Taxation of liquidating trusts

Then, the shareholders are treated as exchanging their stock for the FMV of the assets distributed in complete liquidation, with the resulting gains or losses at the shareholder level.When determining whether a closely held corporation should be liquidated, the tax consequences to the shareholders should be considered.

A trust may earn income in the form of interest on funds held in a bank account, for example, or rent paid by a tenant living in a house owned by the trust.

If you create a revocable trust, known as a grantor trust by the IRS, all trust income is taxed as your personal income, and you must report it on your Form 1040 tax return even if it remains in the trust.

331 for the difference between the FMV and the shareholder’s basis in the stock).

As a result, the tax consequences of a subsequent sale of the assets by the shareholder should be minimal. The corporation is treated as selling the distributed assets for FMV to its shareholders, with the resulting corporate-level tax consequences.

The transfer of assets to an irrevocable trust, or to the beneficiary of a revocable trust, is a taxable event resulting in gift tax liability.

As of 2012, the gift tax exclusion is ,000 per year per beneficiary, except that gifts to your spouse are never subject to gift tax.

But if the amount of the receivable that the shareholder ultimately collects differs from the amount that the corporation distributed, the shareholder recognizes gain or loss for the differences in the amounts reported and collected. Observation: The current reduction of the maximum tax rate on capital gains and on qualifying dividends to 15% through 2012 somewhat mitigates the traditional preference for a sale or exchange transaction (e.g., a Sec. However, under current law, distributions made after 2012 will be taxed at higher capital gain and dividend rates.

A distribution is treated as one made in complete liquidation of a corporation if it is one in a series of distributions in redemption of all the stock of the corporation pursuant to a plan of liquidation (Sec. As a result, all the distributions necessary to effect a complete liquidation of a corporation do not have to take place on the same date or even in the same year. 80-177 raises the issue of the constructive receipt of assets by shareholders when a corporation adopts a plan of liquidation and the shareholders are entitled to a liquidation distribution at any time after a certain date. Therefore, taxpayers should consider making the final distribution before 2013. A shareholder may claim a loss on a series of distributions only in the year the loss is definitely sustained.

331, a liquidating distribution is considered to be full payment in exchange for the shareholder’s stock, rather than a dividend distribution, to the extent of the corporation’s earnings and profits (E&P).

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