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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10131
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Around 10 years ago my father passed away leaving my brother

Customer Question

Around 10 years ago my father passed away leaving my brother and myself a $500,000 trust account which is handled by my mother. Its up to her decision to keep it and use the interest to live on or to release it to us. It appears that after 10 years she is ready to release it to us. Am I taxed on it as a gift or income or is still considered an inheritance from my father and not taxed? Please let me know. Thank You
Submitted: 9 months ago.
Category: Tax
Expert:  Lane replied 9 months ago.

Hi,

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I hold a JD (Juris Doctorate, a doctoral degree in the law), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP® and CRPS designations. - I’ve been providing financial, Social Security & Medicare, estate, corporate & tax advice since 1986.

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You are not taxed on any principal re-titled to you, whether it be a cash account or the value of real estate, or, other capital accounts such as stocks and bonds.Inheritances and gifts are excluded from INCOME taxation under IRC §102

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If you sell, say there were a house, or stocks, you could have capital gains taxed ... and if you invest or keep invested (say this is stocks, bonds, or funds) then you will could have interest, dividends or gains taxed (going forward) or even taxable rental income if there were a rental house in the trust that's retitled to you.

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But simply releasing to you is not a taxable event

Expert:  Lane replied 9 months ago.

On thing that you should be aware of is that, in the final year of the trust, either the trust OR the trusts beneficiaries can pay tax on any INCOME items of the trust (again, interest, dividends, rents) ... you mother MAY decide to use the K-1 from the trust's tax return (form 1041).

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And that can actually be beneficial ... because trust tax rates are much higher than individual rates ... (individual tax rates hit 39.6% at around 400,000, depending on how you file). Trusts, however hit that highest rate at around 12,000 of income.

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So choosing to pass out the last year's income and/or gains to the beneficiaries ( would be done with a K-1 ... much like a 1099 or W-2 to be used for you to report on YOUR taxes) will actually leave more money after tax FOR the beneficiaries (you and your brother)

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Let me know if you have questions.

..

lane

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Expert:  Lane replied 9 months ago.

One final piece... gift taxes and estate taxes are paid by the giver (or the decedent, in the event of an estate, the final gift)

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So no income tax - excluded under section 102 - (other than the possibility of some interest or other income from the last year of the trust, which is a good thing).

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And no gift tax or estate tax is paid by beneficiaries.

Expert:  Lane replied 9 months ago.

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I hope this has helped.

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Please let me know if you have any questions at all.

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If this HAS helped, I'd really appreciate a positive rating (using the rating request, faces, or stars on your screen)

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That's the only way I'll be credited for the work here.

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Thank you!

Lane

Expert:  Lane replied 9 months ago.

Hi,

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I’m just checking back in to see how things are going.

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Did my answer help?

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Let me know…

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Thanks

Lane