16 Aug What happens to tax on a home sold from a trust?

Q. I’m a trustee selling a home in irrevocable trust for a parent who died. Two beneficiaries who will get sale proceeds with a stepped-up basis. I’m filing Form 1041 but or do I still have to file a Form 1040 to report anything for the beneficiaries?

— Trustee

A. Thanks for your question.

Generally, assets transferred to an irrevocable trust will be deemed a completed gift and will not be included in an estate for estate tax purposes, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park..

That means there would not be a step-up in basis to the fair market value upon the decedent’s death, she said.

“However, an irrevocable trust can be prepared whereby the settlor of the trust retains certain rights and powers such that gifts to the trust are incomplete,” Romania said. “In that case, the assets are included in the settlor’s estate upon death and obtain a step-up in basis upon the decedent’s death.”

As you noted, if the trust sells the asset in the trust, the trust may need to file Form 1041, U.S. Income Tax Return for Estates and Trusts, and it may have to pay a tax, she said.

“If the trust distributes any income to the beneficiaries in the same tax year it receives such income, then the income is passed through to the beneficiaries and the beneficiaries report the income on the beneficiaries’ individual tax returns (Form 1040) and pay any tax due,” she said.

Romania noted that it’s generally beneficial to report and pay tax at the individual rate instead of at the trust or estate level because the trust or estate will start to pay tax at the highest rate at only $13,150, whereas an individual does not pay tax at the highest rate until his or her income exceeds over $440,000.

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This story was originally published on Aug. 16, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.