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It’s common for people to establish a revocable living trust, and transfer assets to the trust, so that those assets pass to beneficiaries outside of probate.
Many beneficiaries inquire about the tax consequences to principal beneficiaries when the people who set up the trust, and transfer their assets to the trust, pass away.
Generally, an inheritance from a living trust is income tax free. As long as the estate of the trust settlor is less than $11.58 million, then there will be no 40% federal estate tax.
Bank accounts and cash that is distributed to trust beneficiaries is free of tax. Appreciated assets in the trust receive a step-up in basis when the trust settlor dies.
Beneficiaries of traditional IRAs must pay income tax on distributions they receive from the IRA.
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Paul Rabalais
Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: (225) 329-2450…(read more)
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Living trusts are an integral part of estate planning, allowing individuals to pass on their assets to their beneficiaries without having to go through the probate process. However, when it comes to the taxation of living trust beneficiaries, many people are left wondering about the specifics.
Living trust beneficiaries can be taxed in a few different ways, depending on the nature of the trust and the type of assets they receive. Here are a few key points to consider:
1. Taxation of Revocable Living Trusts:
Revocable living trusts are a popular estate planning tool, allowing the grantor to maintain control over their assets during their lifetime and then pass them on to their beneficiaries upon their death. Because the grantor retains control over the assets in a revocable trust, the income generated by the trust is typically taxed as part of the grantor’s personal income.
Once the grantor passes away and the trust becomes irrevocable, the income generated by the trust will be taxed at the trust level, and the beneficiaries will not be subject to income tax on the distributions they receive from the trust.
2. Taxation of Irrevocable Living Trusts:
Irrevocable living trusts, on the other hand, transfer the assets out of the grantor’s estate and into the trust, which is managed by a trustee for the benefit of the beneficiaries. Income generated by an irrevocable trust is generally taxed at the trust level, and the beneficiaries will only be taxed on distributions they receive from the trust.
3. Taxation of Trust Distributions:
When beneficiaries receive distributions from a living trust, the taxation of those distributions will depend on the nature of the assets being distributed. For example, if the trust holds stocks or mutual funds, the beneficiaries may be subject to capital gains tax on any appreciation in the value of those assets. If the trust holds real estate, the beneficiaries may be responsible for property taxes and any applicable capital gains tax.
Additionally, if the trust generates income from rental properties or business interests, the beneficiaries may need to report that income on their personal tax returns.
It’s important to note that the taxation of living trust beneficiaries can vary depending on the specific circumstances of the trust and the assets it holds. Consulting with a tax professional or estate planning attorney can help ensure that beneficiaries understand their tax obligations and are able to make informed decisions about their inherited assets.
In conclusion, living trust beneficiaries can be taxed in a variety of ways, depending on the type of trust and the nature of the assets being distributed. Understanding the tax implications of living trust distributions is crucial for beneficiaries to effectively manage their inherited assets and minimize their tax liabilities.
This is all BS lawyers should stick to law issues not assets of a person this is by definition greed of the states and lawyers to get what they can from a dead person and steal from his family
When a beneficiary inherits stocks, the cost basis is stepped up. Why does the parent's cost basis matter? This sounds like you're talking about gifting not inheritance.
My dad had a will
Ha ha — I've been binge watching this week without realizing it's a "thing"! Thank you!
Thank you for the information. What happened if one of the beneficiaries is living in the house of the deceased parents that is under an irrevocable trust . What is the tax consequences?
You are the best, which is exactly what we want to know. Many thanks.
Paul- Another great video. All of your videos are easy to understand and well done. I do have one question for you. My sister and I are benefciaries of my parents trust. The trust is to pay both of us roughly $100,000 per year from stock dividends. This schedule is to continue to our deaths. Is the $100,000 that we are to receive tax free or will there be a 15% capital gain tax?
thanks
Ed Koehler
Need help on living trust and how to not pay taxes if person is lowincome
You have a very clear way of presenting this information. The examples really help. Thank you so much!
We get $1000 a month on a $5 million estate plus we have to pay taxes on it and an emergency account. I'm guessing that I owe Uncle Sam $10,000. I was better off without it.
Very, very informative and helpful.
How does trustee files K1 (net income distribution) to former citizens who doesn’t live in USA and doesn’t have any tax #? Thank you
Exactly how is the income from a grantor trust reported on a 1040? Is there a separate schedule to be attached or is the dividend income just listed with other dividend income on Schedule B?
Binge ing
I am binge watching your videos. Thanks for great info. I have a question. You said the bank account was in a trust. Why in a trust if the children could be just the bank account beneficiaries? And what is the difference in terms of taxes paid between these two situations?
thank you
I have a trust but no instructions on how to add assets to it..?
Thanks for a non responce
Thank you. This is exactly what my spouse and I are trying to learn more about.
Lots of good info. I've got a question. I'm a son and beneficiary in a living trust also the executor. Mom passed this year. We are about to sell her home. I owe the IRS $20,000. Up till now I've been listed as uncollectable. If I was to leave my portion in the trust account will the IRS see my portion of the money? My portion will equal approx $125,000. Yes I don't want to tell them
This video could have been 5min for fucks sake
Love your content Paul. Question. If a living trust holds an entity such as an LLC Holding Company that owns rental property and it pays a low salary, say 10% of earnings and the rest is treated as retained earnings to later reinvest in future acquisitions, does that change the math on tax filings? Seeking a strategy that will allow my mom's estate to grow virtually unmolested by the IRS to ensure there is enough there to self pay for eldercare. Any feedback or information you can provide would be great. Thx.
I’ve been binge watching. Thanks for helping me get prepared.
Hi Paul, love your video. They have been invaluable since my mother passed in Feb in CA. I am the trustee and live in FL. The trust has finished selling the CA home and I'm ready to distribute the proceeds to the three beneficiaries…after I have a trust tax accountant advise me on these last steps. Do I need to use a tax accountant licensed in CA, FL, or does it matter? I plan to hold back some of the proceeds in the trust until I confirm there are no final property taxes owed from house gains after the DOD. I recall you saying you only handle LA. Thanks