Advanced Marketing Forum Question

Capital Loss Carryover Between Trusts

Question:
Client had a funded Living Trust and has subsequently died. The Living Trust states that upon his death, the trust is supposed to be divided into two trusts - Marital & Credit Shelter. After death, while still in the Living Trust, the trustee sold some investments which resulted in $52,000 capital loss carryover.

The administrative steps are now almost completed to divide the single trust into the two separate trusts stated above. Currently there are not sufficient unrealized gains that could be used to offset the accumulated losses.

What happens to the $52,000 of realized capital gain losses? Does it get allocated to the two new trusts? Do you lose it?

Reply:
There are a couple of different methods of funding a marital and a residual trust when an estate is settled. To answer this, we (at Wilmington Trust) normally look at the language in the living trust or will that addresses that matter. If there is no direction on the method of funding, then, the capital loss is first reported on the trust tax return of the Living trust, and then up to $3,000 is used to offset other ordinary income of that Living Trust. The remaining capital loss amount is then allocated to all beneficiaries of the Living Trust when it files its "final" tax return, in proportion to their percentage interests in the Living Trust. If the only two beneficiaries of the Living Trust are the Marital and Credit Shelter Trust, with equal interests, than each would receive half of the $52,000 capital loss carryover, less the $3,000 already absorbed by other ordinary income of the Living Trust.

Deborah Markwood
Wilmington Trust

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