We receive several questions related to trusts on a regular basis. In this blog, I will address some of the most frequent questions regarding trusts and taxes.
Do trusts pay taxes?
One of the most frequent questions I get with regards to trusts is whether income earned by a trust is taxable. The short answer is ‘Yes’, income earned by a trust is taxable. Many trusts are “Grantor Trusts” which means the Grantor of the trust includes any income earned by the trust on their tax return. For non-Grantor Trusts, if $600 or more is earned, the trust must file a tax return using form 1041 to calculate the tax. If the income was retained by the trust, the trust will pay the tax or if the income was distributed to the beneficiary, the beneficiary will pay the tax. The trustee is responsible for preparation and filing of the tax return annually.
If I inherit via a trust, is my inheritance taxed?
Estate taxes are assessed against assets in excess of the Estate Tax Exemption an individual has at the time of death. If assets were held in a revocable trust that is a part of the deceased’s estate, taxes are only owed to the extend the assets exceed the exemption. In contrast, if assets are in an irrevocable trust and were not a part of the deceased’s estate, they typically pass without any estate tax. However, if the assets are IRA/401k, etc. pre-tax assets, income taxes will be owed on the funds when they are withdrawn just as income tax would have been owed if the deceased individual withdrew the funds.
What is the cost basis of assets inherited via a trust?
Typically, assets’ cost basis steps up to date of death value if they pass to a beneficiary upon the death of the Grantor of a trust. As a result, the beneficiary typically pays less capital gains tax on the sale of the inherited asset. As with any tax question, there is no single answer, so we recommend discussing your specific situation with a tax professional or estate planning attorney.
Contact a Georgia Estate Attorney
If you inherit a trust or you want to set up a trust, contact our estate planning attorneys at Grissom Law, LLC to help you determine which type of trust is best for your situation.
Disclaimer
This Blog/Web Site is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide legal advice. By using this blog site you understand that there is no attorney-client relationship between you and Grissom Law, LLC.