Does the Dissolution of a Small Irrevocable Trust Cause Any Taxes?
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Question:
I am trustee of an irrevocable trust holding just $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?
Response:
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 it will pass through to you and your brother. If you’re selling property with capital gain to have cash to make the distribution, the trust will pay any tax on the gain that may be due.
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 and have to pay the tax due. If, on the other hand, the trust earned $1,000 in dividends and interest, it would report this on its tax return but not pay any taxes on it. Instead, it would issue k-1s to you and your brother passing through $500 of income to each of you, which you would have to report on your own tax returns. (My guess is that these illustrations are rather unrealistic and, as I said above, the trust has little or no income to pass on to you and your brother.)
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