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Allocating Capital Gains to Distributable Net Income in Estates and Trusts: Achieving Optimal Tax Treatment

Note: CLE credit is not offered on this program

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Wednesday, January 17, 2024

Recorded event now available

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This course will provide tax advisers and counsel with a drill down into the rules and practices covering the inclusion of capital gains in distributable net income (DNI) for trusts and estates. The panel will review the requirements within trust documents to allow treating capital gains as DNI and explore state and local requirements for inclusion of capital gains in fiduciary accounting income (FAI) where the trust's governing document does not contain such a provision.

Description

The treatment of capital gains held within a trust or estate is one of the more complex aspects of fiduciary accounting and taxation. The general rule is that an estate or trust must file a tax return and pay income tax on any undistributed net income.

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 and 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 ($15,200 in 2024).

Additionally, these amounts are subject to the 3.8 percent NIIT, which results in a trust's capital gains being potentially taxed at a much higher rate than an individual would pay. Taxpayers can usually achieve lower taxes by including capital gains in DNI rather than the corpus amount.

Getting the most beneficial treatment of capital gains income involves careful planning by estate attorneys, financial planners, and tax accountants. By including capital gains in DNI, taxpayers may realize overall lower taxes. Tax advisers 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 delves into the complex intersection of FAI and IRS rules to provide tax advisers and preparers with best practices for making the most tax-advantaged treatment of trust capital gains.

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Outline

  1. FAI under IRC Section 643
  2. Treas. Reg. Section 643(a)-3(b) provisions for including cap gains in DNI
    1. The instrument provides for inclusion in trust accounting income
    2. Allocated to corpus but treated as a distribution
    3. Actually distributed
  3. State unitrust rules
  4. Non-tax considerations

Benefits

The panel will review these and other key issues:

  • What are the general requirements of IRC 643 on the treatment of capital gains and FAI?
  • How can the trust document be structured--and interpreted--to allow the inclusion of capital gains in DNI?
  • What states or localities allow total-return-investing under the UPAIA?
  • What are local and state provisions that may allow capital gains inclusion in DNI?

Faculty

Doyle, Jere
Jeremiah W. (Jere) Doyle, IV
Senior Vice President
Bank of New York Mellon

Mr. Doyle provides clients with integrated wealth management advice on how to hold, manage and transfer their...  |  Read More

Patterson, Jacqueline
Jacqueline Patterson, CPA, JD
Partner
Buchanan & Patterson

Ms. Patterson specializes in tax, estate and financial transactions, with an emphasis on asset protection and...  |  Read More

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