Does the Dissolution of a Small Irrevocable Trust Cause Any Taxes?
I am trustee of an irrevocable trust holding $25,000. I now want to cash out the trust — half to my brother, the other half to me. What kind of tax do I have to pay in New York?
Probably none. Trusts and their beneficiaries only pay taxes on income. Presumably the trust earned little or no income (interest or dividends) on $25,000, so you’ll have little or no tax to pay. If it did earn any income or if you’re selling property with capital gain to make the distribution, then the income will pass through to you and your brother.
For instance, let’s assume the $25,000 is all in stock which you’ll be selling to make the distribution. Let’s also assume that on selling the stock the trust will realize $20,000 in capital gains. The trust would then report the gain on its tax return but not pay any taxes on it. Instead, it would issue k-1s to you and your brother passing through $10,000 of gain to each of you, which you would have to report on your own tax returns. (My guess is that this illustration is rather unrealistic and, as I said above, the trust has little or no income to pass on to you and your brother.)