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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29535
Experience:  Taxes, Immigration, Labor Relations
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My husband just received notice of a trust fund disbursement

Customer Question

My husband just received notice of a trust fund disbursement for $31K. He has tax lien on our mortgage from IRS. Will IRS attempt to take that trust disbursement to apply toward lien?

Is a trust fund disbursement considered inheritance? What sort of tax will can he expect to pay on the disbursement if/when he receives it?

If he receives the money, is there a way to shelter it for tax purpose such as a ROTH IRA?
Submitted: 3 years ago.
Category: Tax
Expert:  Lev replied 3 years ago.

Lev :

Hi and welcome to our site!
Will IRS attempt to take that trust disbursement to apply toward lien?
We may not know if the IRS will actually levy on any funds - but if your spouse has outstanding tax debts - the IRS has legal rights to levy on his assets or the property he owns
Please be aware that a lien is not a levy. A lien secures the government’s interest in your property when you don’t pay your tax debt. A levy actually takes the property to pay the tax debt. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any type of real or personal property that you own or have an interest in.
Will or will not the IRS levy any specific property depends of circumstances - but they MAY do that.
Is a trust fund disbursement considered inheritance?
The distribution from the trust may be considered inheritance. Inherited assets are assets owned by the deceased when he/she died. For instance if the trust was created as a living trust - means all assets were treated as owned by the grantor - the distribution of such assets from the trust to beneficiaries will be treated as inherited assets.
If the trust was originally created as irrevocable trust - means it was a separate legal and taxing entity - the distribution would not be inherited.

Lev :

What sort of tax will can he expect to pay on the disbursement if/when he receives it?
That is a question to be addressed by the trustee.
In general inheritance is not taxable income for income tax purposes. However - some income received after the person passed away might be classified as income in respect of the decedent (IRD).
For instance interest credited to the bank account after the person died, taxable distribution from retirement accounts - these are IRD and are taxed thl same way as would be taxed for the decedent.
The trust will issue form K1 which will report taxable distributions (if any)

Lev :

If he receives the money, is there a way to shelter it for tax purpose such as a ROTH IRA?
There is no "shelter" - means - we may not avoid tax liability.
However - if inherited assets are in the tax deferred account - such as IRA or Roth IRA or 401k plan - funds might be transferred to so-called "inherited IRA" account - and distributions from such account might be spread over several years.

Expert:  Lev replied 3 years ago.
Just in case you were not able to use the chat - I am switching to Q&A mode and posting the answer below.
Please feel free to communicate if you need any clarification or have other tax related issues.

Will IRS attempt to take that trust disbursement to apply toward lien?
We may not know if the IRS will actually levy on any funds - but if your spouse has outstanding tax debts - the IRS has legal rights to levy on his assets or the property he owns
Please be aware that a lien is not a levy. A lien secures the government’s interest in your property when you don’t pay your tax debt. A levy actually takes the property to pay the tax debt. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any type of real or personal property that you own or have an interest in.
Will or will not the IRS levy any specific property depends of circumstances - but they MAY do that.

Is a trust fund disbursement considered inheritance?
The distribution from the trust may be considered inheritance. Inherited assets are assets owned by the deceased when he/she died. For instance if the trust was created as a living trust - means all assets were treated as owned by the grantor - the distribution of such assets from the trust to beneficiaries will be treated as inherited assets.
If the trust was originally created as irrevocable trust - means it was a separate legal and taxing entity - the distribution would not be inherited.

What sort of tax will can he expect to pay on the disbursement if/when he receives it?
That is a question to be addressed by the trustee.
In general inheritance is not taxable income for income tax purposes. However - some income received after the person passed away might be classified as income in respect of the decedent (IRD).
For instance interest credited to the bank account after the person died, taxable distribution from retirement accounts - these are IRD and are taxed the same way as would be taxed for the decedent.
The trust will issue form K1 which will report taxable distributions (if any)

If he receives the money, is there a way to shelter it for tax purpose such as a ROTH IRA?
There is no "shelter" - means - we may not avoid tax liability.
However - if inherited assets are in the tax deferred account - such as IRA or Roth IRA or 401k plan - funds might be transferred to so-called "inherited IRA" account - and distributions from such account might be spread over several years.

Let me know if you still need any help.