Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
Can capital losses in trust benefit the beneficiaries?
Posted by: Macolyte, November 28, 2009 05:06PM
I am the trustee of a bypass trust which needs to be distributed before the end of 2010. It turns out to have significant capital losses which were realized this year (3/09) with the sale of most of the original fund stocks and bonds and re-purchase of other securities. The latter have appreciated somewhat since that time, but only recovered about 30% of the loss. I have several questions:

1.) If I distribute the assets - liquidated or not - will the capital losses in the trust convey to the beneficiaries? If so, can those capital losses be used to offset their own capital gains and/or $3000 in income? Does it make a difference whether or not I liquidate the current portfolio?

2.) If those capital losses do go to the beneficiaries, does it make a difference whether I make the distributions in calendar year 2009 or 2010? If I distribute in 2010, how do the capital losses in 2009 get handled?

Thanks.


Re: Can capital losses in trust benefit the beneficiaries?
Posted by: Kaye Thomas, November 30, 2009 05:44PM
This is a complicated area, but the general rule is that a capital loss carryover of a trust that remains unused on the trust's final return becomes a deduction of the beneficiary succeeding to the trust's property. You don't have to liquidate all the assets, but you have to distribute all the assets, and of course any capital losses built into assets that are distributed in kind won't be allowed to the recipient until the asset is sold.

Assuming the trust is using the calendar year for tax reporting, the beneficiaries won't be able to claim the loss on a 2009 return unless the trust is fully liquidated by the end of the year. If you don't get the trust liquidated this year (so 2009 isn't the final year for the trust), the 2009 loss will go on a 2009 fiduciary income tax return for the trust (Form 1041), with any unused portion carrying over to 2010, so that a liquidation in 2010 will allow use of the loss by beneficiaries in that year. See instructions for Form 1041 (available at [www.irs.gov]), especially the discussion of excess deductions on termination, beginning on page 34.

Kaye Thomas
Fairmark.com



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