Taxability of complex trust
My grandfather set up a trust many years ago (maybe 50 years
ago) and my father had been collecting the interest and some principal for the
last 35 years, since my grandfather died. My grandfather stated upon my father's
death that my sister and I would be the final beneficiaries of this trust.
my father passed away in 2006, my sister and I each received $132,400 in 2007,
which was the amount left in the trust. Some of this is capital gains taxable
(according to the bank, about $22,000 each to my sister and me).
My question to you is this: Is the balance, which
is not capital gains taxable, in any way taxable as income either
federal or state to us? I have been told "yes" by some
and "no" by others and am extremely confused and dazed. I
live in Connecticut, my sister lives in Pennsylvania, my father
lived in New York and the original trust set up by my grandfather
was in Connecticut.
for your consideration in answering my question.
A trust established through after-tax
dollars is referred to as the corpus of the trust. When the corpus is eventually
distributed, the recovery of the corpus is tax-free to the beneficiaries. Although
every state has its unique laws, this is pretty much a uniform principle of taxation.
A trust is required to prepare Form 1041 and distribute Schedule
K-1 to the beneficiaries. Schedule K-1 advises beneficiaries of the amount of
distributions that represents taxable income.
In some cases,
distributions occurring after the end of the tax year, maybe such as yours, are
considered or treated by the trust as occurring in the preceding tax year. A trust
can elect under Section 663(b) to treat distributions occurring within 65 days
following the end of its tax year as actually taxable to the beneficiaries in
the preceding year. This allows the trust time to compute its income for the tax
year and make any required distributions.
This usually occurs
in simple trusts, but in the final year of a complex trust, trying to wind up
its affairs, it may also occur. Page 2, Other Information Question 6 of Form 1041
will tell you if the trust made this election. Alternatively, if the trust issued
a final K-1 to you, you can assume that there are no further consequences from
the money you received in 2007. Just to be sure, you should ask the bank.
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