What is the tax situation look like for an inherited trust?

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Captain kangaroo
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What is the tax situation look like for an inherited trust?

Post by Captain kangaroo » Mon Mar 05, 2018 12:44 am

Inheriting low 7 figure portfolio that is held in a trust and managed by ML. Trust stipulates I receive 1/3 principle at 30, 35, 40.

From my research, any tax on money (interest, dividends, CG's) that is created by the trust, and recycled back into the trust, is paid for by the trust and not myself. Any income that the trust distributes to me is what I am interested in. From my understanding, ANY money I recieve would be taxed at my income tax rate and not the qualified dividend rate or the LTCG rate.

It also seems like the tax rates for trusts are much, much higher then personal income tax rates.

I understand the point of trusts and why people set them up while estate planning..but everything seems to lead them to being very tax inefficient for the beneficiary.

AlohaJoe
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Re: What is the tax situation look like for an inherited trust?

Post by AlohaJoe » Mon Mar 05, 2018 12:54 am

What did the trustee say when you called and asked them?

I would expect them to be kind of knowledgeable in this area and they work for you.

Captain kangaroo
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Re: What is the tax situation look like for an inherited trust?

Post by Captain kangaroo » Mon Mar 05, 2018 12:58 am

AlohaJoe wrote:
Mon Mar 05, 2018 12:54 am
What did the trustee say when you called and asked them?

I would expect them to be kind of knowledgeable in this area and they work for you.
I haven't asked. I feel like information here is non-bias and straight forward. I would like to get the input of the forum before I ask questions to them and hopefully the answers/information are similar.

Wagnerjb
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Re: What is the tax situation look like for an inherited trust?

Post by Wagnerjb » Mon Mar 05, 2018 9:00 am

Captain kangaroo wrote:
Mon Mar 05, 2018 12:44 am
From my research, any tax on money (interest, dividends, CG's) that is created by the trust, and recycled back into the trust, is paid for by the trust and not myself. Any income that the trust distributes to me is what I am interested in. From my understanding, ANY money I recieve would be taxed at my income tax rate and not the qualified dividend rate or the LTCG rate.
I do the taxes for a Special Needs Trust for one of my brothers. I have to allocate the nature of the income inside the trust to the distributions. For example, if the trust earns $10k in dividends and $5k in interest and the trust only distributes $12k in funds, then the $12k is taxable to the recipient and will be considered to be $8k of dividends and $4k of interest. The trustee will send you a form K-1 at the end of the year, which will indicate how much of the distribution was considered dividends, interest, etc. If the dividends earned in the trust were qualified dividends, then you - as the recipient - will pay tax on them at the qualified dividend rate.

Also, it is my understanding that a trust cannot distribute a capital gain (or loss) to a beneficiary, except for in the final year of the trust. For that reason, I wouldn't expect any distributions to contain capital gains or losses in the meantime.

Trusts are mostly beyond my pay grade, but there are a handful of very knowledgable people on this forum who understand the different types of trusts and can be more helpful for your specific situation.

Best wishes.
Andy

Gill
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Re: What is the tax situation look like for an inherited trust?

Post by Gill » Mon Mar 05, 2018 9:04 am

No, trusts are not necessarily tax inefficient. The accumulated income might be offset by administration expenses or taxed at a rate lower than yours. Also, income distributed to you retains its character and is taxed to you accordingly.
Gill

westrichj312
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Re: What is the tax situation look like for an inherited trust?

Post by westrichj312 » Mon Mar 05, 2018 9:24 am

Say you inherited 3 million from a personal bank account or a trust the tax is the same zero! It's not more or less anything.

ryman554
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Re: What is the tax situation look like for an inherited trust?

Post by ryman554 » Mon Mar 05, 2018 10:11 am

westrichj312 wrote:
Mon Mar 05, 2018 9:24 am
Say you inherited 3 million from a personal bank account or a trust the tax is the same zero! It's not more or less anything.
Huh?

The OP was talking about a restrictive trust that retains earnings and gains until the OP is 30/35/40. Assuming the OP is under 30, the OP has not inherited anything yet -- the trust has, and the OP is but a beneficiary -- and is worried about how tax accounting is done for the lifetime of the trust.

Tax rates inside a trust a different than personal rates. I'm sure there are other differences as well that I will (sadly) get to know over the next handful of years. Trusts (can) also provide legal protection against lawsuits, so there are a whole lot of moving parts that make inheritance via probate (checking account) and via trust (well, trust!) significantly different.

westrichj312
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Re: What is the tax situation look like for an inherited trust?

Post by westrichj312 » Mon Mar 05, 2018 1:34 pm

Yes your right. I was referring to the more common trust. In a regular trust the taxes/capital gains are payed yearly and there is no difference in tax rates at that point as long as its under the lifetime exemption. The trust is there to prevent probate mainly.

TrustButVerifying
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Re: What is the tax situation look like for an inherited trust?

Post by TrustButVerifying » Mon Mar 05, 2018 3:12 pm

My understanding is that Trust income is taxed at a higher rate than personal income. Therefore to be tax efficient, all trust generated income (interest, dividends or capital gains) is distributed to me every year because my personal tax rate is way lower than the Trust's. This is allowable under the terms of my Trust.

One thing to consider is that "Trusts" are not all the same. You are dealing with a very large sum of money and the consequences of mistakes could be significant. IMHO you should be working with a team of trusted experts and have their expenses be paid by the trust.

Gill
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Re: What is the tax situation look like for an inherited trust?

Post by Gill » Mon Mar 05, 2018 3:22 pm

westrichj312 wrote:
Mon Mar 05, 2018 1:34 pm
Yes your right. I was referring to the more common trust. In a regular trust the taxes/capital gains are payed yearly and there is no difference in tax rates at that point as long as its under the lifetime exemption. The trust is there to prevent probate mainly.
I think you mean a revocable living trust or an inter vivos trust.
Gill

NotWhoYouThink
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Re: What is the tax situation look like for an inherited trust?

Post by NotWhoYouThink » Mon Mar 05, 2018 3:23 pm

Who is the trustee? Is it Uncle Fred or ML?
Does the trust have any requirements about who manages the investments?
What does the trust say about income going to you?

You really have to dig through a lot of details to get to the heart of things. I don't know that you need a team of trusted experts, but you probably want to read through the trust documents (which as the beneficiary you should have access to) and then come back with some questions.

delamer
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Re: What is the tax situation look like for an inherited trust?

Post by delamer » Mon Mar 05, 2018 3:41 pm

Captain kangaroo wrote:
Mon Mar 05, 2018 12:58 am
AlohaJoe wrote:
Mon Mar 05, 2018 12:54 am
What did the trustee say when you called and asked them?

I would expect them to be kind of knowledgeable in this area and they work for you.
I haven't asked. I feel like information here is non-bias and straight forward. I would like to get the input of the forum before I ask questions to them and hopefully the answers/information are similar.
I understand your desire to get some background before you contact the trust administrator. But the knowledge you get here is constrained by you/us not knowing the details of the trust.

Another source of information could be the attorney who drew up the trust documents, if s/he is still practicing.

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