The Internal Revenue Service typically implements trust funds taxes based on an entities annual income, not the value of individual assets, such as stocks and mutual funds. While stocks held in a trust fund are not taxable, the fund can face tax liability if it earns a profit from the sale of securities. If you inherit a trust fund as part of an estate, you can also face federal estate taxes, depending on the value of the overall estate.
Trust fund are subjected to taxes much like any other form of financial utility today. Although individuals do not face tax liability when they come into ownership of a trust fund, they may be forced to pay capital gains tax if stocks in the fund are sold for profit.
Finding More Information About Capital Gains
When you sell an asset for a profit, such as share of stock, the IRS can require you to pay capital gains taxes. Trust funds, like individuals, can also earn a profit from the sale of assets. Capital gains or losses are determined by the basis of assets. If you buy an asset, its basis is typically the purchase price you paid. However, the basis of an asset in a trust fund might be different from an asset you purchase. If you received your trust fund as a gift, or through an inheritance, the basis of its individual assets will typically be their value on the day you took ownership of the fund. This information is particularly useful if you are in a situation where, for example, distribution of stock form an irrevocable trust occurs.
Looking at Stock Taxation Rules
You do not face tax liability when you receive a trust fund, regardless of the types of assets it holds. However, if you are selling stock in an estate account for a profit, the fund can owe capital gains taxes. The basis of a share of stock determines whether it earns a profit or incurs a loss when sold. For example, if shares of stock within the trust fund were valued at $25 per share on the day you took control of the fund, and are sold for $30 per share, the fund earns a capital gain of $5 per share.
Obtaining Trust Fund Tax Filing Documents
The majority of trust funds are considered entities by the IRS, and often require trust fund taxes to be paid. The owner of the fund, or in certain cases the fund's trustee, must typically file a tax return if the fund earns at least $600 during the tax year. If, for example, you sell shares of stock within the trust fund, and the fund earns a $1,000 profit, you must file a tax return for the fund. If the trust fund falls under the governance of U.S. tax laws, and you are a nonresident alien of the U.S, you must file a tax return for the fund regardless of earnings levels. Undistributed earnings held in trust funds is typically taxed at a higher rate than income earned by individuals.
Reporting Estate Taxes
Depending on the value of the trust fund you inherit, you may have to pay estate taxes. If the decedent died in 2017, the IRS requires you to file an estate tax return if the estate value is over $5.49 million. If the estate value is at or under this amount, you won't have to pay estate taxes or file the return. It is important to note that the IRS looks at the total estate value to decide whether you need to pay estate taxes. If you only inherit a trust fund worth $2 million that is part of a $7 million estate, you still will be liable for federal estate taxes since the total estate value exceeds the $5.49 million threshold.
- IRS: Topic 409-Capital Gains and Losses
- IRS: Instructions for Form-Who Must File
- IRS: Form 1041-U.S. Income Tax Return for Estates and Trusts
- Turbo Tax: Estates and Trusts
- IRS: Estate Tax
- IRS: Frequently Asked Questions on Estate Taxes
- Internal Revenue Service. "Instructions for Form 5227: Split-Interest Trust Information Return," Pages 1-2. Accessed July 24, 2020.
Michael Evans graduated from The University of Memphis, where he studied photography and film production. His writings have appeared in numerous print and online publications, including International Living, USA Today, The Guardian, Fox Business, Yahoo Finance and Bankrate.