• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
  • Home
  • WHO WE ARE
    • About Our Firm
    • Attorney and Staff Profiles
    • News and Events
  • Areas We Serve
    • Essex County, MA
      • Andover
      • North Andover
    • Hillsborough County, NH
      • Manchester
      • Nashua
    • Middlesex County, MA
      • Concord
      • Lexington
      • Wakefield
      • Winchester
      • Woburn
    • Rockingham County, NH
      • Exeter
      • Londonderry
      • Salem
  • Services
    • Asset & Business Planning
    • Elder Law & Medicaid Services
    • Estate And Gift Tax Figures
    • Family-Owned Businesses & Farms
    • Legacy Planning Services
    • LGBTQ Estate Planning
    • Loss Of A Loved One
    • Pet Planning
    • Power Of Attorney
    • Probate and Trust Administration
    • SECURE Act
    • Special Needs Planning
    • Young Families
  • Elder Law
    • Coping with Alzheimer’s
    • Hospice Care
    • Medicaid Planning
    • Nursing Home Planning
  • Resources
    • Elder Law
      • Elder Law & Medicaid Definitions
      • Elder law reports
      • Elder Law Resources
        • Elder Law Resources – Londonderry, New Hampshire
        • Elder Law Resources North Andover, Massachusetts
        • Nashua, New Hampshire Elder Law Resources
        • Woburn, MA Elder Law Resources
    • Estate Planning
      • Estate Planning Articles
      • Estate and Gift Tax Figures
      • Estate Planning Checkup
      • Estate Planning Definitions
      • Estate Planning Reports
        • Advanced Estate Planning
        • Basic Estate Planning
        • Estate Planning for Niches
        • Trust Administration
      • Incapacity Planning Definitions
      • Is Your Estate Plan Outdated?
      • Top 10 Estate and Legacy Planning Techniques
    • Free Estate Planning Worksheet
    • Frequently Asked Questions
      • Asset Protection Planning
      • Business Planning
      • Charitable Gifting
      • Estate Planning
      • Elder Law
      • Frequently Asked Questions for Families Without an Estate Plan
      • Incapacity Planning
      • Legacy Wealth Planning
      • LGBTQ Estate Planning
      • Medicaid Planning
      • Trust Administration & Probate
      • Wills and Trusts
    • Medicaid Calculator
    • Newsletters
    • Pre Consultation Form
    • Presentations
    • Probate and Trust Administration
      • Bereavement Resources
      • How to Know if You Need Extra Help With Your Grieving
      • Loss Of A Loved One
      • Probate Resources
        • Nashua, New Hampshire Probate Resources
        • Probate Resources – Londonderry, New Hampshire
        • Probate Resources – North Andover, MA
        • Probate Resources – Wakefield, Massachusetts
        • Woburn, MA Probate Resources
      • The Mourner’s Bill of Rights
      • Things You Need To Do When a Loved One Passes Away With a Trust
      • Things You Need To Do When a Loved One Passes Away With a Will
      • Trust Administration & Probate Definitions
    • Published Books
  • Seminars
    • Live Seminars
    • Online Seminars
  • Videos
  • Contact Us
  • Blog
  • Reviews
    • Our Reviews
    • Review Us

DeBruyckere Law Offices, PC

Serving Southern New Hampshire & Essex Country, Massachussetts

Call us today(603) 894-4141

(978) 969-0331

Online Seminars
Attend Free Seminar
Home » Trust Administration » Do Irrevocable Trusts Pay Capital Gains Taxes?

Do Irrevocable Trusts Pay Capital Gains Taxes?

June 1, 2021Trust Administration

North Andover trust attorneys

One of the most common additions to a well thought out estate plan is a trust, sue in large part to the fact that a trust can accomplish such a wide range of estate planning goals. In order to know whether a trust could be a beneficial addition to your estate plan, you need to better understand your trust options and how each type of trust operates as well as the various benefits each type of trust offers. The North Andover trust attorneys at DeBruyckere Law Offices explain when an irrevocable trust pays taxes and who pays the tax.

Revocable vs. Irrevocable Trusts

Trusts all fall into one of two categories – testamentary or living trusts. A testamentary trust is activated by a provision in the Settlor’s Will at the time of death whereas a living trust activates once all formalities of creation are in place and the trust is funded. Living trusts can be further divided into revocable and irrevocable living trusts. Because a testamentary trust is activated by a provision in the Settlor’s Will, and a Will can always be revoked up to the time of the Testator’s death, a testamentary trust is also revocable up to that point.

Capital Gains Taxes

Capital gains taxes are paid when you realize a gain on the sale of an asset. For example, if you purchased real property for $100,000 and sold it ten years later for $200,000, you would realize a gain of $100,000. Determining when capital gains taxes are due, how to calculate the gain upon which the tax is paid, and how much tax is due can be quite complicated because of the numerous and varied factors involved and the complexity of the tax laws.

Irrevocable Trusts and Capital Gains Taxes

Whether or not capital gains taxes are due after the sale of a trust asset will depend on several factors, starting with the type of trust involved. If the trust is a revocable trust, the trust is not usually a separate tax entity during the lifetime of the Settlor. As such, the Settlor retains incidents of ownership over the property held by the trust. If a trust asset is sold, and a gain is realized, triggering a capital gains tax obligation, that gain must be reported on the Settlor’s personal tax return.

Conversely, an irrevocable trust is typically a separate tax entity because when you transfer ownership of property into it, you give up control and any opportunity to take the assets back. For this reason, gains or losses are not reported on the Settlor’s personal tax return. Unfortunately, however, that is not the end of the capital gains tax analysis. You must still consider what type of irrevocable trust is involved.

A simple irrevocable trust is required to disburse all income made by the trust every tax year.  Those disbursements are then taxable to the beneficiaries as income. Some irrevocable trusts, however, are more complex and are permitted by law to retain income.  This type of irrevocable trust may only distribute some of the income to the trust beneficiaries. Capital gains, however, are not considered to be income to irrevocable trusts. Instead, capital gains are viewed as contributions to the principal. Consequently, if the trust sells an asset and realizes a gain, that gain would not be distributed, meaning the trust would have to pay taxes on the gain as profit to the trust.

Transfer to a Beneficiary

If an irrevocable trust distributes, or transfers, an asset to a beneficiary, instead of selling the assets and distributing the gain, then the beneficiary becomes responsible for any taxes due. Although the initial distribution may not be taxable, capital gains taxes may become due if the beneficiary sells the asset down the road. In that case, the amount of capital gains tax due will usually be calculated using the value of the assets at the time it was distributed to the beneficiary as the basis, not the value of the asset at the time it was originally purchased.

Contact North Andover Trust Attorneys

For more information, please join us for an upcoming FREE seminar. If you have additional questions about how capital gains taxes impact an irrevocable trust, contact the North Andover trust attorneys at DeBruyckere Law Offices by calling (603) 894-4141 or (978) 969-0331 to schedule an appointment.

What is a trust?

A trust is a legal relationship where property is held by one party for the benefit of another party.

What does a Trustee do?

The person who creates a trust is referred to as the “Settlor”, “Trustor” or “Grantor.” The Settlor transfers property to a Trustee, appointed by the Settlor. The Trustee holds that property for the trust’s beneficiaries as well as invests trust assets and administers the trust terms according to the terms created by the Settlor.

Why would I want my trust to be irrevocable?

A primary reason for creating an irrevocable trust is to protect the assets held by the trust from creditors and other threats.

  • Author
  • Recent Posts
Daniel DeBruyckere
Daniel DeBruyckere
Attorney Daniel A. DeBruyckere has been practicing law in New Hampshire and Massachusetts since 1998, and has helped hundreds of clients with their estate planning and elder care issues. He is very well respected in the area of estate planning, probate, trust administration, elder law issues, and business planning.
Daniel DeBruyckere
Latest posts by Daniel DeBruyckere (see all)
  • Do You Need to Update Your Life Insurance? - June 30, 2022
  • Understanding a Step Up in Basis for Tax Planning - June 28, 2022
  • Legal Options for Co-Owning Property in Massachusetts - June 23, 2022

Other Articles You May Find Useful

DeBruyckere Law Offices, PC | Estate Planning & Medicaid Attorneys
How Can an Incentive Trust Help Me?
North Andover trust attorneys
How Much Does a Trustee Get Paid?
Londonderry trust attorney
When Does a New Hampshire Trust Terminate?
Londonderry trust administration attorneys
5 Reasons to Hire an Attorney If You Are the Trustee
Woburn trust attorneys
What Type of Trust Is Right for Me?
North Andover estate planning attorney
Why Would I Create an Intentionally Defective Trust?

Download our free Estate Planning Worksheet

There's a lot that goes into setting up a comprehensive estate plan, but with our FREE worksheet, you'll be one step closer to getting yourself and your family on the path to a secure and happy future.
  • This field is for validation purposes and should be left unchanged.

Follow Us

  • Facebook
  • Twitter
  • Linkdin
  • Youtube

Blog Subscribe

  • This field is for validation purposes and should be left unchanged.

Testimonials

I felt complete trust and confidence in Dan DeBruyckere and his staff. They have a caring, low-key approach and there is no pressure to add products to the estate plan; rather he makes me aware of changes in the law, etc. I always learn something new to assist me in our planning!

LN

Your seminar was the only seminar we attended without financial advisors wanting to invest our money instead of protecting it! The information this firm provided was easy to understand even though it is a difficult topic. Thank you for all of your help!

HR

We both felt so comfortable in they way our Estate Planning was handled. We felt like someone was watching out for our best interest. Everyone we worked with at the firm was thorough, and explained everything in a way where we could walk away feeling like everything was complete.

RS

A truly great experience all the way through. Felt like we were a part of the family! Thank you.

LW

We could not have picked a more qualified law firm. Everyone that we came in contact with made us feel at ease.

Happy Client

DeBruyckere Law Offices, PC footer

Connect with Us

  • Facebook
  • Twitter
  • Linkdin
  • Youtube
footer-logo

© 2022 DeBruyckere Law Offices
All Right Reseved.

Attorney Advertisement

© 2022 American Academy of Estate Planning Attorneys, Inc.