What is the capital gains tax rate for assets held in a trust?
Learn about the capital gains tax rate for assets held in a trust and the taxation guidelines relevant to trusts.
The capital gains tax rate for assets held in a trust can vary depending on several factors, including the type of trust, the duration of the trust, the income distribution methods, and the beneficiaries' tax status. Here's a general overview of how capital gains taxes on assets held in a trust are calculated:
Type of Trust:
Revocable Living Trust: Assets held in a revocable living trust are typically treated as owned by the grantor (person who established the trust) for tax purposes. Capital gains on assets in this type of trust are generally reported on the grantor's individual tax return, and the grantor's individual capital gains tax rates apply.
Irrevocable Trust: Assets held in an irrevocable trust are typically considered separate legal entities for tax purposes. Capital gains generated by assets in an irrevocable trust are generally taxed at the trust level.
Duration of the Trust:
Simple Trust: A simple trust is required to distribute all its income (including capital gains) to the beneficiaries each year. In this case, the capital gains are typically taxed at the beneficiary's individual tax rates.
Complex Trust: A complex trust has the flexibility to distribute income to beneficiaries or retain it within the trust. If the trust retains capital gains and does not distribute them, the trust itself is subject to income tax on those gains.
Taxable Income Distribution:
- If a trust distributes capital gains to beneficiaries, the beneficiaries report those gains on their individual tax returns. The beneficiaries are then subject to their respective individual capital gains tax rates.
Trust Tax Rates:
- Irrevocable trusts have their own set of tax brackets and rates, which differ from individual tax rates.The highest federal tax rate for irrevocable trusts was 37% for income over $13,050.
Beneficiary's Tax Rate:
- When capital gains are distributed to beneficiaries, the tax rate that applies is based on the beneficiary's income and filing status. Beneficiaries may be subject to the same capital gains tax rates that apply to individuals.
Net Investment Income Tax (NIIT):
- High-income beneficiaries may also be subject to the 3.8% Net Investment Income Tax (NIIT) on the lesser of their net investment income or the amount by which their income exceeds certain thresholds ($200,000 for singles and $250,000 for married couples filing jointly).
It's important to consult with a tax professional or estate planning attorney when dealing with capital gains taxes in trusts. The specific terms of the trust agreement, the income distribution policies, and the individual tax status of both the trust and the beneficiaries can impact the tax treatment of capital gains within a trust. Tax laws can change over time, so staying updated and seeking professional advice is essential.
Capital Gains Tax Rate for Trust-Held Assets: Trust Taxation Guidelines.
The capital gains tax rate for trust-held assets depends on the type of trust and the income tax bracket of the beneficiary.
Types of trusts
There are two main types of trusts: revocable trusts and irrevocable trusts. A revocable trust is a trust that can be changed or revoked by the grantor (the person who created the trust) at any time. An irrevocable trust is a trust that cannot be changed or revoked once it is created.
Income tax bracket of the beneficiary
The income tax bracket of the beneficiary is the tax bracket that the beneficiary would be in if they received the capital gains directly.
Capital gains tax rates for trust-held assets
The following table shows the capital gains tax rates for trust-held assets in 2023:
|Type of trust||Income tax bracket of the beneficiary||Short-term capital gains tax rate||Long-term capital gains tax rate|
|Revocable trust||Income tax bracket of the grantor||Same as grantor's income tax bracket||Same as grantor's income tax bracket|
|Irrevocable trust||Income tax bracket of the trust||10%-37%||0%-20%|
A grantor creates a revocable trust and transfers $100,000 in assets to the trust. The grantor is in the 37% income tax bracket. The trustee sells one of the trust's assets for a gain of $50,000. The trust's capital gains tax rate will be 37%, the same as the grantor's income tax bracket.
If the grantor had created an irrevocable trust instead, the trust's capital gains tax rate would have been 0%-20%, depending on the amount of the trust's income.
Trust taxation guidelines
Here are some additional guidelines for trust taxation:
- Trusts are separate taxable entities. This means that trusts are taxed on their own income and losses, regardless of the grantor's or beneficiary's income tax bracket.
- Trusts can be taxed at a higher rate than individuals. This is because trusts are not entitled to the same personal exemptions and deductions as individuals.
- Trusts can be used to defer capital gains taxes. This is because trusts can distribute capital gains to beneficiaries over a period of time.
It is important to consult with a tax professional to determine how the capital gains tax rules apply to your specific trust situation.