Tax treatment of liquidating trusts

17-Jan-2020 23:30 by 9 Comments

Tax treatment of liquidating trusts - what to know about dating an older man

Minimize the Medicare surtax Distribute to beneficiaries who are in low income tax brackets.

Also, if the trust is exempt from generation-skipping transfer (GST) taxes, the transfer tax savings from accumulating income in the trust may outweigh any income tax savings from distributions. Generally, estates and trusts are taxed on a calendar year basis, but estates may elect to be taxed on a fiscal year basis.

Will Rogers has been quoted as saying “The only difference between death and taxes is that death doesn’t get worse every time Congress meets.” Earlier this year, Congress passed the American Taxpayer Relief Act of 2012, which may have prevented us from falling off the fiscal cliff, but further complicated the already complex world of income taxation of estates and trusts.

Whether you are a fiduciary or beneficiary of an estate or trust, or one of their advisors, you should take note of some of the more important changes under the new income tax laws, as well as strategies that can be employed to minimize the tax.

For individuals, the top rate kicks in at taxable income of 0,000 (or 0,000 if married filing jointly); however, for estates and trusts in 2013, the top rate kicks in at taxable income of only ,950.

The rate on long-term capital gains and qualified dividends has increased from 15% to 20%.

The election also is not desirable if the beneficiary plans to hold the asset for a long time before selling it, because the recognition of gain may be deferred until the sale.

As you can see, there are a number of techniques that can be used to minimize income taxes under the new tax laws.

Moreover, an election may be made to treat a decedent’s qualified revocable trust as part of the estate, thereby permitting the trust to be taxed on a fiscal year basis as well.

A fiscal year is adopted when filing the estate’s first federal income tax return, Form 1041.

These trust taxation norms do not apply when a trust is considered a "business trust" and is therefore taxed like other similar business entities. First consideration is given to the consequences of business trust classification followed by a consideration of the rules used to determine whether a trust will be considered a business trust.

The applicable legal standard distinguishing an ordinary trust from a business trust has remained relatively static (albeit vague) since the ancient origins of our federal tax system. Finally, all business trusts whose certificates of beneficial interests are publicly traded will be taxed as corporations under IRC § 7704 and are beyond the scope of this article.

Generally, when an estate or trust distributes an asset in-kind to a beneficiary (as opposed to liquidating the asset and distributing cash), there is no gain or loss to the estate or trust, and the beneficiary takes a carryover basis in the asset.

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