At what point is the contents of a trust considered to be the property of the beneficiary?

Question

My grandmother passed away several years ago, and left a generous trust fund to her 5 grand children. We can access our share of the money when either of the following two conditions are met:

1. We turn 25
2. We get married

Currently, all of my siblings and cousins have received their shares; only mine in currently held in trust (I believe I can refer to myself as the sole beneficiary at this point). I will turn 25 in 6 months time. However, the money was originally an some kind of managed financial fund (I don't know what, exactly), invested in the stock market. When the market tanked, my mother, the trustee, pulled the money out of the financial fund, and placed it in a (thankfully separate from everything else) personal investment account, in her name.

My share of the trust fund was, at its inception ~$25k; when it was pulled out of the financial fund, it was ~$10k, and is now ~$16k.

I know I will probably have to pay taxes on this money. My question is, at what point is/was the money considered mine, for tax purposes? When my grandmother passed away (and I was 9)? When it was removed from the financial fund (half a decade or more ago)? In six months, when I receive it?

Also, since the trust value has decreased, can I claim a loss against my income? If so, from what point to what point do I calculate the loss?

Answer 1

No, you will not have to pay taxes on the corpus (principal) of the trust distribution.

If the trust tax forms were filed correctly, you might have as much as a $9000 loss that will flow to you on the trust's termination.

Previously, the trust was supposed to file a return each year, and either claim the dividends or realized cap gains each year, and pay taxes at trust's rate, or distribute them to the beneficiaries via K-1 form. This is the best way to handle this as the trust has a steep tax table (relative high rates) vs the kiddie tax which would let you get nearly $1K/yr tax free each year as a minor.

During that time, losses net again gains, but can't be 'distributed' to the beneficiary. They are carried forward year to year. In the year the trust is terminated, that loss is not lost, but it's then passed on to the beneficiary, still via K-1. See Schedule K-1 instructions and Schedule K-1 itself.

On a lighter note, the trustee failed you. In the 16 years (Jan 2000-Dec 2015), the market (S&P) grew by 88%, with a compound 4.02%/yr return. Instead of any gain, you got a loss with a -2.75%/yr return. If this were a paid professional, you'd have a potential claim for a lawsuit. This is a reason why amateurs should not be assigned the role of trustee.

To clearly answer the mix of questions you asked -

• You will not have tax due if the trust and its tax returns were handled properly.
• The money is yours when you get the check or transferred assets.
• You will be able take the loss, via the K-1 the trustee is obligated to issue to you. It should clearly indicate the amounts, and the fact that this is a terminated trust. Final return.

Note - it's always a good idea to seek professional advice. But, the nature of this board is that if any of my answer isn't accurate, a high ranked member (top 20 or so on this list) will likely set me straight within 24 hours.

Answer 2

Both a trust and an estate are separate, legal, taxpaying entities, just like any individual. Income earned by the trust or estate property (e.g., rents collected from real estate) is income earned by the trust or the estate.

Who is liable for taxes on income earned by a trust depends on who receives or retains benefits from the trust. Who is liable for taxes on income received by an estate depends on how the income is classified (i.e., income earned by the decedent, income earned by the estate, income in respect of the decedent, or income distributed to beneficiaries).

Generally, trusts and estates are taxed like individuals. General tax principles that apply to individuals therefore also apply to trusts and estates. A trust or estate may earn tax−exempt income and may deduct certain expenses. Each is allowed a small exemption ($300 for a simple trust, $100 for a complex trust, $600 for an estate). However, neither is allowed a standard deduction. The tax brackets for income taxable to a trust or estate are much more compressed and can result in higher taxes than for individuals.

In short, the trust should have been paying taxes on its gains all along, when the money transfers to you it will be taxed as ordinary income.