If you’re the recipient of money from a trust, you may be a bit concerned about the taxes associated with your inheritance. After all, while Florida doesn’t have an estate tax that would require you to pay anything out of your pocket or the estate, the federal government does require the estate or beneficiaries of it to pay estate taxes if it meets certain guidelines. Trusts, though, aren’t usually considered part of an estate, so do you have to pay taxes on a trust fund from a deceased family member? The answer is a little complex.
A Quick Lesson on Trusts
Trusts are created to hold assets for individuals or organizations. The goal is to safeguard assets. The person who creates a trust is called a trustor or a grantor. The person who manages it is called the trustee. Those who actually gain access to the assets are considered to be beneficiaries.
There are a few different kinds of trusts. They are usually either revocable trusts, which can be changed any time the grantor is alive or irrevocable trusts which, once made, cannot be changed.
There are many reasons individuals create a trust, but in general, one of the biggest is that they help to reduce estate taxes. So, do you pay taxes on a trust inheritance? It depends a bit on what you inherited.
Principal and Interest
Still, many people wonder, do you have to pay taxes on a trust fund from a deceased family member? Since almost anything can be placed in a trust, from real estate to pensions to cash, trust funds offer many advantages. Whether or not you have a tax liability on what you inherited depends on what you actually get from the trust. It also depends on the type of trust involved. A simple trust reports income to the IRS. Any earnings it makes from interest must be taxed. If you get earnings from this kind of trust, it is taxable income. A complex trust, though, can take deductions on taxes if it makes contributions to charities. It might distribute income dividends to beneficiaries, and you may not have to pay taxes on those. It depends a bit on whether the money you got came from the principal or from the interest. In some cases, the taxes will be paid by the trust. In others, you will be responsible for them.
How Do You Get Money from a Trust?
If you are the beneficiary of a trust, you’ll get the distributions in one of three different ways. An outright distribution means you get the money or property all at once. Staggered distributions are also common. In this situation, you get money over a certain time at various intervals. For example, you may get $1,000 a month or you may gain access to money after an event like reaching the age of 18 or graduating from college. Discretionary distributions are the final type. In this situation, you gain access to the assets at certain times determined by the trustee in accordance with the grantor’s wishes. For example, you may apply to receive funds to pay for your education or your first home.
Gaining a Better Understanding of Your Tax Liabilities
Whether or not you have to pay taxes on the money you get from a trust depends a bit on how the distribution works and the type of trust itself. If you still have questions, please feel free to contact us today! We have years of experience helping Floridians, and we’d be happy to help you too.