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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?

  • As Dilip pointed out to me, it seems your mom withdrew it from the trust some time ago, right? If she pulled it out, into her name, the loss may very well be gone. But, since you still refer to the trust, I'm a bit confused. – JoeTaxpayer Apr 28 '16 at 22:51
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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.

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    I did a doubletake as well when I saw the 16 year period, even though 2000 wasn't exactly a down year and immediately preceded a down period, still I'd expect $25k in 2000 to be closer to $40-50k now ... amateur trustees indeed. – Joe Apr 27 '16 at 20:41
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    +1 but note the sentence "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. At this point, the trust likely had been violated by the trustee. I think we both owe an apology to @AnthonyMcCloskey whose comment "I would advise the questioner to seek professional advice in person so that someone can review the structure of the trust." is spot-on. But the advice, if acted upon, may well leave the mother-child relationship in tatters. – Dilip Sarwate Apr 28 '16 at 15:28
  • Hmmm. There's no trust, then. And mom can gift $14k this year with the remaining amount next year. Thankfully she sold at the bottom? I specifically would now recommend leaving the pros out. Mom's in deep trouble. – JoeTaxpayer Apr 28 '16 at 16:43
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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.

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    Someone sets aside funds each year into a trust and on their death the beneficiary pays income tax on the full disbursement? That doesn't sound right. The only tax due should be on unrealized gains, only after they are realized. Why would I find a trust only to have my child get a huge tax bill when I die? – JoeTaxpayer Apr 26 '16 at 18:48
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    I was trying to be delicate. Your answer is wrong. Only that last sentence. – JoeTaxpayer Apr 26 '16 at 22:56
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    I agree with JoeTaxpayer that the last sentence of Mccluskey's answer is incorrect. Generally, disbursements from testamentary trusts are of two kinds of money: trust income which can be passed on to the beneficiaries who treat it as interest income or dividends or capital gains, whatever the K-1 form issued by the trust says, and trust assets which are what Grandma bequested , and these are tax-free as are all inheritances in the US. In the last year when the trust distributes all the money it has left, some might be capital gains realized when stock/bonds are sold, and some the basis. – Dilip Sarwate Apr 27 '16 at 1:58
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    Do you? I've help set up multiple trusts. Your description is as if one inherited a Traditional IRA, not a trust funded with post tax money. The law isn't logical, I understand that. But for me to take $28K each year and deposit into a trust for my child, only to find that it's taxed as ordinary income on withdrawal would make the use of the trust remarkably tax inefficient. A trust is not meant to avoid tax, it really doesn't, but in your answer, which you hold firm, the trust creates a potential 50% tax hit. This simply isn't how it works. – JoeTaxpayer Apr 27 '16 at 2:02
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    +1 for professional advice. I don't see how this could possibly be taxable income, though, except for the gains of the trust - the assets are never taxable unless they came from an IRA or similar. – Joe Apr 27 '16 at 20:40

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