tax responsibility as pertains trust fund beneficiaries

[Nancylala]

I am in Washington state and my question is...will I have to pay taxes on 1) a by-pass trust and/or a trust fund inheritance? And, is it the dollar amount of each that makes them taxable or not?

 

[TrustUser]

i am assuming that the trustor of the trust has died ?

distribution depends on the language of the trust.

the income that is distributed to the beneficiaries will be claimed by the beneficiaries on their individual income tax returns.

the income that is kept in the trust will be reported on the trust income tax return.

i dont try to keep up to date on the tax levels, but it used to be that trust income was taxed at the highest rate, at the very first dollar.

 

[trust_id_09]

i am assuming that the trustor of the trust has died ?

distribution depends on the language of the trust.

the income that is distributed to the beneficiaries will be claimed by the beneficiaries on their individual income tax returns.

the income that is kept in the trust will be reported on the trust income tax return.

i dont try to keep up to date on the tax levels, but it used to be that trust income was taxed at the highest rate, at the very first dollar.

You are right on one aspect, but it is solely a tax decision by the trustee on the advice of an experienced accountant to have the beneficiary as opposed to the trust absorbing income taxes. which can be at the rate of upwards of 36%.

the income that is kept in the trust will be reported on the trust income tax return.

Once again you are correct that taxes on all undistributed whether income or principal will be paid by the Trust. Hence, distribution of both should be done in a timely fashion.

 

[TrustUser]

after re-reading my reply, i have nothing to change.

distribution depends on the language of the trust.

if the trust allows for income to either be distributed or kept, then it would be the trustee's final decision. but as i said, i think the tax rate on the trust starts out at the highest level.

your comment about undistributed income or PRINCIPAL does not make sense to me.

there are many advantages to having a trust last, as opposed to distributing the principal.

income taxes are paid on income, not principal.

 

[anteater]

...but as i said, i think the tax rate on the trust starts out at the highest level...

Not quite, but the marginal rate gets to 35% awfully quickly. $11,000 plus change in 2009, if I remember correctly.

 

[tranquility]

I choose not to answer the question as the OP did not provide enough information.

However, even with a simple trust, the entire amount required to be distributed to the beneficiary is taxable to them whether OR NOT it is distributed during the tax year. (Up to the amount of distributable net income.[DNI]) If the income required to be distributed exceeds DNI then the beneficiary only has a proportionate share of each share included in his income. A complex trust will have different rules for the amounts exceeding DNI. (And more difficult to state without looking it up and could include adjustments based on NOLs, different rules regarding charitable deductions and discharge or satisfactions of legal obligations.)

Simple trust rules on taxable income will tend to be in Code Sec. 652 and the associated regs and Complex trust rules at Code Sec. 653.

 

[TrustUser]

hi ant,

i was just looking it up, not knowing that you had posted.

you are correct - $10,700 to be exact.

Trust Tax Rates - 2009 Trust and Estate Income Tax Rates

the 2009 tax brackets for individuals can be found here :

Tax Brackets (Federal Income Tax Rates) 2000 through 2009 and 2010

the maximum rates are the same, but the individual does not reach that amount until 372,950.

at every point below 372,950 - the trust rate is higher.

so at least from a tax standpoint, there is no reason to keep things in trust. there may be other reasons, such as protection.

if you are really wealthy, and making income in the millions, it may well behoove you to pay the price on the first 372, but keep the rest of it better protected.

 

[TrustUser]

hi tq,

i was thinking that if the trust kept a portion of the dni, that the trust got taxed on that portion, and it was not reported on the individual's return ?

 

[anteater]

hi ant,

i was just looking it up, not knowing that you had posted.

you are correct - $10,700 to be exact.

Trust Tax Rates - 2009 Trust and Estate Income Tax Rates

Never believe what you read on the internets.

$11,150.

http://www.irs.gov/pub/irs-pdf/i1041.pdf

Page 27.

 

[tranquility]

was thinking that if the trust kept a portion of the dni, that the trust got taxed on that portion, and it was not reported on the individual's return ?

No. While the parties desired such treatment for specific reasons, the tax court (And, I agree now, but not at the time for zealous advocate reasons.) determined differently.

It can be difficult and may require calculation, but, DNI is going to be taxable to the beneficiary in both a simple and complex trust. The things which exceed may have an argument, depending on many factors.