Photo by Floriane Vita on Unsplash

Question:

My brother and myself 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. 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 of that in our current low-interest-rate environment.

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 $11.7 million (in 2021). Some states have their own estate taxes with lower thresholds, the lowest being $1 million in Massachusetts and 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:

Does Your State Have Estate or Inheritance Taxes?

What’s a “Step-Up” in Basis and Why Would You Want It?

How Are Revocable and Irrevocable Trusts Taxed?

How Are My Trust Distributions Taxed?

Related Articles

A Short History of the Federal Estate Tax What’s a “Step-Up” in Basis and Why Would You Want It? Does Your State Have Estate or Inheritance Taxes?