Inclusion of Capital Gains in Distributable Net Income for Trusts and Estates: Allocations for Optimal Tax Treatment

Description

The treatment of capital gains held within a trust or estate involves complex tax rules and effective planning for both fiduciary accounting and estate planning. Trusts, estates, and tax counsel must understand essential planning methods and potential pitfalls in treating capital gains as DNI.

Where the executor of the estate or administrator of the trust has the discretion, the general practice is to distribute income whenever possible. However, trust accounting rules, as well as IRC 643, generally treat capital gains as part of the corpus of the trust.

The current tax treatment of trusts provides a significant incentive for getting capital gains out of a trust. Currently, trusts are taxed at the maximum rate on any capital gains above the statutory threshold.

Additionally, these amounts are subject to the 3.8% NIIT, which results in a much higher tax rate on trusts than on individuals. Achieving lower overall taxes can be as simple as including capital gains in DNI rather than added to the corpus amount.

Getting the most beneficial treatment of capital gains income involves careful planning on the part of estate planners and tax counsel. If capital gains are included in DNI, lower overall taxes are generally achieved. Counsel must pay close attention to ensure the trust document and the trust return permit distribution of capital gains to beneficiaries as income.

Listen as our experienced panel discusses trust document provisions to allow treating capital gains as DNI, state and local requirements and issues, and best practices for making the most tax-advantaged treatment of trust capital gains.