Trust Inheritance Question (ATTN: Tax Agent)

Previous | Next
 rated by 0 users
Latest post 05-08-2010 8:15 PM by JohnB3. 6 replies.
  • 05-03-2010 8:34 PM

    Trust Inheritance Question (ATTN: Tax Agent)

    Last week I found out that apparently I am an heir to a trust. (no seriously) A semi-distant relative died and in planetary alignment quite a number of people between myself and my siblings also passed away prior to the founder of the trust passing on and therefore we are the surviving heirs.  

    I just received a copy of the trust as well as a list of assets in it from the bank along with a W-9 form and a Beneficiary Data Questionnaire.  I have two questions:  what is the purpose of the W-9 and on the BDQ it asks for a tax bracket.  How do I determine that or can it be left blank?

    Thanks.

    "That's just my opinion, then again I might be wrong."  Dennis Miller

     

  • 05-03-2010 10:19 PM In reply to

    Re: Trust Inheritance Question (ATTN: Tax Agent)

    ClydesMom:
    I have two questions: what is the purpose of the W-9 and on the BDQ it asks for a tax bracket. How do I determine that or can it be left blank?

    Here's the deal. The trust is likely a complex trust (as opposed to a simple trust). As used in the tax world, complex and simple trusts have a distinct meaning. A simple trust is a trust that is required by its terms to pay out all of its income every year to the trust beneficiaries. A complex trust is any trust that is not a simple trust.

    Trusts are taxed on their income except to the extent that they make distributions from the trust to the trust beneficiaries during the year, in which case the income passes to the beneficiaries and those beneficiaries then include the trust income on their returns and pay tax on it. So, for example, if the trust has $100 of tax income for the year and distributes during the year at least $100 to the beneficiaries, all the $100 of trust income will end up on the beneficiaries' returns.  But if the trust only distributed $50 to beneficiaries, only $50 passes out to the trust beneficiaries and the trust is taxed on the remaining $50. The trust return (Form 1041) includes Schedules K-1 that show what share of the trust income goes to each beneficiary. The beneficiary gets a copy from the trust of his/her K-1. That K-1 then helps you to know what amount goes on your return and where. The trust needs the W-9 information from you because that information is necessary for the K-1.

    The tax bracket is easy to determine, assuming that your income is expected to be about the same this year as it was last year. First, though, let me explain why it matters. The trust basically wants to know your marginal tax rate, i.e. what your next dollar of income would be taxed at if you received that dollar at the end of the year. That's effectively what the trust income will be taxed at if the trust distributes income to you during the year. The reason this matters is that while trusts are taxed on their incomes at the same rates as individuals, the rate structure for the trust is much more progressive; i.e. it hits the maximum tax rate at a much lower income level than individuals typically do. So, often it is better for everyone if the trust at least distributes enough in assets to the beneficiaries to force the trust income up to the beneficiaries. That is not always the case, though, depending on the rate that the beneficiary is taxed. In other words, knowing your tax rate will help the trustee determine if the tax smart thing to do is distribute some assets to you or keep everything in the trust and have the trust pay the tax.

    Ok, assuming you are married and filed a joint Form 1040 (the "long form") return for 2009, here's what you do to determine your marginal tax rate. Look at line 43 of your return—the taxable income line. If the amount on that line is:

    less than $16,700 — 10%

    at least $16,700 but less than $67,900 — 15%

    at least $67,900 but less than $137,050 — 25%

    at least $137,050 but less than $208,850 — 28%

    at least $208,850 but less than $372,950 — 33%

    $37,950 or more — 35%

  • 05-03-2010 11:07 PM In reply to

    Re: Trust Inheritance Question (ATTN: Tax Agent)

    That explains it very clearly.  If I take what the trust pays me and roll it into a Roth IRA is there a tax benefit to that?  Or should I be speaking to a local tax attorney prior to disbursement?

    Thanks for the help.  

    "That's just my opinion, then again I might be wrong."  Dennis Miller

     

  • 05-03-2010 11:48 PM In reply to

    • Drew
      Consumer
    • Top 10 Contributor
    • Joined on 03-30-2000
    • PA
    • Posts 49,103

    Re: Trust Inheritance Question (ATTN: Tax Agent)

    Unless you are talking about some sort of qualified rollover, you must fund an IRA out of work earnings--so to put trust disbursement into IRA  won't work (absent work earings in equation)



  • 05-03-2010 11:50 PM In reply to

    Re: Trust Inheritance Question (ATTN: Tax Agent)

    ClydesMom:
    If I take what the trust pays me and roll it into a Roth IRA is there a tax benefit to that?

    Once you have the trust distribution, it's much like the money you get from a job, selling stock or whatever. So, anything you'd do with those funds to save tax, like charitable contributions, etc., will work with the trust distribution, too. You can make a contribution to a traditional IRA and get a deduction for that (up to the contribution limit for the year) but not for Roth IRAs. Roths are not taxed when you take distributions from them, though, unlike the traditional IRAs.

  • 05-08-2010 8:13 PM In reply to

    • JohnB3
      Consumer
    • Top 500 Contributor
    • Joined on 03-16-2006
    • Posts 92

    Re: Trust Inheritance Question (ATTN: Tax Agent)

    "If I take what the trust pays me"

    You won't know how much of it is reportable as income/dividends/quali... dividends, etc. until you get the form from the trust.

    For instance, for the past three years a trust in Delaware has been paying my mother's nursing home bills and she is totally dependent, except for chewing, due to advanced Alzheimers. Anyway, they have paid nearly $90k per year to the facility and the K-1 I get on or about March 1 has listed reportable income of $27k to $37k per year and some of that is qualified dividends and there are even some deductions for foreign taxes and such.

    It all depends on what the investments are, how they've done, what the deductions look like inside the trust, how badly the stock market tanked and how the trust handles it - their call. The K-1 income this year was the smallest so far. Go figure and the market is up.

    And that's all I know about it, so far. When my mother dies, my cousin and I will split what's left. Fwiw, the trust was for the care of 3 sisters "...if they ever need it." Even in this market the trust company is doing pretty well (for us, and themselves no doubt :) Have you seen the fee schedule for accounts over $4 million?)  And I suppose I won't know how it plays out until they send me the final paperwork. Tax planning? I'm just a working stiff who should take his 35 years and retire at 60. Well, 36 years by the time I turn 60.

    John

  • 05-08-2010 8:15 PM In reply to

    • JohnB3
      Consumer
    • Top 500 Contributor
    • Joined on 03-16-2006
    • Posts 92

    Re: Trust Inheritance Question (ATTN: Tax Agent)

    I wonder why q u a l i f i e d dividends turned into quali...d dividends?

Page 1 of 1 (7 items) | RSS

My Community

Community Membership New Users: Search Community