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Law Educator, Esq.
Law Educator, Esq., Attorney
Category: Legal
Satisfied Customers: 118175
Experience:  JA Mentor -Attorney Labor/employment, corporate, sports law, admiralty/maritime and civil rights law
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We live in ID. My fa-in-law died in December. His

Customer Question

Hi. We live in ID. My fa-in-law died in December. His annuity had 3 yrs left OR could be received in a lump sum. My husband is trustee. The annuity company asked if he wanted taxes taken out or not, he said 'yes'. So, 28% was taken out. Now, the money
is in the trust account. My husband wants to disburse the funds to himself and his two brothers. BUT, we are concerned about how this will affect our taxes. Can you tell us how the portion, approx $30k, will be taxed with this coming years income tax filing?
Will it show as income, or inheritance, or....? We are super stressed about this, your advice is VERY much appreciated and needed! Thank you.
Submitted: 2 years ago.
Category: Legal
Expert:  Law Educator, Esq. replied 2 years ago.
Thank you for your question. I look forward to working with you to provide you the information you are seeking for educational purposes only.
If you take income from the trust, since the annuity went to the trust and the trust was taxed on the amount. The income distribution deduction is figured by completing Schedule B of Form 1041. The beneficiary, not the trust, pays the income tax on the taxable amount of the distributions, so anything you take from the trust would be taxed. Thus, in taking the distributions from the trust, you need to figure what your tax would be on that and it would be best to not take any distribution until you sit with your local tax accountant to review your entire asset and tax situation before taking distributions so you can figure out how much you can take from trust distributions with the minimal tax impact to you and the other beneficiaries should do the same.
Customer: replied 2 years ago.
Hello, and thank you for your reply. To clarify - the trust is taxed (which it already was), and now the beneficiaries are also taxed? To me, it seems the trust 'earns' the money, and gets taxed on it - so why do the beneficiaries also get taxed (when it is just a 'gift' or inheritance')? Please help me understand this. Thanks!
Expert:  Law Educator, Esq. replied 2 years ago.
Thank you for your reply.
I understand the trust is taxed on income of the trust, but when the trust distributes to beneficiaries if anything that has not been taxed yet is being distributed, the beneficiaries are liable for that tax. As I said above, the beneficiaries are liable for paying tax on whatever part of the distributions that are taxable (those that have not yet been taxed).
As I do not know the assets of the trust, that is why I also said that your accountant has to review before making any distributions to determine what is gift and what is taxable.