Tax reporting liquidating trust
For distributions to beneficiaries between January 1, 2013 and March 6, 2013, the election may allow the distributions to be taxed to the beneficiaries at the lower 2012 rates and to escape the Medicare surtax. The fiduciary should weigh the potential income tax savings against the possible disadvantages of distributions, such as exposing the distributed assets to the beneficiaries’ creditors or to their spouses in the event of divorce.Also, if the trust is exempt from generation-skipping transfer (GST) taxes, the transfer tax savings from accumulating income in the trust may outweigh any income tax savings from distributions. Generally, estates and trusts are taxed on a calendar year basis, but estates may elect to be taxed on a fiscal year basis.Generally, when an estate or trust distributes an asset in-kind to a beneficiary (as opposed to liquidating the asset and distributing cash), there is no gain or loss to the estate or trust, and the beneficiary takes a carryover basis in the asset.However, the estate or trust may elect to recognize the gain, in which case the beneficiary takes a basis in the asset equal to its fair market value on the date of distribution.
That makes most revocable trusts qualify as grantor trusts.Grantor and non-grantor trusts For tax purposes, the key distinction in a family trust is whether it qualifies as a grantor trust.To be a grantor trust, a trust must meet at least one condition out of a list of requirements.In addition, powers like being able to take trust income, retaining a remainder or reversionary interest in the trust, or having certain administrative powers over trust assets can lead to grantor trust status.The benefit of grantor trust treatment is that the trust doesn't have to file a separate tax return at the entity level.