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Home / Estate Planning / Are Living Trust Payouts Taxed?

Are Living Trust Payouts Taxed?

December 4, 2020Estate Planning

living trustWe are going to provide some information about taxes on living trust distributions in this post. But before we address this central question, we should provide some general information about the benefits that these trusts provide.

Lump Sum Inheritance Concerns

You may have concerns about leaving a direct, lump sum inheritance to someone that is on your list. Some folks have a proven history of poor money management, and there are young people that simply may not be prepared to handle a significant inheritance right away.

Unless there are special provisions made, the people that are named in a will do in fact receive their inheritances all at once, and the estate is closed. This is not necessarily the case when you use a living trust.

When you establish the trust declaration, you dictate the way the assets will be distributed. For example, you can instruct the trustee to distribute a certain amount each month until the beneficiary reaches a certain age.

Through the inclusion of a spendthrift clause, you can protect the principal from the beneficiary’s creditors, and this is another advantage.

Streamlined Estate Administration

Many people think that the estate administration process is very simple and straightforward when a will is used, but this is not the case. A will must be admitted to probate, which is a time-consuming and expensive legal process.

It will take eight months at minimum in most jurisdictions, and no inheritances are distributed while the estate is being probated by the court. In addition to the time consumption and the cost, it is a public proceeding, so anyone that has an interest can access probate records.

The executor is the estate administrator when a will is utilized, and an executor has to locate and inventory assets that are not consolidated in an orderly fashion.

On the other hand, when a living trust has been established, all of the assets that are owned by the trust will be listed on a schedule. This simplifies the administration process, and the asset distributions are not subject to probate, so the drawbacks that we touched upon are avoided.

Control, Flexibility & Disability Planning

When you establish a living trust, you do not lose control of the assets, because you will act as the trustee while you are alive and well. If you were to transfer your bank account to the trust, your ability to use the account would be exactly the same as it would be if you kept it in your name.

The same thing is true for a home or any other property that you decide to transfer to the trust. Plus, the trust will be revocable, so you can rescind the trust at any time. It would no longer exist, and you would regain direct personal possession of the assets.

In the trust declaration, you name a successor trustee to assume the role after you are gone, and your heirs would be the beneficiaries. As time goes on, you can change the trustee and beneficiary designations, and you can also alter the terms of the trust.

A significant percentage of elders become incapacitated late in their lives. To account for this eventuality, you can name a disability trustee to assume the role if it ever becomes necessary.

Taxes on Living Trust Distributions

Now we can tie it all together with the answer to the taxation question. The assets in the trust are a remainder that you were able to hang on to after you paid taxes all of your life. Taxes on distributions would be instances of double taxation, and this would not be fair.

The IRS and state tax authorities apply this logic, so distributions of the principal are not taxable. However, distributed interest earnings must be claimed by the beneficiaries when they file their tax returns. The trust would also have to pay taxes on undistributed interest income.

Schedule a Consultation Today!

We are here to help if you are ready to put an estate plan in place. A living trust may be the right choice for you, but we can evaluate your situation and make recommendations based on the circumstances.

Personalized attention is key, this is exactly what you get when you choose our firm. You can set the wheels in motion right now if you call us at 219-865-2285, and you can fill out our contact form if you would rather send us a message.

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Amy Nowaczyk
Amy Nowaczyk
Amy Nowaczyk is a partner at O’Drobinak & Nowaczyk, P.C. Amy’s background in psychology and law have given her a unique perspective on estate planning and elder law issues. Her education and experience have enabled her to identify the needs of her clients in order to create customized estate plans that help her clients avoid probate, control the distribution of their estate, and protect their assets from the high cost of long term nursing care. Clients frequently praise Amy’s ability to make them feel comfortable and at ease while discussing difficult subjects such as their disability and death.
Amy Nowaczyk
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