First of all, I am not very well versed with trusts in general. I will do my best to give the details of the situation at hand, but please feel free to ask for more information if I do not supply enough.

There is a grantor trust set up with two beneficiaries. One of the beneficiaries and a third party had 50/50 ownership in a building. The third party passed away and the trust purchased the deceased's interest in the building. The beneficiary with the other half of the interest now wants to sell the building on an installment plan. I need to know the tax treatment of the building when it is transferred/distributed to the beneficiary with the other half of the interest. Does he have to claim income from the sale based on FMV or the original basis when purchased by the trust? Also, would there be any other taxes on the distribution?

#1;It depends; assets placed in a trust are typically able to avoid some kinds of taxes, but income tax will still be due at the time of distribution. Revocable and irrevocable trusts are treated quite differently under U.S. tax law. The main reason for this disparity is that the assets of a revocable trust are considered the property of the grantor, while an irrevocable trust is treated as an independent legal entity that owns its assets. Generally, all revocable trusts are, by definition, grantor trusts under the Internal Revenue Code. Some irrevocable trusts can also qualify as grantor trusts under the Internal Revenue Code If the trust is an irrevocable grantor trust, then, money that is distributed from the trust to the beneficiary is considered income for the beneficiary receiving the fund. Typically, when an irrevocable trust is established the funds are not distributed all at once, but instead are paid out over a period of time. Any money received by a beneficiary of the trust must be declared as income for the year in which it was received. It will be taxed at the recipient's tax rate for that year. Trust income is generally taxed at higher rates than personal income, and distributions are deductible from the trust income, so both trust and beneficiaries benefit from distributions, whether from income or principal. A mass distribution of all assets on the death of a trust grantor may be subject to estate taxes, but those have a $5 million exemption, so most estates won't produce trust or beneficiary taxes. Beneficiaries who receive distributions must include the income from the distributions in their income calculations on their annual tax return. Beneficiaries receive a Schedule K-1, which is tax Form 1041, at the conclusion of each tax year with the details of the relevant trust that they need to include on their federal income tax return. That information includes the total amount of distribution funds that the beneficiaries received during the course of the year. Beneficiaries are taxed on the income at the same rate as other income


#2;An irrevocable trust is responsible for paying its own taxes. Once money is distributed, the beneficiary is the one responsible for paying income taxes. This amount varies greatly depending on the person's status and situation, and should be checked with a tax professional when filing. Also, in some cases the person who claims the beneficiary as a dependent can include the funds as part of his income, in which case the beneficiary doesn't need to file.


Revocable grantor trusts do not provide any estate tax benefits. When the grantor dies, the trust will be considered in his gross estate and could incur estate taxes. This is different from other types of trusts, called irrevocable trusts, which are not included in the gross estate. Gift taxes may incur if gifts are given out of the trust in excess of the annual exclusion ($14k in 2014). Both of these tax rates are progressive, projected to max out at 55 percent in 2014.

note;if the trust is a Trust is a revocable “grantor” Trust, then
as the grantor established the Trust and retained the power to substitute assets or to revoke the Trust,the grantor Trust is taxable to the grantor, whether or not any distributions were made from the Trust to the grantor during the tax year in question. In other words, if you have a grantor Trust, all the property in the Trust is treated as your property for income tax purposes. In fact, many grantor Trusts don’t even have their own tax identification number; instead, the income and expenses incurred by such Trusts are simply reported to the IRS under their grantor’s social security number.

for example,
A creates the A trust, a grantor Trust. The Trust has $30,000 in income for the year and it distributes $10,000 to B, who is not a grantor. The entire $30,000 is included on A's tax return; B does not include the distribution to her on her income tax return.