Liquidating trust and taxable event
However, expenses for the production of tax-free income are not deductible and depreciation can be claimed either by the trust or by the income beneficiaries or it can be apportioned to both according to the trust document.
The trust itself often retains some income, especially capital gains, which is usually allocated to the trust corpus.Capital gains that are allocated to trust principal are subtracted from taxable income because the gains are not distributed to the beneficiaries.For the same reason, capital losses that are allocated to trust principal are added back, because the losses decrease taxable income, but do not decrease the income that is available for distribution to the beneficiaries.However, taxable income includes all income earned by the trust, including capital gains, minus tax-free income.Typical trust expenses include trust administration expenses, expenses for the production of income, depreciation, and charitable contributions.If the trust document does not specify the allocation, then state law applies.
Most states have adopted all or part of the Uniform Principal and Income Act ( Trust taxable income is generally determined as it is for individuals.
To calculate this allocation, an intermediate result must first be calculated, called the distributable net income.
The distributable net income () sets a ceiling both on the trust distribution deduction and the amount that is taxable to the trust beneficiaries.
Property transfers to an irrevocable trust may be subject to gift tax, but for revocable trusts, gift tax liability will not be incurred until the property is transferred to a beneficiary or when the trust becomes irrevocable. If the trust has taxable income or gross income of $600 or more, or if any of the beneficiaries are non-resident aliens, then it must file Form 1041, U. Income Tax Return for Estates and Trusts and may also have to make estimated tax payments.
A simple trust is one that is required to distribute all its income and no amount is paid or set aside for charitable contributions. Capital gains, under most state laws and trust documents, are allocated to corpus.
Likewise, any taxable distribution to beneficiaries is deductible by the trust.