If a trust earns capital gains and distributes $10,000 to beneficiaries in the same tax year, who gets taxed on the $10,000?

• A. The beneficiaries get taxed on all of it.
• B. No one gets taxed on anything.
• C. The trust gets taxed on all of it.
• D. Some gets taxed to each.

Answer: (C)

Think about how trusts handle capital gains versus distributions. Capital gains earned by a trust are taxed to the trust itself, unless the gains are treated as pass-through to beneficiaries under specific rules. When the trust both earns capital gains and distributes cash to beneficiaries in the same year, the act of distributing does not automatically shift the tax on those capital gains out of the trust in that year. In this scenario, the tax liability for the capital gains remains with the trust, so the trust is taxed on the $10,000. The distribution is just a cash outlay to beneficiaries; it does not change who bears the tax on those capital gains in that tax year.