Taxes on Inherited Trusts
When you inherit a trust from a friend or family member, it can be a potentially large source of funds, but at the same time, part of the money may go to the government in taxes. Depending on the type of trust and where you live, the amount that is spent in taxes will vary.
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Inheritance Taxes
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When you inherit money or other assets from a trust, you will not have to pay any inheritance taxes to the Internal Revenue Service. The federal government does not charge in inheritance taxes on items that you inherit. However, you may have to pay some inheritance taxes to your state government. Several states levy an inheritance tax based on the value of what you inherit from friends and family members. If you live in one of those states, save some of the assets from the trust to pay the taxes.
Estate Taxes
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If you inherit a trust, you will not have to pay estate taxes, but part of the money from the trust may be used to pay them. When an individual dies, the total value of the estate is added together to determine whether estate taxes will be due. As of September 2011, if your estate is worth less than $5 million, no estate taxes will be due. If the value is over $5 million, however, part of the money from the trust will have to go to taxes.
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Income Earned
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In some cases, trusts are set up to hold assets that earn income. For example, the person who creates the trust may put bonds or stocks in the trust, which earn income for it. If you receive a distribution from the trust before it pay taxes on the income, you will have to pay taxes on it. The income will be added to your income tax return, and you will pay taxes on it at your marginal tax rate. (See References 3)
Irrevocable Trust
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When an individual sets up an irrevocable trust, it could limit the amount of taxes that are due. With an irrevocable trust, the assets inside the trust are removed from your estate, which means that they will not count towards the $5 million estate tax limit. The drawback to setting up an irrevocable trust is that the owner of the trust may not access the assets any longer, which makes it a strategy for those who have plenty of assets and only want to limit the possibility of having to pay estate tax.
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