Question:

My brother and I are the trustees of an irrevocable family trust from my deceased parents in Maryland. The trust has 5 beneficiaries (5 siblings). We just sold and closed on my parents’ home. My parents had 3 different back accounts at one bank; one of those accounts was a “trust account.” Our plan is to move all the assets and the proceeds from the home sale into the “trust account” and then split everything evenly to the 5 beneficiaries and close all of the accounts. How will the beneficiaries be taxed on their share or is it possible to gift each beneficiary their share?

Response:

That sounds like a good plan to simplify and track all the accounts. When the distributions are made to you and your siblings, the trust income will pass through to you. This will include any capital gains on the sale of the house and on the sale of any stock the trust may have held. However, depending on how the trust was written, there may be little or no gain.

All property in revocable trusts is included in the grantor’s taxable estate and therefor receives a “step up” in basis upon the grantor’s death. Irrevocable trusts vary depending on how much control the grantor retains over the trust. If they give up complete control, then the funding of the trust is considered a completed gift at that time. In such cases, the trust property is not includible in the grantor’s taxable estate and does not receive a step-up in basis upon their death. Instead, the heirs receive the property with same basis as the grantor. This is known as a “carry over” basis.

On the other hand, irrevocable trusts can also be written so that they remain in the grantor’s taxable estate. One common way to do this is for the grantor to retain a testamentary power of appointment giving them the ability through their will to change the ultimate distribution of the trust property. If a trust is written in this way, then the property receives a step-up in basis upon the grantor’s death even though the trust is irrevocable.

So, if the trust property was in your parents’ taxable estates when they passed away, it will have received a “step up” in basis at their deaths. This will result in little or no capital gain on the sale of either the house or any stock. Any interest or dividend income will also pass through to you as beneficiaries, but there’s unlikely to be much between the date of death and the distribution of the trust property.

To clarify one more point, there’s no tax on the receipt of an inheritance except in five states. There is a tax on estates, but federally only if the estate exceeds $14 million (in 2025). Some states have their own estate taxes with lower thresholds, the lowest being $1 million in Oregon. If the total value of the house and the accounts exceeds $1 million, you will want to check to see if an estate tax may be applicable in your state.

 

Related Articles:

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