Is cash distributed from a deceased parent's trust taxable to the beneficiary?

[P_Ohana]

My husband's parents passed way in April 2023. They set up a Revocable Trust that my hubby is the sole Trustee for. He has a sister. Last year, they sold the vacation home and the Trust will pay the CG tax on the sale. Now the trust assets are the parent's principal residence, the proceeds from the sale, which is currently in an escrow account, and $ in a couple of bank accounts.

The Trust directs that the sister's share will go in to a remainder Special needs trust for her and my hubby's portion to be paid in cash. His portion, depending on expenses going forward, is in the range of $700K to $750K.

Will his distribution be taxable on our income tax returns? And can the distributions be managed on TT next year?

[Hi Palms]

If the trust pays the CG tax then the distribution will be tax free to the benecificiaries. You should use a tax pro, accountant, or other local pro for the SNT in future years so the matter is handled properly.

[ThomasM125 · Accepted solution]

Since the trust is paying the capital gains tax, then the beneficiaries would not have to pay that. However, the trust likely has other income such as interest income on bank account that may be taxable to the beneficiaries once they start taking distributions. Such income would be reported on the the Trust K-1 schedule that the beneficiaries would use to report income from the trust on their personal tax return.

You can use the TurboTax Business product to prepare the trust tax return. You can enter the K-1 schedule in the TurboTax personal tax return software.

[Hi Palms]

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@ThomasM125 wrote:

You can use the TurboTax Business product to prepare the trust tax return. 

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Yeah, probably not a great idea for anyone who does not have any experience with trust (1041) returns, espcially since this will involve an SNT in future years. A tax pro should be recommended.

[P_Ohana]

Thank you. You are correct that the Trust has interest income as well. Once the distributions are made, do you mean that the beneficiaries as well as the original Trust need to pay income tax on the interest income? I can see a pro-rata tax situation.

The plan is that Trust will cease to exist once the distributions are made and will not be making annual distributions. The remainder Trust will exist as a separate entity and will not be under our purview.

[Hi Palms]

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@P_Ohana wrote:

.....do you mean that the beneficiaries as well as the original Trust need to pay income tax on the interest income?

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No, that would be an "either or" propostion.

[slowreader]

I suggest you do a web search for your question. "Talk to your accountant" is the default answer for a company that is covering itself. You will see multiple intelligent discussions on the web. 

If you distribute stock or real estate etc to beneficiaries, they get the trust basis, which will probably be lower than the market price today. You should pass this information along so that the beneficiaries can prepare their tax returns in future years.

You also have to distribute EVERYTHING in the trust and check the box that says this is its Final Return. You still have time to get an extension, which is probably a good idea since you really have only a couple of weeks to finish up. It's Form 7004, which TTax Business will provide you. (View Forms / Open Form / 7004). Or get it from the IRS website.

Note that an extension of time to file 1041 is not an extension to pay all due taxes by April 15, so estimate that if you have to.

Good luck!

[P_Ohana]

Thank you Slowreader!

The return for 2025 is complete and has been filed. I'm just looking ahead in hopes that 2026 might actually be the year that the Trust can complete its mission and be done. No guarantees that it will, but it's good to think a step or so ahead and be as prepared as possible.