Should the trust pay capital gains taxes or distribute them to beneficiaries?

This is helpful, thanks! But I'm confused about the DNI concept. Does this mean if I choose to distribute the gains, the beneficiaries will each pay taxes based on their individual tax brackets? And does the trust document always spell out how capital gains should be handled, or is this sometimes left open to interpretation?

DNI essentially determines what's taxable to the beneficiaries versus what's taxable to the trust. Generally, capital gains are excluded from DNI and taxed to the trust, but there are exceptions where they can be included and passed through to beneficiaries. Trust documents vary widely in how specifically they address capital gains treatment. Some trusts are very explicit about how gains should be handled, while others provide general guidance giving the trustee discretion. If your trust document is silent on this matter, you typically have more flexibility as trustee to decide what's in the best interest of all parties involved, considering both tax consequences and fairness among beneficiaries.

How does this work exactly? My aunt's trust has similar issues and we keep getting different interpretations from various advisors. Does it actually analyze specific trust language or just provide general guidance? Some of these AI tools promise a lot but deliver generic advice.

I'm skeptical about trusting AI with complex trust documents. How accurate was it compared to what an actual tax attorney would say? These documents have all kinds of specific clauses and I'm worried about missing something important if I rely on software instead of a professional.

It analyzes the actual language in your specific trust document and highlights relevant sections that address distributions, capital gains treatment, and trustee powers. It's not just generic advice - it focuses on your exact document's provisions that relate to your question. The system was surprisingly accurate in my case - I had our attorney review the findings afterward and he confirmed that the analysis matched his interpretation. He was actually impressed by how thorough it was. The difference is that the software can quickly process the entire document to find relevant clauses that might be scattered throughout different sections.

Wait, how does this actually work? The IRS phone system is a nightmare with constant disconnects. Are you saying this service somehow gets you to the front of the queue? That seems too good to be true.

I call BS on this. I've tried every trick in the book to get through to the IRS and nothing works. They're perpetually understaffed and overwhelmed. No way there's some magic solution that gets you through in 15 minutes when millions of people are trying to reach them.

It's not magic - they use technology that continuously redials and navigates the IRS phone system for you. When they finally get through, they call you and connect you directly to the IRS agent. It's basically doing what you'd do manually (calling repeatedly and navigating the menu system) but automated. Yes, it absolutely works. I was connected in about 17 minutes when I had been trying on my own for days with no success. The system keeps you updated via text message about where you are in the process, so you're not left wondering.

Good point about state taxes! Does anyone know if California taxes trusts differently than individuals? My mom's trust is based there but I live in Nevada (no state income tax). Would it be better for me to have the trust distribute gains to me instead of the trust paying in CA?

California taxes trusts at individual rates, which can be as high as 13.3% for income over $1 million. If the trust is a California trust but you're a Nevada resident, having the gains distributed to you could potentially save significant state taxes because Nevada has no income tax. However, you need to confirm whether your trust is considered a California trust for tax purposes. This typically depends on factors like where the trustee resides and where trust administration occurs. If the trust has sufficient connection to California, it may be subject to California tax regardless of where the beneficiaries live.

We hired a professional fiduciary after family drama made it impossible for any of us to serve as trustee. It was expensive (about 1.25% of assets annually) but worth every penny. They handled all the tax decisions based on what was optimal and kept detailed records. Eliminated the family fighting because decisions were made by a neutral third party based on expertise rather than emotion.

This timing point is really important - I hadn't considered that the distribution needs to happen in the same tax year as the sale. Does this mean I need to make the distribution by December 31st, 2025, or is there some extension period? Also, when you say "running the numbers for each beneficiary," are there specific calculations or worksheets that help compare the trust tax rate versus individual rates? I want to make sure I'm being fair to both my siblings while also minimizing the overall tax burden.

Yes, the distribution generally needs to occur by December 31st of the tax year (2025 in your case) for the gains to be taxable to beneficiaries rather than the trust. There's no extension period for this - it's based on when the distribution actually occurs, not when it's decided or announced. For running the numbers, you'll want to calculate the total tax burden under each scenario. Compare the trust paying capital gains tax at compressed rates (reaching 37% at $14,450) versus each beneficiary paying at their individual rates. Don't forget to factor in state taxes too, as mentioned earlier. A simple approach is to create a spreadsheet showing: 1) Total capital gains amount, 2) Trust tax if gains stay in trust, 3) Individual tax for each beneficiary if gains are distributed proportionally, 4) Total family tax burden under each scenario. This helps demonstrate fairness to your siblings while optimizing the overall tax outcome. Most CPAs who work with trusts can help you run these calculations if you're not comfortable doing it yourself.