On January 18, 2016

A Denver trust attorney discusses when trust distributions can be taxable.

A Denver trust attorney discusses when trust distributions can be taxable.

It depends on the nature of the distribution, as well as when the distribution is made.

More specifically, the income earned and distributed by trusts is subject to taxes. Whether you or the trust is responsible for paying these taxes, however, will depend on when the funds are distributed:

  • The trust will be responsible for paying taxes on this income when it retains the income through the end of a calendar year.
  • The recipient (i.e., the beneficiary) will be responsible for covering the taxes on trust distributions if this income is distributed to a beneficiary within a year of receipt (i.e., the trust does not hold onto the income through the year-end).

Trusts & Taxes: More Important Information

  • The principal held by a trust is not generally taxable – The principal, also known as the corpus, refers to the property and assets used to fund the trust (i.e., the property transferred from the grantor’s name into the trust’s ownership). In contrast, the trust income, which refers to funds earned by the trust from investments, etc., is subject to taxes. Understanding this distinction is critical to knowing when and how tax issues come into play with trust distributions.
  • Trusts are not subject to double taxation – This means that, if a trust has already paid taxes on certain income, that income can be distributed to beneficiaries tax-free. It also means that trusts can use taxable distributions paid to beneficiaries as deductions.
  • While the same general tax rules that apply to individuals apply to trusts, the specific tax calculations for trusts tend to be more complex – And this is generally due to the fact that calculating tax obligations for trusts involves a number of additional factors, including (but not limited to) the income to the trust, the distributable net income (DNI), and distribution deductions.
  • Trustees are responsible for meeting trusts’ tax obligations – This may be the most important takeaway for trustees – and beneficiaries – because it means that:
    • Trustees can be held personally responsible for failing to properly satisfy the tax obligations for a trust.
    • Trustees should consider retaining an experienced attorney for help satisfying these obligations – and to ensure they do not do anything that could put them in breach of their fiduciary duties.

Contact a Denver Trust Attorney at JR Phillips & Associates, PC

For experienced help resolving estate and trust tax issues, you can turn to the trust attorney at JR Phillips & Associates, PC.

To discuss your best estate planning options, contact us today to set up an initial consultation with one of our lawyers. Schedule this meeting by calling us at (303) 741-2400, or email us using the contact form at the top of this page.

From our offices in Denver, we serve clients throughout the southwest and southeast Metro Area, including (but not limited to) people in Highlands Ranch, Littleton, Castle Rock, Parker, Aurora, Greenwood Village and Englewood.

Categories: Estate Administration, Trust Administration, Trustee Duties, Trustees, Executors & Fiduciaries