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What Happens When You Inherit Money From a Trust?

A trust is one of the best ways to protect your assets and provide for your loved ones after your death. If you are the beneficiary of money from a trust, you may wonder what happens next and what your obligations and requirements are once you receive the funds. As a beneficiary of trust funds, you do not want to make any mistakes in the handling of your newfound assets. It is helpful to understand the types of trusts so you know what taxes you must pay.

What is a Trust?

A trust is a legal entity that holds property for another person. A trust is generally part of an estate plan. The grantor of the trust provides the details of how the property is to be distributed after death.

A trustee or administrator is appointed to oversee and hold title to the trust.

A beneficiary is a person who receives the benefits of the trust.

Trusts are useful in estate planning because they offer several benefits. Trusts allow you to provide assets to specific individuals. It can also help beneficiaries avoid probate following your death. In some cases, it can help manage gift taxes.

Is Trust Inheritance Taxable?

Trust inheritance may be taxable, depending on the type of trust that has been set up.

A simple trust is non-grantor trust. The trust itself must report income to the IRS and pay capital gains taxes on earnings. It must distribute income earned on trust assets to beneficiaries annually. If you receive assets from a simple trust, it is considered taxable income and you must report it as such and pay the appropriate taxes.

A complex trust must contribute to a charity and can take deductions on its taxes. The complex trust may distribute income dividends to beneficiaries and must do so before distribution of capital gains.

Estate Tax Exemptions

The estate itself is required to pay taxes on assets, however, there are exemptions. The federal estate tax exemption allows estates to pay taxes only after the assets reach a certain amount. The exemption limit adjusts regularly with inflation. In 2021, the personal federal estate tax exemption is $11.7 million. This means that the estate must pay taxes on any amount over $11.7 million. It is important to note that there could be some cuts to the estate tax exemption based on possible legislation. The estate tax rate varies from 18% up to 40% based on the value of the estate.

If you are setting up a trust it is critical that you discuss the matter with an attorney to determine the best option. If you are a trustee or have inherited money from a trust, you must follow the current laws and pay the appropriate taxes. Trusts can be complex and it is helpful to seek guidance from a qualified attorney. Contact Moen Sheehan Meyer, Ltd. online or call us at (608) 784-8310 to schedule an initial consultation.

Published October 29, 2021
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