USA Irrevocable Trust Tax Questions


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Hello Everyone,

I recently became the beneficiary of an irrevocable trust. An attorney has been managing it for the last several months and refuses to answer any questions, especially in regards to taxes. That attorney is removing himself from the trust before the end of the year.

My understanding is that income from the trust which comes from principle is not taxed, but interest on the trust is taxed. Is this correct? Secondly, capital gains taxed was paid out of my trust for the parent trust. Is that tax bill going to be a write off in any capacity? The trust was created in California and I live in Colorado if that changes anything regarding taxes.

Sincerely,
Andrew
 
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Hi Andrew,

At some point you are going to have to file tax returns for the trust so you will need a qualified tax preparer. Might as well hire one now to answer your questions for your precise circumstances then can do the return when it is time.

Regards,
Kat
 
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Sometimes it depends on the trust and what is stated within. But correct, principal withdrawals (if allowed by the trust) are not taxed (since they were taxed prior to being added), but any interest (unless from tax-exempt holdings) or cap gains are. Who pays the tax is up to how the trust is written, state laws, and how the income is distributed. If it isn't required to be distributed but can be left in the trust, the trust pays. But usually, it is distributed to the beneficiaries and the tax is paid by them. I personally am a beneficiary of an IRR trust and it earns income in Illinois (I am a nonresident) and the trust is required to pay the tax to Illinois on a pass-thru for the beneficiaries (I guess this makes sure it gets paid!) I have done trust taxes for years, but with the nonresident income it through in some problems. Nonresident state taxes are a pain because programs out there aren't refined enough to handle some of the states nor easy to understand if you don't have experience. TurboTax was ok for federal fiduciary, but not the states. HR software worked for the states, but was hard to learn until a great HR software specialist on the phone walked me through. You need to know what goes where, I just didn't know where each correct input area was. Andrew is right, you should probably find a good tax preparer that knows trusts (not the chains, but an independent would be best).
 

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