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Do I pay taxes on a trust fund?

Jan 15, 2012 by Ernie from Las Vegas, NV
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14 votes

The answer to this question is “it depends.” There are a variety of trusts with very specific structures that require detailed tax treatment.

If it is an irrevocable trust funded by an individual or entity for the benefit of another party, for example an irrevocable life insurance trust, and the trust pays out all income to the beneficiary then it is considered a pass through trust with its own tax ID number. This can also include the exemption portion of a living trust. An exemption trust is created when one person dies and their living trust splits assets based on the estate tax exemption amount.

While it is required to file a tax return for an irrevocable trust entity, the income and corresponding tax from this type of trust is passed through to the beneficiary. A K-1 income tax reporting form is generated by the original trust, sent to the IRS by the trust, and given to the beneficiary for filing with their taxes.

Another type of irrevocable trust allows for discretion in the distribution of income and can retain earnings. In this case any income received is taxed at estate and trust tax rates which are 35% for income over $11,650 annually. Any distributed income is again reported on a K-1 and given to the beneficiary for inclusion with their tax returns.

If it is a revocable trust set up by someone for their own benefit, for example a living trust, then the trust typically continues to utilize the individual (or one of the couples) social security numbers as a tax ID number. Tax reporting 1099’s are generated with the individual’s tax id and income is reported on the individual or joint tax return and paid at their prevailing rates.

** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.

Comment   |   Share This Answer   |  Report   |  Aug 29, 2012 from Rancho Santa Fe, CA

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The taxation of a trust will depend on whether it is a pass-through trust, in which case, each recipient pays tax at their own rate, or a trust with discretion to retain earnings and withhold payments, in which case the trust pays its' own, often higher, tax rate.

Comment   |   Share This Answer   |  Report   |  Jan 24, 2012 from Arvada, CO

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hi: Yes, the Trust should have been assigned a tax ID number. The trust gets a deduction for all income distributed, and the reciprient picks up the income, in kind: dividend, interest or capital gain. You should get a K-1 statement telling you what has been distributed to you.

Comment   |   Share This Answer   |  Report   |  Jan 15, 2012 from Fort Lauderdale, FL

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Yes, or no. It depends on the type of trust (pass-through or not) and the taxation of the trust itself. Check with the trustee and your own tax advisor.

Comment   |   Share This Answer   |  Report   |  Feb 08, 2012 from San Diego, CA

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