Capital gains on real estate sale through a trust

[tgfathergoose]

My father and his wife set up trusts to cover themselves years ago. My father died in 2011, and his part of the house was in a trust, with the three sons as beneficiaries when the house was actually sold. His wife has now sold the property. I am totally confused over how this money gets distributed to me, and what entity actually has to pay the capital gains. I live in Virginia, the property was in Nebraska. My brother is the trustee, and he is handling everything, but I'm not sure we are getting the right information. My thought is that since the proceeds from the sale of the property went to the trust, that the trust would have to pay the capital gains. Once that is paid, we'd get the remainder of the money split three ways. He is being told that once the money gets into the trust, the money gets distributed, and each of us is responsible for capital gains. I don't see how the capital gains can be split between the three of us. Luckily, I won't have to do anything until I file 2025 taxes, but I want to make sure we are doing things right. Frankly, I don't think I should by paying capital gains if the trust gets the money. I know it may have something to do with how the trust was set up, but I don't have access to those documents. If I do have to pay capital gains, do I have to pay both federal and state of Nebraska, and how do I even do that?

[M-MTax]

If you father and his wife had separate trusts, the house was in your father's separate trust and that trust was a standard (typical) grantor trust, then the trust became irrevocable upon your father's passing, and the basis of the house would be its fair market value on that date.

If the house remained in that trust until it was sold, then the sales proceeds would be held in the trust until distributed and when distributed to the beneficiaries it would be typical for the trust to issue K-1s to the beneficiaries who would then assume the responsibility to pay any tax due (federal and state) on the gain; each beneficiary would receive a K-1 for their portion of the gain in that instance. If the trust had paid the tax for some reason, then the proceeds would be distributed to the beneficiaries essentially tax-free.

It is critical to read and understand the terms of the trust, however. For example, did the trust give the right to your father's wife to live in the house for life or as long as she pleased? Also, your facts are somewhat confusing in that you stated your father's wife "sold the property" but also that your "brother is the trustee". Typically, only the trustee would have the right to convey the property out of the trust. Again, the terms of the trust need to be examined. Regardless, under normal circumstances, you and your brothers would receive state and federal K-1s (the equivalent for Nebraska) from the trustee.