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jgordosea, Enrolled Agent
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Experience:  I've prepared all types of taxes since 1987.
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If you put your lottery winnings in a Blind ...

Resolved Question:

If you put your lottery winnings in a "Blind Trust" how are the yearly taxes paid? Does the IRS know only that the Trust is paying the taxs not you. I'm wondering because; lets say you draw out "X" amount of dollars out of the Trust. That now becomes "Income". Do you pay a Tax on that with draw? And at the same time is the trust paying taxes as well?
Submitted: 7 years ago.
Category: Tax
Expert:  jgordosea replied 7 years ago.

From http://en.wikipedia.org/wiki/Blind_trust : "A blind trust is a trust in which the executors or those who have been given power of attorney have full discretion over the assets, and the trust beneficiaries have no knowledge of the holdings of the trust. Blind trusts are generally used when a trustor wishes to keep the beneficiary unaware of the specific assets in the trust, such as to avoid conflict of interest between the beneficiary and the investments. Politicians often place their personal assets (including investment income) into blind trusts, to avoid public scrutiny and accusations of conflicts of interest when they direct government funds to the private sector." For income tax purposes, whether or not it is a blind trust is not a consideration.

A grantor is a person who creates a trust. When a grantor retains substantial control of a trust, the grantor is taxed on the trust's income, and the trust is disregarded for tax purposes. If the grantor retains control of only part of a trust, the grantor is treated as the owner of only the assets controlled; income from other assets is taxed to the trust or its beneficiaries.

The income from lottery winnings generally must be included in the income of the winner unless the winnings are assigned to another and no control or benefit from the winnings is retained by the winner.

To the extent that the assets held in the trust are not in control of the grantor, the trust will file a tax return for the earniings on those assets and may have to pay income tax if there is undistributed income. The income tax on the income distributed is paid by the beneficiary that receives the income from the trust and the trust is allowed a deduction for the distributions. In this manner, the income earned on the lottery winnings transferred to the trust can be taxed at the (lower) tax rate of the beneficiary.

Hope this helps.

 

Customer: replied 7 years ago.
Does this mean that I (as a lottery winner) I draw out partial amount of the total monies in the "Trust account" that I only pay taxes on the amount of with draw? Can the attoney who set up the trust account prevent me for asking for "X" amount of with draw?
Expert:  jgordosea replied 7 years ago.

No, it means you pay tax on all of the lottery winings; but if you then transfer the winnings to a trust that you are not the beneficiary and do not control the assets then the trust will pay income tax on the earnings (or the beneficiary will pay if the earnings are distributed.

The only way that you as the winner wil not pay tax on the winnings is if you give them away without any control or rights to the winnings (but check with a lawyer for your state laws on the assignment of income). You will only not pay the tax if the income is no longer yours.

Hope that helps.

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3095
Experience: I've prepared all types of taxes since 1987.
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jgordosea
jgordosea
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