Irrevocable Trust question

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
iWantToLearn
Posts: 31
Joined: Wed Dec 10, 2014 1:41 pm

Irrevocable Trust question

Post by iWantToLearn » Sat May 19, 2018 8:08 pm

I have a few questions about assets that are held in an irrevocable trust. I realize that assets that are held in this type of trust are taxed for capital gains like taxable accounts, but at the trust level (separate EIN, but usually at a slightly higher rate). My question is, if funds are then distributed from an irrevocable trust to a beneficiary are individuals also taxed personally? Is that shown on a K1?

If so, would it be advantageous to transfer assets from the irrevocable trust to their personal account to sell at a lower tax level when needed? I wouldn't think gift taxes would apply if the beneficiary of the trust and the taxable account are the same. I realize some benefits to these types of accounts (i.e. these funds don't count towards your estate, it protects the assets from potential legal issues, etc.), but what other benefits do they offer? It seems like they may be taxed twice (if it's true that the trust is taxed and distributions are too), but maybe I'm misinterpreting the situation.

I greatly appreciate the help.

Bonanza77
Posts: 14
Joined: Thu Dec 31, 2015 7:42 pm

Re: Irrevocable Trust question

Post by Bonanza77 » Sat May 19, 2018 9:49 pm

Trust income and capital gains that are not distributed to a beneficiary in the same year that they are earned/realized (or that are not distributed within a specific period at the beginning of the following year) are taxed at the trust level.

Trust income and capital gains that are distributed to a beneficiary the same year that they are earned/realized (or that are distributed within a specific period at the beginning of the following year) are not taxed at the trust level but are taxed at the beneficiary level.

To answer your specific question: if a trust pays taxes on capital gains and then distributes the after-tax proceeds to the beneficiary, the beneficiary does not have to pay tax on the distribution.

RDHUSA
Posts: 6
Joined: Mon Jan 22, 2018 10:35 pm

Re: Irrevocable Trust question

Post by RDHUSA » Sun May 20, 2018 3:12 pm

I've been a successor trustee for several years. I can think of few situations where you would want the Trust to pay the taxes, it's almost always better to pass the income to the beneficiaries where the income will be taxed at their individual income tax rates. If the Trust pays the taxes, any income over $12,500 will be taxed at 39.6% for Federal taxes and there is no standard deduction for a Trust. You will supply a K-1 to each beneficiary and to the IRS. The K-1 will detail what funds are taxable and if any funds are a return of the corpus (which is not taxable as the original grantors of the Trust already paid those taxes). I've used TaxAct for Trusts the last two years to help navigate through the tax seasons. It's ok and successfully navigated me through two tax seasons, but I felt that TaxAct didn't do a great job clarifying areas that weren't too clear. However, I don't know how TaxAct compares to other Trust tax preparation software.

Here's a good link that gives a good summary:

https://www.journalofaccountancy.com/is ... tions.html
Life is good.

Post Reply