I am sole trustee/beneficiary of my deceaparent's irrevocable trust. Can I transfer the income I receive In-Kind from the the Trust to my account? Tax consequence?

[lou_renshaw]

I really need to have a CPA help me with this one.

The Trust is invested in a mutual fund, and I am the beneficiary of  the income every year. However, even though I personally paid the tax on the income I was entitled to every year, I stupidly left the income in the trust to grow. Now I want to transfer all the income I was entitled to over the years into my own taxable account, but want to avoid selling it in the Trust because of the Trust's much larger capital gains tax. My thought was if I transferred the income in-kind to my own personal account, then the tax burden would be on me instead of the Trust.

Then, once transferred in kind to me how is it taxed? Does the value stay the same as it was in the Trust before it was transferred? Do I personally owe capital gain taxes on it immediately whether I sell it or not? Upon transfer to the beneficiary, does an in-kind transfer of income from a mutual fund then becomes a long-term capital gain for the beneficiary (since it was held long term in the Trust)? Or is it considered a short term capital gain and does it get a new cost basis or value?

Since both accounts are already taxable, I know it would be treated differently than if I were taking it in-kind from a tax protected account and putting it into a taxable account. In that case, the basis resets and taxes are owed because you are changing the character of the taxation of the account.

Thanks so much!

[tagteam]

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@lou_renshaw wrote:

I really need to have a CPA help me with this one.

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Frankly, what you need is an individual (attorney, CPA, EA, et al) that is experienced in trusts and estates issues to sit down with you and read through the trust instrument itself.

Beyond that, I believe what you would like to do is transfer the principal (aka assets, aka corpus) out of the trust and into your personal account. Whether or not that is possible is dependent upon the language in the trust and the only way to determine that would be to examine the document.

Typically, though, when in-kind distributions are made, the beneficiary of the trust takes the trust's basis in the property; there is no gain recognition until the beneficiary disposes of the property in a taxable transaction. After the distribution, in this instance a mutual fund, the beneficiary would own the asset outright and be responsible for reporting any income generated by the asset in his/her personal account.

Finally, I would again urge you to seek professional guidance in this matter. Since you are purportedly the sole trustee and sole beneficiary, then depending upon the authority and powers granted to you in the trust, you may actually be able to treat the trust as if you are the owner thereof (aka like a grantor trust) and essentially bypass transferring the assets (i.e., report the income on your own individual income tax return).

[lou_renshaw]

My understanding is that it is a Simple Trust, because I am supposed to take the income every year.  I also can take principal/corpus if I need to, but I think that is still a simple trust. 

The income from the Trust every year is supposed to be allocated to me.  I paid the taxes on it, but did not take the income out, leaving it in the trust to grow.  I don't know if that remains income because I am entitled to it, or somehow goes back to being principal of the Trust.  However, I am able to take principal/corpus out if I need to.  I have researched everywhere and cannot find anywhere except in foreign countries, anything that really addresses taking income in-kind from a Trust. 

I know you can do it, the problem is the taxation of it.  My only reasoning for taking it in-kind would be to bypass capital gain taxes at the Trust's level.  I have found websites that discuss in-kind transfers when you are dissolving a trust and how it is allocated to the beneficiary, but this is not the case. 

That is why I turned to Turbotax in the hopes I could get some advice from a CPA, which I have been able to do in the past. 

I have found it much more difficult to find the right category to post this question.  I used to just post it in the general community , but I tried twice and it never showed up. 

[tagteam]

A simple trust is a trust that is required to distribute all of its income currently (each tax year), does not accumulate income, and does not distribute corpus. In any tax years where the foregoing is not the case, then the trust is treated as a complex trust.

The beneficiary of a simple trust includes in his/her gross income the amount of income required to be distributed to him/her whether actually distributed or not.

See Treas. Reg. § 1.652(a)-1

Since you have paid taxes on the income required to be distributed by the trust but the trust has been accumulating income, it could be the case that the language in the trust (and the intent therein) has not been followed precisely. However, since you apparently have the discretion to allocate corpus to yourself, that is probably a moot point since the trust, in any given year, can be treated as a complex trust (and note that complex trusts can also be trusts that require income to be distributed currently).

Regardless, if income that has already been taxed has accumulated in the trust, it becomes corpus which can then be distributed (if in accordance with the terms of the trust); no further taxes would be due but any gain or income generated thereafter on the accumulation would be subject to taxation.

An example would be where the income of $1,000 for a tax year that is required to be distributed is not distributed but left in the trust. The $1,000 is invested in a mutual fund which is sold two years later for $1,100. In that instance, the $100 represents long-term capital gain and, depending upon the language of the trust, is distributed and taxed at the beneficiary level or retained within the trust and taxed at the trust level. If, instead, the entire mutual fund is distributed, then $1,000 represents an in-kind distribution (corpus) and is not taxed.

Again, you might want to seek an in-person consultation with an trusts/estates professional so the language in the document can be reviewed thoroughly.