Capital Gains Tax and Trusts

Web Admin - Thursday, June 25, 2015

capital gains tax, Illinois estate planning lawyerToday, increasing numbers of individuals are turning to trusts as opposed to wills for their estate planning. Trusts are often advantageous over wills because they allow for greater flexibility and control over assets. It is important to know the impact of capital gains tax on the assets that fund a trust.

Step-up in Basis

Capital assets include items like a house, stocks or bonds, and machinery. When one of these items is sold, the difference in the sale price and the original purchase price is considered a capital gain or loss. If an item is sold and a profit is realized, the capital gain is taxed.

If an individual forms a grantor-type trust, all appreciated assets that are transferred into the trust (items like real estate or a stock portfolio) are eligible to receive a step-up in basis upon the death of the grantor. Basis is the cost of the property or asset. A step-up in basis is a readjustment of the value of an asset to its current value for tax purposes upon inheritance of the asset. This is important because it minimizes the beneficiary’s capital gains taxes going forward.

For example, let’s say a grantor purchased an asset for $50 and transferred it to a trust. The grantor’s basis is $50, meaning if the asset were to be sold, the difference between $50 and the sale price would be the amount subject to the capital gains tax. Now, let’s say that at the time of the grantor’s death, the value of the asset is $100. The beneficiary receives a step-up in basis, meaning his or her basis is $100, not the $50 that the grantor originally paid. This is important because if the beneficiary decides to immediately sell the asset for $100, she will not be subject to any tax. Further, any sale in the future after the asset increases in value will be subject to tax on the difference between the sale price and $100, as opposed to $50 if a step-up in basis was not available.

An important consideration is when the step-up in basis is applied. For example, how is the step-up in basis determined if a married couple each owns half of an asset through the use of separate trusts and they die at different points in time? If the deceased spouse’s share is transferred to the surviving spouse, the surviving spouse will receive a step-up in basis. When the surviving spouse dies and the trust is inherited by the beneficiaries, they will also receive a step-up in basis.

Finally, it is important to be aware of the Medicare tax on “unearned” net investment income. This imposes a 3.8 percent tax on the net investment income, which includes capital gains, of joint filers who have a modified adjusted gross income of greater than $250,000 or single filers with an adjusted gross income of greater than $200,000.

Help Forming Your Trust

If you would like more information about forming a trust, you should reach out to an experienced Illinois estate planning attorney today. Our firm proudly represents individuals throughout the northwest suburbs, including areas such as Crystal Lake, Inverness, Schaumburg, Kenilworth, Long Grove, Palatine, and Barrington.

About the Author: Attorney Jay Andrew is a founding partner of Drost, Gilbert, Andrew & Apicella, LLC. He is a graduate of the University of Dayton School of Law and has been practicing in estate planning, probate, trust administration, real estate law, residential/ commercial leasing, contracts, and civil litigation. Since 2005, Jay has been a Chair of the Mock Trial Committee for the Annual Northwest Suburban Bar Association High School Mock Trial Invitation which serves over 240 local Illinois students each year.

Trust Payments and the Capital Gains Tax

Web Admin - Wednesday, August 27, 2014

capital gains tax in IllinoisThe capital gains tax exists as a way for the government to tax the income that flows to investors from certain investments. In general, the capital gains tax applies to the sale of most assets other than inventory. This includes the sale of things like stocks, bonds, and real estate. The current capital gains tax rates vary depending on a person's income bracket. According to the IRS, the capital gains tax for people in the 25 percent, 28, percent, 33 percent, and 35 percent income tax brackets would be 15 percent.

People paying taxes in the highest bracket, 39.6 percent, would pay 20 percent in capital gains tax, and people in the other, lower tax brackets do not pay capital gains tax at all for most capital gains income. Additionally, the Affordable Care Act also introduced a further 3.8 percent tax on capital gains income for people earning either $200,000 a year as single filers, or $250,000 a year as married filers, which went into effect at the start of 2013.

This capital gains tax can interact with trusts in complex ways, and trustees should be aware of the issues created by the capital gains tax and trusts. First, trustees should be aware of how capital gains affects the way that they manage K-1 tax forms. Second, trustees should keep in mind the interaction between capital gains and the income distribution tax deduction that trusts are allowed to take.

K-1 Forms

K-1 forms are a type of tax form that exists to help the owners of pass through entities fill out their personal income tax returns. Pass through entities are entities like S corporations and some LLCs that do not pay taxes themselves, but instead pass the taxes on to the owners. Trusts, strictly speaking, are not actually pass through entities since the trust is responsible for paying some taxes, but the beneficiaries may also owe taxes based on distributions to them from the trust, so they often receive a K-1 form. As far as the need to report capital gains income on a K-1 form, that depends on the specifics of the trust. As a default rule, the capital gains and losses stay with the trust itself, but the trust instrument may choose to pass those along to the beneficiaries, which would result in the trustee needing to add them to the K-1 form.

Capital Gains and the Income Distribution Deduction

Capital gains may also have an effect on the trust's income distribution deduction, a tax deduction that trusts may take for amounts paid to an income beneficiary. The income distribution deduction is equal to the lesser of either (1) the distributions minus tax-exempt income or (2) the “distributable net income” minus tax exempt income. Capital gains may affect this distribution because it figures into the calculation of distributable net income under several circumstances, most commonly if the trust requires the trustee to distribute the gains to the beneficiaries.

Managing a trust is a complex task from both a legal and financial perspective. If you have questions, seek help from an experienced Illinois estate planning attorney. Our firm's skilled lawyers serve clients in many northwest suburban towns such as Inverness, Barrington, and Kenilworth.

About the Author: Attorney Jay Andrew is a founding partner of Drost, Gilbert, Andrew & Apicella, LLC. He is a graduate of the University of Dayton School of Law and has been practicing in estate planning, probate, trust administration, real estate law, residential/ commercial leasing, contracts, and civil litigation. Since 2005, Jay has been a Chair of the Mock Trial Committee for the Annual Northwest Suburban Bar Association High School Mock Trial Invitation which serves over 240 local Illinois students each year.

Recent Posts


pedestrian accident Des Plaines motorcycle accident attorney Illinois trusts attorney probate process Family Medical Leave Act criminal defense health insurance dispute murder defense Palatine probate lawyer Des Plaines drug crimes lawyer Fourth of July Illinois employment lawyer Crystal Lake accident attorney Retaliatory Discharge pregnant women Rolling Meadows residential real estate criminal hands free device car accident Chicago attorney Palatine employment law lawyer Policy Cancellation Illinois tax attorney speeding Schaumburg drug defense lawyer Schaumburg traffic lawyer Rolling Meadows personal injury lawyers probate lawyer Arlington Heights wills and trusts lawyers Chicago lawyer Illinois medical malpractice attorney Rolling Meadows business lawyer Buffalo Grove traffic attorney Illinois employment attorneys Schaumburg insurance lawyers golf accidents Schaumburg wrongful death attorney Barrington Illinois estate planning lawyer Illinois Transfer on Death Instrument Des Plaines injury law firm Illinois workplace discrimination attorney Arlington Heights car accident lawyer Illinois defective products attorney unauthorized overtime Rolling Meadows estate planning attorney medical malpractice compensation Schaumburg estate planning attorney car crash digital evidence Schaumburg employment attorney blended families vacation home fines cell phone accidents filing a medical malpractice claim pedestrian injuries, pedestrian fatality rollover car crashes Deer Park personal injury lawyer ken apicella Illinois personal injury attorney gift taxes Illinois civil litigation lawyer Arlington Heights tax lawyer estate tax Des Plaines DUI attorney Arlington Heights wills and trusts lawyer Mt Prospect Attorney deed transfer changes to mortgage law head on collisions Rolling Meadows Traffic Lawyer homestead rights life insurance claims deadly crashes car crash injuries new real estate form insurance dispute preventable medical errors Rolling Meadows employment law attorney Palatine civil attorney Illinois medical malpractice claim Arlington Heights pedestrian accidents Long Grove estate planning attorneys Barrington employment law attorney estate planning attorney Arlington Heights Traffic Lawyer Crystal Lake civil litigation lawyer Employment Discrimination Law creditors overtime violations texting while driving contracts Des Plaines collections attorney Barrington medical malpractice lawyers Buffalo Grove traffic lawyers personal injury accidents POA drug crime compensatory time mass shooting Buffalo Grove employment lawyer workplace sexual harassment Super Mario medical malpractice claims Illinois pedestrian accident attorney Illinois employment law attorneys Illinois employment laws Inverness insurance attorney Crystal Lake criminal defense attorney Deer Park criminal attorney Buffalo Grove personal injury lawyer bad faith insurance claims Illinois wrongful termination lawyer Arlington Heights TBI attorney Illinois medical malpractice lawyers Illinois mortgages license Illinois estate planning attorney Illinois traffic ticket lawyer products liability Illinois boating accident lawyer Schaumburg medical malpractice lawyer employee discrimination rumble strips Arlington Heights trucking lawyer real estate lawyer breathalyzer test food poisoning Palatine business attorney Illinois insurance claim dispute lawyers Barrington business law firm motorcycle accident Illinois insurance lawyer cell phone trust payments Crystal Lake business law attorneys Inverness injury lawyer employment contract, employment law, employment at-will, Deer Park employment law attorneys, contract, School Visitation Rights Act insurance agent negligence Arlington Heights medical malpractice lawyer Illinois lawyer Palatine personal injury lawyer Des Plaines texting and driving Arlington Heights employment attorney installment contracts swimming pools Schaumburg corporate attorney Fair Labor Standards Act appealing an insurance claim Arlington Heights traffic attorney home inspection lawyer Illinois jet ski accident lawyer Palatine Attorney child safety construction accidents, personal injury, wrongful death, Arlington Heights personal injury attorneys, workers' compensation insurance denial appeals Deer Park accident attorney digital media accounts, estate planning, Arlington Heights estate planning attorney, investment property Buffalo Grove law firm trucking accident lawyers Colin H. Gilbert Liquor Control Act Arlington Heights wills and trusts attorneys construction contracts how to avoid common denials of life insurance claims tax attorney Rolling Meadows insurance dispute lawyers fatal car accidents Illinois insurance disputes coronavirus lapse in policy Rolling Meadows probate lawyer Illinois driving without license special needs trust life insurance lawyer Home Sale Contingencies workers compensation civil litigation gift tax exemption, estate planning, estate planning strategies, Illinois estate planning, South Barrington estate planning attorneys bike accident wills Arlington Heights wills and trusts attorney Illinois business law atorneys estate planning Barrington personal injury attorney PTSD Schaumburg criminal law attorney Illinois speeding lawyer Home Remodeling Repair Act Barrington drug crime attorney Barrington estate planning attorney foreclosed rental property insufficient documentation unpaid overtime eluding a police officer Buffalo Grove personal injury attorney Inverness real estate lawyer Buffalo Grove injury lawyer institutional trustee low-ball insurance settlement unpaid assessment severance agreements Illinois attorney Arlington Heights criminal lawyer job lawyers Rolling Meadows employment attorney Arlington Heights accident attorney civil rights violation Buffalo Grove medical malpractice lawyers real estate leasing DUI attorney Illinois red light cameras pedestrian-automobile accident Crystal lake insurance dispute attorney fault based insurance unfunded trust Detainer Actions DUI Schaumburg estate attorney mortgage work unions traffic laws dog bites Do Not Resuscitate elder abuse Des Plaines insurance attorney Rolling Meadows traffic attorney Schaumburg Illinois car accident attorney Crystal Lake personal injury attorney living trust vs will boating DUI real estate forming a corporation in Illinois estate plan preventing accidents fiduciary rule Schaumburg real estate lawyer Chicago traffic lawyer denial of life insurance Illinois Workers’ Compensation Commission life insurance claim denial, denial of life insurance claim DUI penalities agent Barrington life insurance lawyer capital gains tax Arlington Heights car crash attorneys Inverness personal injury attorney probate claims real estate attorneys federal crimes Des Plaines accident attorney Rolling Meadows Attorney personal injury lawyer ACA Illinois collections attorney sole proprietorship sexual harassment employment attorney denied insurance claim Arlington Heights lawyer Schaumburg estate planning lawyer defective products lawyer Crystal Lake traffic attorney Riverwoods estate planning lawyer Des Plaines claims law firm medical malpractice probate claims process Illinois workers compensation lawyer Palatine corporate law attorneys healthcare foreclosure Illinois personal injury top life insurance claim denials subcontractor underinsured motorist paid sick leave Chicago insurance claim attorneys license suspension employees minimum wage Forcible Entry insurance denials social media after death life insurance policy Chicago car accident lawyer Arlington Heights personal injury lawyer Long Grove real estate lawyer Joliet general practice lawyers Barrington litigation attorney Palatine law firm Rolling Meadows insurance attorney financial advisors revenge porn wrongful termination, employment law, whistleblower protections, Illinois employment laws, discrimination in the workplace Chicago employment lawyer Crystal Lake car accident attorney trauma after an accident Rolling Meadows DUI lawyer IRS trench injuries living trust IRA trust transfer medical malpractice, missed diagnosis, delayed diagnosis, medical mistake, Deer Creek medical malpractice lawyers Illinois personal injury lawyer Schaumburg life insurance attorney cause-of-death exclusions Des Plaines criminal attorney FMLA car accident lawyer whistleblower protections nursing home negligence estate planning, death tax, succession plans, business estate plans, Barrington estate planning lawyers Inverness real estate attorney Illinois living will uninsured motorist Illinois traffic laws Landlord Tenant Ordinance Illinois Probate Act of 1975 Illinois employee rights attorney. probate fees Crystal Lake employment law attorney Rolling Meadows personal injury lawyer Illinois personal injury lawyers liability distracted driving accidents Illinois medical malpractice case Palatine real estate lawyer Palatine traffic accidents Chicago insurance law firm rest breaks Illinois estate planning law firm driving Des Plaines personal injury lawyer traffic tickets Crystal Lake employment attorney wrongful death Self-Directed IRA Accounts living wills auto accidents Chicago trucking accident attorney wills and trusts employment lawyer Chicago biking tips Deer Park real estate law firm Illinois wills and trusts attorneys trustee Inverness probate lawyer wage theft underfunded trust hit and run accident Rolling Meadows traffic law firm Deer Park workers compensation lawyer Illinois probate lawyer insurance negligence operating agreements employment law, meal breaks, rest breaks, hotel employees, Des Plaines employment law attorneys taxes personal injury, auto accident injuries, delayed injuries, serious injuries, Des Plaines personal injury attorneys Chicago corporate attorney dram shop law right to work Barrington criminal defense lawyer medical research Illinois estate planning Schaumburg personal injury lawyers internet Barrington criminal lawyer distracted driving accident victims wrongful termination Illinois will lawyer holiday statistics Illinois small business insurance claim denials Illinois rollover accident lawyers Illinois Wage Payment and Collection Act living trust benefits healthcare claims underage DUI senior citizens Barrington estate planning lawyer insurance claim dispute attorney Crystal Lake pet attorney accidental death benefits Buffalo Grove corporate attorney hiring employees clemency estate planning lawyer liability claims Illinois real estate lawyer Illinois drugs DMV Des Plaines civil attorney Buffalo Grove probate lawyer traumatic brain injuries Crystal Lake medical malpractice attorneys Rolling Meadows criminal attorney material misrepresentation denial of insurance claim estate planning for college students dynasty trusts BUI DGAA Thanksgiving insurance claim denial personal injury drunk driving statistics IRA benefits Illinois Trust Code car crashes Illinois insurance attorney Buffalo Grove car accident lawyer llinois Real Estate Lawyers Association Crystal Lake injury attorney civil litigation attorney estate attorney real estate closing caretaker rights Deer Park medical malpractice attorney advance healthcare directive Kenilworth estate planning attorney traffic crimes marijuana crimes attorney insurance dispute, insurance dispute lawyers, insurance claim denial, insurance claim delays, Rolling Meadows insurance dispute attorneys independent contractor insurance claim dispute Deer Park employment law attorney Inverness corporate attorney Palatine employment attorney premises liability DNR Schaumburg elder law lawyer murder Illinois traffic attorneys Illinois criminal defense attorney Barrington Traffic Lawyer attorney fees Chicago will attorney dealing with problem employees Mount Prospect elder law attorney Buffalo Grove life insurance attorney commercial leasing Des Plaines personal injury lawyers insurance agents Deer Park DUI lawyer Chicago estate planning lawyer BAC insurance claims license revocation digital information Arlington Heights injury attorney DUI defense defective products liens Schaumburg employment law attorneys Crystal Lake pedestrian accident lawyer Rolling Meadows life insurance claim denial attorney caregiver most common reasons for life insurance claim denials Barrington employment law firm Arlington Heights real estate lawyer privacy FSLA Inverness accident lawyer Illinois workplace lawyer Illinois home inspection bicycle accidents Arlington Heights insurance attorney Chicago estate planning Barrington attorney business litigation pedestrian accidents Crystal Lake employment lawyer cell phone tower data reckless homicide South Barrington real estate attorney product liability Palatine employment lawyer Illinois workers compensation attorney Chicago employment attorney Des Plaines Traffic Lawyer Crystal Lake tax lawyer car accidents Barrington personal injury lawyer beneficiary complications Barrington civil litigation attorney Arlington Heights employment law attorneys Palatine life insurance lawyer Deer Park traffic lawyer Palatine workers compensation lawyer boating under the influence Crystal Lake car accident lawyer car accident lawyers blood alcohol content criminal record income distribution deducation Illinois wills and trusts Barrington workers compensation attorney corporate law denied insurance claims Attorney Ken Apicella comp time criminal law Crystal Lake medical malpractice lawyer brain injury pizza emoji real estate contract power of attorney Exclusions marijuana employment law, Illinois employment laws commercial leases Arlington Heights Attorney Palatine trusts lawyer no contest clauses in terrorem provision Palatine estate planning lawyer real estate attorney Des Plaines drug lawyer automated cars South Barrington real estate lawyer Illinois insurance claim dispute lawyer digital assets, digital fiduciary, estate planning, digital content, Long Grove estate planning lawyers loopholes landlord traffic violations defense Palatine civil litigation lawyer federal regulations for LLCs Rolling Meadows car accident lawyers overtime pay murder charges Palatine injury attorney slip and fall accidents traumatic brain injury Rolling Meadows insurance dispute lawyers, insurance dispute employee rights Rolling Meadows marijuana attorney Palatine insurance lawyer Illinois law Inverness DUI lawyer Palatine punch death personal injury law firm employee misclassification college kids Palatine corporate attorney jet ski accidents Jay Andrew Crystal Lake law firm anesthesia errors CAM estate planning trusts Barrington employment attorney Schaumburg construction accident lawyer Schaumburg personal injury lawyer Palatine elder law attorney real estate zoning Inverness elder law lawyer personal injury attorney Illinois employment law attorney rent to own real estate contracts spinal cord injuries pet law Illinois injury lawyer insurance disputes insurance claim drunk driving breach of contract Palatine construction attorney suspended license Mount Prospect real estate lawyer Food and Drug Administration's Food Safety Modernization Act car collision elder law Rolling Meadows criminal lawyer Illinois Human Rights Act owner responsibility Illinois registered agent Schaumburg civil litigation attorney surgical mistakes insurance dispute attorney motorcycle accident lawyer vacation home insurance claim delay power of attorney for healthcare Des Plaines tax law firm Schaumburg car accident attorney Palatine drug lawyer Schaumburg personal injury attorney employment contract Illinois insurance dispute lawyers bicycle dooring accidents construction accidents Rolling Meadows tax attorney employment law Barrington injury attorney Mount Prospect wills and trusts lawyers Colin Gilbert workers compensation benefits Illinois real estate Des Plaines real estate attorney Long Grove estate planning Schaumburg injury lawyer BAIID insurance adjusters GM ignition switches Chicago life insurance attorney Illinois DUI attorney Rolling Meadows medical malpractice lawyers disability benefits natural gas explosion Illinois business lawyer crossover accidents drug crimes lawyer workers comp field sobriety test Rolling Meadows drug defense attorney traffic deaths manufacturing Illinois employment law Illinois employment law firm Illinois corporate lawyer traffic violations pain and suffering Schaumburg Attorney Palatine criminal defense lawyer Crystal Lake estate planning lawyer drug possession Des Plaines pet law attorney startup company Buffalo Grove real estate attorney life insurance Long Grove wills and trusts attorneys Illinois LLC creation Illinois trucking safety Buffalo Grove criminal defense lawyer Crystal Lake personal injury lawyer expungement jet ski guardianship attorney personal injury claims Schaumburg probate attorney Kenilworth estate planning lawyer Illinois construction accident attorney Whistleblower Claims involuntary manslaughter digital assets license reinstatement insurance attorney spinal cord injury Buffalo Grove insurance claim dispute lawyers Chicago will attorney, social media platforms, Illinois estate planning lawyer, Illinois job attorney Illinois motorcycle accident lawyer Rolling Meadows litigation lawyer landlord tenant law insurance disputes, Illinois insurance disputes, Illinois insurance dispute attorneys, denied insurance claims, Arlington Heights insurance dispute attorneys Rolling Meadows insurance lawyer back injuries Des Plaines real estate lawyer Class A misdemeanor Legal Info Inverness civil lawyer Illinois insurance claims lawyers condo association Crystal Lake will lawyer meal breaks Barrington boating accident attorney small business Illinois bicycle safety Crystal Lake traffic lawyer Rolling Meadows corporate lawyer Illinois traffic attorney ObamaCare Illinois traffic accident lawyer privacy laws Illinois Smoke Detector Act problem employees Schaumburg criminal attorney Rolling Meadows accident lawyer commercial real estate Crystal Lake insurance lawyer Rolling Meadows personal injury attorney drug crimes pet bites loss of consortium slip and fall icy parking lots Illinois Sales Representative Act Inverness traffic law firm first degree murder Illinois insurance claim attorney trucking accidents Kenilworth estate planning attorneys traffic accidents TBI trusts medication errors fiduciary rule delay Long Grove real estate attorney IRELA pay when paid contract sexual images condo Des Plaines personal injury attorney Des Plaines medical malpractice attorney Long Grove estate planning attorney traffic offenses Illinois elder law attorney truck collisions estate planning, digital assets, Revised Uniform Fiduciary Access to Digital Assets Act, Illinois digital assets, Illinois estate planning, Arlington Heights personal injury attorney controlled substance Deer Park traffic accident attorney Palatine traffic lawyer Crystal Lake bike accident lawyer Rolling Meadows real estate attorney Rolling Meadows employment law attorneys Federal Food Drug and Cosmetic Act irrevocable trust modern family estate planning natural gas Crystal Lake medical malpractice law firm Illinois pet lawyer Inverness estate planning lawyer Deer Park motorcycle accident lawyer rollover accidents personal injury claim Transfer on Death Instrument consent to a search probate medical marijuana comparative negligence boating accidents Barrington real estate lawyer Rolling Meadows boating crash lawyer LLCs Affordable Care Act Arlington Heights estate planning attorney