Are Trust Distributions Taxable?

Are Trust Distributions Taxable?


Hi. Lee Phillips here. I guess you’re familiar with me now I’m a lawyer. Don’t hold that against me. K? I want to talk about when a beneficiary of a living revocable trust or even an irrevocable trust gets a distribution from the trust The question is is that taxable? Do they have to pay income tax on it? And the answer is, well, it depends. Is it the income that the trust has earned during the year? and we’ve got a YouTube video on Trust Tax Rates they’re hellacious you don’t want to pay trust tax rates so the trust the living revocable trust is required to pay all of its income all of its “earnings” all the dividends and the interest and all that sort of stuff that the assets in the trust generate the living revocable trust will usually say that those have to be paid out every year. We’re not going to have what’s called a “complex” trust or trust that can accumulate assets it’s going to be paid out that’s called a “simple” trust it’s going to be paid out every year so that the trust doesn’t actually file a tax return. In fact, under your living revocable trust, it’s YOUR social security number. Now the money isn’t actually paid out you recognize it as a distribution and income. But it is paid out after you die to the kids the kid gets his money Is it taxable? Well if it’s income that the trust generated and did not pay tax on then it is taxable to you to the beneficiary. Somebody has to pay the tax. The IRS is always going to get their bite at the apple. Rule #1. Rule #2. The IRS always gets its bite at the apple. So you’ve got to think, where’s it going to get its bite? If the trust distributes its income the profit then it gets a “deduction” for that and the beneficiary pays the tax. If the trust is distributing principal or the property that’s in the trust that has already had tax paid on it it’s the stuff you put in to the trust you paid tax on it before you put it into the trust then when that comes out that’s not taxable to the beneficiaries. That’s a distribution of principal. So are we distributing the profit? The income of the trust is what they refer to it as or are we distributing the principal? Basically, the principal is not taxable income tax or estate tax to the individual now if you live in some states there might be an inheritance tax a few states do have an inheritance tax if I get money because dad died, they basically call that income to me. So barring that distribution of the principal? Not taxable. Distribution of the earnings, the income of the trust would be taxable as income to the beneficiary. The trust got a deduction for paying it out so it didn’t pay tax on it and then the beneficiary recognizes that income in their tax bracket and pays the income tax. So Lee Phillips talking about whether a distribution to a beneficary is taxable or not.

4 thoughts on “Are Trust Distributions Taxable?

  1. If the income is left in the trust to continue earning more income, yet recognized as income on the owner's tax return each year, does that then become a tax free distribution when the owner dies and the kids get the pile ???

  2. Lee:
    Watching your YouTube video is fascinating. So open, honest talk, plain and clear to the point and above all no hidden point. You lay it out. Just two words “Thank You”

  3. If the distribution of principal was from an IRA in the trust, then it is taxable to the beneficiary because income tax was not paid by the settlor. Again, the IRS always gets their bite.

Leave a Reply

Your email address will not be published. Required fields are marked *