Business & farm

The following contradicts your statement that "No matter what you try to do, the Trust will have to pay tax on the gain if retained."

Exception No. 2: Allocated to Corpus but Consistently Treated as Part of a Distribution

Capital gains allocated to corpus but treated consistently by the fiduciary on the trust's books, records, and tax returns as part of a distribution to a beneficiary may be included in DNI (Regs. Sec. 1.643(a)-3(b)(2)). In the A Trust example, the trustee has discretionary power to distribute principal to B for health, maintenance, and support. After calculating FAI of $10,000 per Example 1, the trustee distributes $10,000 of income plus, at his or her discretion, an additional $25,000 of principal to B . Assuming the trustee intends to follow a regular practice of treating discretionary distributions of principal as being paid first from any net capital gains realized by A Trust during the year, the trustee can treat the $25,000 principal distribution as consisting of the capital gains and include it in DNI (see Regs. Sec. 1.643(a)-3(e), Example (2)). However, the trustee must continue to treat principal distributions as coming from realized capital gains for all future years.

The consistent practice is adopted during the trust's initial tax year (id., Example (1)). For new trusts, this is not an issue, since the capital gains could be included in DNI under this exception, with the limitation that the fiduciary must continue to do so going forward. (Given the uncertainty of future tax rates for both the trust and beneficiaries, this decision should not be taken lightly.) However, will older trusts be allowed to adopt a new consistent practice, particularly following new tax legislation? A commentator on the IRS's proposed net investment income tax regulations asked this question, and the IRS indicated that the final net investment income tax regulations do not allow a fiduciary to adopt a new consistent practice going forward (preamble to T.D. 9644). Existing trusts for which the statute of limitation has expired on prior tax returns will likely be unable to adopt a new methodology despite the subsequent creation of tax rules that were not contemplated when the initial tax return was prepared.

 

The source of this excerpt is taken from: https://www.thetaxadviser.com/issues/2014/aug/tax-clinic-03.html

 

My question is, provided the above is correct and applies to NY, can the beneficiary offset the capital gains allocated but not distributed to him, with capital loss carryovers that he has from his own accounts?