Tag Archives: taxes

Taxes and Beneficiaries: Estate, Income and Capital Gains

Dear Liza:

My aunt died recently, leaving her estate to me and my four siblings, in equal shares. She owned stocks and bonds, and some farmland in Iowa. Will I have to pay taxes on my share of the distributions?

That’s such a good question! You are most definitely not alone — almost everyone who receives an inheritance worries about the tax implications of the gift.

There are actually three taxes to consider here:

  1. The estate tax. If your aunt died in 2017, and owned less than $5.49 million dollars (like most people), her estate would owe no estate tax. That tax falls on the estate, not on the beneficiaries, so, even it were due, the trustee would pay that first, then distribute the assets to you and your siblings. The trust might pay it, then distribute what’s left, or, the trust might pay it, then deduct the tax payment from each distribution, but in your aunt’s case, let’s assume zero tax.
  2. Income tax. Beneficiaries don’t have to pay tax on distributions from the trust’s principal, but they will have to pay income tax on distributions from trust income to the extent that there are distributions to the beneficiaries or in the final year of a trust.  Income tax rates are much more compressed for trusts than for individuals, which means that a trust’s income is taxed at a much higher rate than that same income would be taxed to an individual.  That’s why it is usually better to distribute all the trust’s income out to the beneficiaries so that each beneficiary can pay tax on that income at their lower individual rate. How can you know which distributions are from principal and which are from income? Only the taxable portion of the distribution will be reported on the Form K-1 that you will receive from the trustee.
  3. Capital gains taxes. If your aunt’s assets have gone up in value since she died, and you sell what you’ve inherited from her (like stocks for example), you would have to pay capital gains taxes on the gain since the time of her death.

Trust Tax ID Numbers and Other Basics of Trust Administration

 

Dear Liza: My mother recently died and I am the Trustee of her trust. She left everything to me and my brother, equally.  I live far away from California, where she lived. My brother lives in her house. The bank told me that I need to get a tax identification number for my mother’s trust, is that true? Also, I’m worried that my brother is going to take her furniture and other things in the house before I have the chance to get there. I really don’t know where to start or how to get help. So, first things first. Yes, you DO need to get a tax identification number for your mother’s trust now that she’s died. That’s because now her trust is irrevocable, and, until you distribute the trust property to yourself and your brother, any income earned by the trust during this interim period needs to be reported under this new tax identification number, which is called an ‘EIN’ (employee identification number). You can apply for it online at this website. I’ve written about how to do this on Legal Consumer, which offers national probate information, organized by zip code–click on the article about how to get a tax id number.

Next, you, as Trustee, are responsible for gathering and protecting the trust’s assets until they are distributed to the beneficiaries. That’s the legal answer — but in real life, this can be tricky, especially when you are far away and you two are the only beneficiaries. I would advise seeing how cooperative your brother will be — after all, he benefits from having the house clean and sold for a good price. Ultimately, if he won’t cooperate and you can’t get him to move out, you should seek to have him removed by the local law enforcement authority, but I would hope it doesn’t come to that.

Finally, in terms of getting help, I’d advise you go find an estate planning attorney to advise you on your duties as Trustee. If there are trust assets other than that house, you can use trust money to pay for this advice, and it will be well worth it, since you have to do the job properly or risk personal liability. Nolo has a lawyer directory that should be helpful here.

Death and Taxes: The Basics

Dear Liza: My cousin passed away in 2011, and she had a revocable living trust. My cousins inherited the assets 50/50. The assets were stocks. Do my cousins have to file income tax returns for what they received? Also, am I required to file an income tax return for the trust? Your cousins inherited the stocks at their value on the date your cousin died in 2011. Inheritances are NOT ordinary income under the federal tax code, so they receive those assets free of federal income tax. (We have a federal estate tax; if any tax was due, it would have been on your deceased cousin’s estate, if she owned more than $ 5 million in assets when she died.)  Seven states have an inheritance tax, so they’ll need to check on whether any state inheritance tax is due.  Your two cousins will be responsible for filing income taxes on any dividends they received after inheriting the stocks, and for any capital gains earned when they sell that stock if it has appreciated since they inherited it. You, as Trustee, would be responsible for filing a trust income tax return (Form 1041) if the trust earned more than $600 worth of income between the time your cousin died and the time the trust assets were distributed to the beneficiaries.