Transferring Stocks from Trust to Individual Accounts - Capital Gains & Basis Question

You've got the basics right! When stocks are transferred from a trust to beneficiaries, generally the beneficiary receives the same cost basis the trust had (carryover basis). This is what the tax code you quoted is referring to in part (A). The part about "gain or loss recognized to the trust on distribution" (part B) comes into play in special situations. Typically when a trust distributes appreciated property, the trust itself doesn't recognize gain. However, if the trust's governing document or applicable state law requires the trustee to satisfy a distribution of a specific dollar amount with appreciated property, the trust may have to recognize gain. Regarding DNI (Distributable Net Income), yes, the distribution would be reported on the beneficiary's K-1 and would generally be taxable to the extent of the trust's DNI for the year. If the fair market value of the distributed property exceeds the trust's DNI, the excess typically isn't taxable to the beneficiary. One thing to consider: make sure the trust instrument actually allows for these distributions to the beneficiaries. Some trusts have specific distribution requirements or limitations.

Last year I was dealing with something similar with a family trust and was totally confused about the tax implications. I ended up using https://taxr.ai to help sort through all the trust documentation and figure out the basis calculations. It analyzed our trust documents and the tax code provisions that applied to our specific situation. For your situation, it looks like you're on the right track with the carryover basis understanding, but the tool might help clarify those special situations where gain/loss could be recognized by the trust. It also helped me understand the DNI limits and how they applied to our in-kind distributions.

I was definitely skeptical about using an AI tax tool for our trust distribution issues, but after struggling with our accountant who kept charging us for basic questions, I gave https://taxr.ai a try. The biggest help was that it organized all our trust's stock purchases by date, basis, and current value, then showed exactly how the carryover basis would work for each beneficiary. It even flagged situations where the trust might recognize gain based on specific distribution requirements in our trust document. For anyone dealing with complex trust distributions, having this kind of analysis before meeting with your tax professional saves a ton of time and money. Our accountant was actually impressed with how organized everything was when we finally met.

If you're trying to reach the IRS to get clarification on trust distribution rules, good luck! I spent 6 weeks trying to get through to someone who could answer questions about basis calculations for trust distributions. After endless busy signals and disconnects, I finally used https://claimyr.com and their system got me through to an IRS agent in under an hour. You can see how it works at https://youtu.be/_kiP6q8DX5c The IRS agent confirmed what others here have said about carryover basis, but also explained some nuances about when trusts must recognize gain on distribution that were specific to our situation. Was definitely worth the time saved after weeks of frustration.

I have to admit I was completely wrong about that Claimyr service. After posting my skeptical comment, I decided to try it because I was desperate to get answers about a similar trust distribution situation. I had been trying to reach the IRS for nearly 3 weeks with no luck. Using their service, I got a call back in about 40 minutes when they reached an IRS agent. The agent confirmed that our trust-to-individual stock transfer would indeed use carryover basis and walked me through exactly how to document everything for both the trust's final return and the beneficiaries' individual returns. Worth every penny for the hours of hold music I didn't have to listen to, and the agent I spoke with was actually really knowledgeable about trust tax law.

Something to consider that hasn't been mentioned: if your trust is a simple trust (required to distribute all income) vs. a complex trust (has discretion over distributions), the tax treatment might differ slightly. In a simple trust, distributions of principal (like your stock) typically won't carry out DNI unless all the income has already been distributed and the principal distribution is deductible by the trust. For complex trusts, the trustee has more flexibility, but the 65-day rule might apply where distributions made within the first 65 days of the year can be treated as made in the previous tax year.

Don't forget to consider state tax implications too! I went through something similar last year and discovered that while federal treatment was straightforward, our state had different rules for trust distributions. In our case, California treated the distribution differently than the feds did, and we ended up with an unexpected state tax bill because the trustee didn't withhold for state taxes. Make sure to check your state's treatment of trust distributions, especially if the trust and beneficiaries are in different states.

For Illinois to Wisconsin situations, you'll want to check both states' tax codes on trust distributions. Illinois generally follows federal treatment for basis calculations, but Wisconsin has some quirks around accumulated trust income. I'd recommend starting with Illinois Department of Revenue Publication 101 (Income Tax) and Wisconsin's Publication 102 for trust and estate taxation. Both states have specific sections on distributions to non-resident beneficiaries. The key thing to watch for is whether either state treats the distribution as carrying out accumulated income differently than the federal rules. Wisconsin in particular sometimes requires beneficiaries to pay state tax on trust distributions even when the trust paid Illinois tax on the same income. Your trustee should be able to help coordinate the state filings, but definitely get clarity on this before making the distributions. State tax surprises on large stock distributions can be really expensive!