What is a Sale to a Beneficiary?

• A sale of a trust asset, or a portion of the asset, to the beneficiary of a trust is an exchange of the asset in kind, such as real estate, a stock, jewelry, or other asset, in exchange for cash. The sale must be an arm's-length transaction, meaning a transaction that is conducted as if the beneficiary is any outside buyer. The sale is handled by the trustee in order to ensure that all beneficiaries are impacted equally by the transaction. All current beneficiaries of the trust must agree to the sale.
  
  

Why Would a Sale to a Beneficiary be Made?

• Trust accounts can hold a variety of complex investments and can have many beneficiaries with varying needs. The most common instance of a sale to a beneficiary of a trust asset is that of real estate. For example, a trust holds title to the homestead property that has been in the family for generations. The property is a large portion of the trust and must be sold in order to cover expenses and to diversify the investments to stabilize the trust against market value decreases in a particular industry. By selling the property to a beneficiary, the homestead remains in the family and all beneficiaries benefit from the added liquidity in the trust.
  
  

How Does a Trust Make a Sale to a Beneficiary?

• One of the primary duties of a trustee is to treat all beneficiaries impartially with regard to investments. In order for the trustee to make a sale of a particular asset to a beneficiary, it must ensure that the transaction is done at arm's length. In other words, it must sell the asset to the beneficiary at or above the fair market value of the asset at the time of the sale. The asset is then re-titled in the name of the beneficiary and the cash is deposited in the trust account.
  
  

What are the Consequences of a Sale to a Beneficiary?

• The consequences of a sale to a beneficiary must only be positive for the trust or the transaction cannot take place. If the trust has capital losses to offset in a particular tax year, the trustee can elect to take the capital gains from the sale of the asset at the trust level, thereby offsetting the losses. Additionally, there are tax benefits to both the trust and the beneficiary if a trust sells appreciated property to a beneficiary, elects not to realize the capital gain, and the beneficiary donates that same property to a charity. The consequences to the beneficiary are determined by whether the trustee decides to take all or a portion of the capital gain at the trust level, or to assign the capital gain to the beneficiary.