Inherited Trust Taxes

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bucky6225
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Inherited Trust Taxes

Post by bucky6225 »

In 2023 Grandma passed away and Mom inherited a mix of taxable and IRA money. The taxable money was in a Trust. I was surprised to see a significant tax bill on the taxable money. My understanding was that an inheritance below the estate limit (which this inheritance is well below) are not taxed.

But apparently the income on those funds flows through to a K1 as earnings and those earnings are taxed.

In this case the taxable money had earnings of more than $50k, while the trust value was around $250k.

A couple of questions:

What exactly are considered “earnings” and when is the start date of those earnings?

Am I to understand that if this was not structured as a trust there would have been no tax bill?

Also, now that the funds have transferred to Mom can there still be earnings that are taxed in 2024 and later years?
Last edited by bucky6225 on Tue Apr 02, 2024 7:42 pm, edited 1 time in total.
Topic Author
bucky6225
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Re: Inherited Trust Taxes

Post by bucky6225 »

One other piece of info is this trust was first inherited by Grandma when her husband passed away, then when she passed away was inherited by her daughter.
cadreamer2015
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Re: Inherited Trust Taxes

Post by cadreamer2015 »

Income is income and is subject to income taxes. If the income is retained inside a trust it is subject to trust income taxes. If the income is distributed to beneficiaries then it shows up on the beneficiaries’ personal income tax return through a K-1. It is not realistic to expect that income can escape income taxation because the income producing asset is held inside a trust.
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Topic Author
bucky6225
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Re: Inherited Trust Taxes

Post by bucky6225 »

cadreamer2015 wrote: Tue Apr 02, 2024 7:42 pm Income is income and is subject to income taxes. If the income is retained inside a trust it is subject to trust income taxes. If the income is distributed to beneficiaries then it shows up on the beneficiaries’ personal income tax return through a K-1. It is not realistic to expect that income can escape income taxation because the income producing asset is held inside a trust.
I think what I’m not understanding is the term “earnings” as it relates to the Trust and how the same assets/earnings would be treated if there was no trust.
bsteiner
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Re: Inherited Trust Taxes

Post by bsteiner »

Income taxation of estates and trusts is complicated but in general to the extent a trust distributes its income the income id taxed to the beneficiaries and to the extent the income is not distributed it’s taxed to the trust.
increment
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Re: Inherited Trust Taxes

Post by increment »

If you have many millions of dollars and want to give, say, $30 million to someone (not a charity), then the government will be looking to levy a tax on that. If the giving away happens when you leave inheritances, the taxing is done through estate tax, for which there is the $13.61 million exemption that you referred to.

Income tax is a separate matter. For estates, the sources of taxable income include things that many people on this forum have to deal with: interest, dividends, capital gains. If an estate receives income, it may have the option to passing the income and the responsibility for paying income tax on it to the beneficiaries. The situation may be much the same if a trust is involved.
CuriousGeorgeTx
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Re: Inherited Trust Taxes

Post by CuriousGeorgeTx »

The $50 k “earnings” on $250 k in assets seems high.

What types of income did she receive from the trust, and how much of each type: (total dividends, qualified dividends, capital gains (long and short term), interest, exempt interest)?

What assets are in the trust? Perhaps a mutual fund that had significant capital gain distributions?

Or was there trading activity that generated taxable gains?
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celia
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Re: Inherited Trust Taxes

Post by celia »

bucky6225 wrote: Tue Apr 02, 2024 7:40 pm One other piece of info is this trust was first inherited by Grandma when her husband passed away, then when she passed away was inherited by her daughter.
When Grandpa died, did the assets get a step up in value? When Grandma died, was there another step-up?
Topic Author
bucky6225
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Re: Inherited Trust Taxes

Post by bucky6225 »

CuriousGeorgeTx wrote: Tue Apr 02, 2024 9:01 pm The $50 k “earnings” on $250 k in assets seems high.

What types of income did she receive from the trust, and how much of each type: (total dividends, qualified dividends, capital gains (long and short term), interest, exempt interest)?

What assets are in the trust? Perhaps a mutual fund that had significant capital gain distributions?

Or was there trading activity that generated taxable gains?
All positions were sold and then distributed to those inheriting assets.
Retired2013
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Re: Inherited Trust Taxes

Post by Retired2013 »

celia wrote: Tue Apr 02, 2024 10:56 pm
bucky6225 wrote: Tue Apr 02, 2024 7:40 pm One other piece of info is this trust was first inherited by Grandma when her husband passed away, then when she passed away was inherited by her daughter.
When Grandpa died, did the assets get a step up in value? When Grandma died, was there another step-up?
Step-up within a trust?
bsteiner
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Re: Inherited Trust Taxes

Post by bsteiner »

Retired2013 wrote: Wed Apr 03, 2024 5:51 am
celia wrote: Tue Apr 02, 2024 10:56 pm
bucky6225 wrote: Tue Apr 02, 2024 7:40 pm One other piece of info is this trust was first inherited by Grandma when her husband passed away, then when she passed away was inherited by her daughter.
When Grandpa died, did the assets get a step up in value? When Grandma died, was there another step-up?
Step-up within a trust?
It’s possible, for example if it was a marital (QTIP) trust under Grandpa’s Will, or if the trustees conferred a general power of appointment on Grandma.

The original poster should ask the lawyer handling Grandma’s estate.
Last edited by bsteiner on Wed Apr 03, 2024 7:27 am, edited 1 time in total.
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TomatoTomahto
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Re: Inherited Trust Taxes

Post by TomatoTomahto »

bsteiner wrote: Wed Apr 03, 2024 6:27 am if it was a martial (QTIP) trust under Grandpa’s Will
Freudian typo? :D
I get the FI part but not the RE part of FIRE.
Retired2013
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Re: Inherited Trust Taxes

Post by Retired2013 »

bsteiner wrote: Wed Apr 03, 2024 6:27 am
Retired2013 wrote: Wed Apr 03, 2024 5:51 am
celia wrote: Tue Apr 02, 2024 10:56 pm
bucky6225 wrote: Tue Apr 02, 2024 7:40 pm One other piece of info is this trust was first inherited by Grandma when her husband passed away, then when she passed away was inherited by her daughter.
When Grandpa died, did the assets get a step up in value? When Grandma died, was there another step-up?
Step-up within a trust?
It’s possible, for example if it was a martial (QTIP) trust under Grandpa’s Will, or if the trustees conferred a general power of appointment on Grandma.

The original poster should ask the lawyer handling Grandma’s estate.
Interesting! Thank you.
Topic Author
bucky6225
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Re: Inherited Trust Taxes

Post by bucky6225 »

I’m not sure if I’ll be able to find out what type of trust it was. But I’m wondering if it’s possible if there are types of trusts where you can only get a stepped basis one time? If so, I think that might explain large amount of earnings.
bsteiner
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Re: Inherited Trust Taxes

Post by bsteiner »

TomatoTomahto wrote: Wed Apr 03, 2024 6:30 am
bsteiner wrote: Wed Apr 03, 2024 6:27 am if it was a martial (QTIP) trust under Grandpa’s Will
Freudian typo? :D
I posted from my phone, and didn't look closely at the auto-fill suggestion.
bsteiner
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Re: Inherited Trust Taxes

Post by bsteiner »

bucky6225 wrote: Wed Apr 03, 2024 8:29 am I’m not sure if I’ll be able to find out what type of trust it was. But I’m wondering if it’s possible if there are types of trusts where you can only get a stepped basis one time? If so, I think that might explain large amount of earnings.
Yes. It's also possible (indeed it's the most common situation) for a trust to get no basis step-up.

You can probably tell from one or more of Grandpa's Will, Grandpa's estate tax return, and Grandma's estate tax return. Or just ask the lawyer.
Topic Author
bucky6225
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Re: Inherited Trust Taxes

Post by bucky6225 »

Thanks all, I think there was no stepped up basis and when the positions were sold there were capital gains. Not sure of the particulars of this Trust, but this sounds like the most likely explanation.
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bucky6225
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Re: Inherited Trust Taxes

Post by bucky6225 »

This all kind of begs the question, if you don’t have significant assets aren’t there more tax efficient ways to structure them legally? Why have a trust where the inheritor will not get a stepped up basis?
toddthebod
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Re: Inherited Trust Taxes

Post by toddthebod »

bucky6225 wrote: Wed Apr 03, 2024 10:52 am This all kind of begs the question, if you don’t have significant assets aren’t there more tax efficient ways to structure them legally? Why have a trust where the inheritor will not get a stepped up basis?
The typical revocable living trust gets a step up in basis when the grantor dies. As long as the assets remain in the trust, they generally will not get a further step up in basis. However, they will stay out of the beneficiaries' estates, and be protected from creditors, divorce, and Medicaid. I suspect most people with trusts and small estates (e.g., the $250,000 you mentioned), set up the trust such that all assets can be distributed to the beneficiaries, which gives up the protections but then can be stepped up again when the beneficiary dies.

If the assets in the trust were originally Grandma's (and not inherited via trust from her parents), it is likely they got a stepped up basis. It would be very unusual to set up an irrevocable non-grantor trust for a smaller state.
dmolesky
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Re: Inherited Trust Taxes

Post by dmolesky »

So, basically, the money in the trust gets taxed on whatever it earns, whether it's from interest, dividends, or any other source. And even after it's passed on to your mom, there's still a chance that any earnings it makes in the future could be taxed.
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