We are going to explain taxes on living trust distributions in this post. But before we drill down to this specific detail, we will share some of the benefits that these trusts provide.
Efficient Estate Administration
When you have a living trust, you act as the trustee while you are alive and well, and you name a successor trustee to administer the trust after your passing.
The trust would technically be the owner of the assets, but you would control the trust. As a result, you would have complete access to all the assets that you convey into the trust.
The property that is held by the trust would be listed on a schedule, and this consolidation of ownership will simplify the estate administration process. Plus, if you are married, you and your spouse could facilitate efficient administration through the utilization of a shared living trust.
Another benefit is the avoidance of probate. When a simple will is used, it must be admitted to probate, which is a court supervised proceeding. It will take eight months or more for the estate to be probated in most jurisdictions, and no inheritances are distributed during this interim.
Probate expenses will typically consume between three percent and seven percent of the total value of the estate, and probate records are available to the general public.
The probate court is not involved when a living trust is used to facilitate asset transfers, so these negatives never enter the picture.
A lot of people harbor misconception about trust. They think that the terms are set in stone when you establish any type of trust so you can never alter them if circumstances change.
This is not the case with a revocable living trust. If you want to change the beneficiary or successor trustee designations, you are free to do so at any time, and you can alter the terms.
You do not have to allow for the distribution of the assets to the beneficiaries all at once in lump sums. For example, if you want the beneficiaries to receive a certain amount each month for an extended period of time, you can set these terms.
Taxes on Living Trust Distributions
Now that we have provided a brief overview, we can focus on the point at hand. People often wonder about taxes on inheritances, and generally speaking, you do not have to claim an inheritance when you file your federal and state tax returns.
This applies to direct inheritances that are bequeathed through the terms of a will or an insurance policy. The matter is a little more tricky when it comes to living trust distributions.
Distributions of the principal are not taxable, because the decedent paid taxes on their income along the way. The estate is essentially an after-tax remainder.
On the other hand, the earnings that are generated by the principal are subject to taxation. Distributed appreciation would be taxable to the beneficiary, and the trust itself would be required to pay taxes on undistributed trust earnings.
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If you have already learned enough to know that you should work with an attorney to put an estate plan in place, we have you covered. You can send us a message to request a consultation appointment, and we can be reached by phone at 513-721-1513.
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