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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11861
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I have had a trust with a bank in MS for many years. My trust

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I have had a trust with a bank in MS for many years. My trust is now less than $200,000 and I plan to terminate it. I live in Tx and need to know if I will have any tax consequences on the money. I haven't paid any taxes on the income from this trust because I have been drawing my monthly income from the principal.
Welcome! My goal is to do my very best to understand your situation and to provide a full and complete answer for you.


Good morning. Can you tell me whether this is a revocable or irrevocable trust? Were you the grantor of the trust? Are you the trustee and beneficiary now? Has the trust been filing tax returns and paying the tax on the income? Thanks.
Customer: replied 3 years ago.
This is an irrevocable trust and controlled by Regions Bank as Trustee. I have spoken with my Trustee and he says that they can hire an attorney for me to have it terminated.

Yes, the trust has paid taxes on trust.

Myself, and my two sons are the beneficiaries of the trust.
Thanks. I'm going to opt out so an expert with more specific expertise in your area can address this for you. Please do not respond to this post as it will only slow the process of another expert picking this up for you. Take care.

Hi,

As the trust is irrevocable, the trust would have been paying income taxes on the income not being distributed.

Here's the basic outline of how that happens

The estate’s or trust’s taxable income is computed using the following formula:

Gross income

Less

Deductible trust expenses

Less

Personal exemption amount

Equals

Taxable income before distribution deduction

Less

Distribution deduction

Equals

Taxable income

Times

Applicable tax rates

Equals

Tax liability


As the trust pays taxes and you pay taxes on any distributed income, and you are a beneficiary the result will affect you either way ... you may actually want to pay income taxes yourself(you and you sons) because personal tax brackets are much higher (lower taxes on the same amount of income) for individuals that trusts.

Look at the difference here between trust tax brackets and tax brackets for Married FIling Jointly:

Trust, 2013:

If taxable income is: The tax is:

Not over $2,450 15% of the taxable income

Over $2,450 but $367.50 plus 25% of
not over $5,700 the excess over $2,450

Over $5,700 but $1,180 plus 28% of
not over $8,750 the excess over $5,700

Over $8,750 but $2,034 plus 33% of
not over $11,950 the excess over $8,750

Over $11,950 $3,090 plus 39.6% of
the excess over $11,950

Married Filing Jointly:

 

 


  • 10%
    on taxable income from $0 to $17,850, plus
  •  

     

  • 15% on taxable income over $17,850 to $72,500, plus
  • 25% on taxable income over $72,500 to $146,400, plus
  • 28% on taxable income over $146,400 to $223,050, plus
  • 33% on taxable income over $223,050 to $398,350, plus
  • 35% on taxable income over $398,350 to $450,000, plus
  • 39.6% on taxable income over $450,000.
  •  


    Essentially both entities file a tax return (beneficiaries and trusts)

    Any capital gains or income will not be taxed twice.... If the trust distributes it takes a deduction and the beneficiary pays the tax.

    He real work to be done is to run things both ways to see which has the lower net tax cost (because both the trust's taxes - less to pay out to you - and the beneficiaries' taxes - same income taxes at a lower rate it the trust distributes it - will have a effect on the beneficiaries)

    To answer your question - Yes there will be tax effect, either way, but the analysis work you should have the trustee do, is to see whether distributions should be made before termination, because both the beneficiaries and the trust will have a tax return to do for 2013.

    Hope this helps

    Lane
    Customer: replied 3 years ago.
    Will the fact that I am 72 and haven't owed any taxes for years affect what I will owe in taxes?

    No,as long as you have not actually owed and been below the threshold for filing.

    Honestly, my intuition says that if any flags are raised at all. IRS will see that you have been the beneficiary of a trust that HAS been paying taxes for many years ...

    ... and that will "connect the dots."

    THis is not all that atypical.

    Lane

    If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.

    HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

    Lane, JD, CFP, MBA, CRPS
    Category: Tax
    Satisfied Customers: 11861
    Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
    Lane and other Tax Specialists are ready to help you


    Make sense?

    Lane