded to say, "... if the trust elects to report the gain ...," then both your assumptions are correct. (Code §643(e)(1))

[buzzardbreath]

A Strategy

Good to hear from Sluggo on this one. I presume the 643(e) election must be made in the year of distribution if all shares are transferred. Tacking on another $23,000 in income is normally not a good idea, but if the beneficiary has a NOL or a low income year, it might be a good strategy to absorb the income and enjoy future benefits with higher basis.

Thanks Roland...