Revocable Trust distributions considered income? Taxes owed?

NBrazil

New Member
Jurisdiction
Georgia
My mom passed away recently and a REVOCABLE trust had been set up. It instructs a certain amount of money to be distributed monthly to the three beneficiaries as long as is possible, hopefully lifetime, but there are provisions to make adjustments to amount and time given changeable economic conditions. There is also a house to be sold and those funds to be distributed equally.

Anyway, I'm on social security and a subsidized health care plan so it is vital I find out not only the tax consequences, but even more importantly, are these two money distributions considered INCOME? Why? For example, capital gains are not considered income as I understand it leading to crazy things like a millionaire only receiving it can collect unemployment insurance because it isn't income.

It appears from my searches, that distributions from a REVOCABLE trust are not taxable and not income? But also, "it depends." I also found distributions from an IRREVOCABLE trust ARE taxable (and possibly "income"). I know that normally the profits from the sale of a house are also not income or taxable… (we are not talking millions here) but I was told that this money has to be run through the trust to be distributed.

Anyway, do you see my problem? I need to know if the money distributions from the estate are 1) taxable and 2) "income." The consequences are very relevant because of the limits one can earn on social security and on the estimated income for the health care subsidy. If I don't get it right I could wind up in a lot of trouble.

Side note, started taking SS at 63 1/2, and I turn 65 in 6 months… so then there will be the whole medicare thing. But I don't think this issue matters to it.

So, what do you say about (1) and (2)?

If it matters, mother lived and died in Florida.

Thanks
 
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As I understand it, yes, any disbursements you receive from the trust in a given year are retorrep as income, and are taxable as income.

You can likely get a cheap and efficient answer from an accountant or from one of the many tax agencies that are still open this time of year.
 
What you receive from the trust is an inheritance. Inheritances are not taxable by the IRS unless they exceed the lifetime estate tax exclusion or maybe estate tax has been eliminated for 2018. Probably doesn't matter in your case.

Your state might have an inheritance tax. You'll have to check that.

If the trust earned any income (interest, dividends, stock appreciation, etc) then part of the distributions may be taxed as income or maybe the tax has to be paid by the trust before distributions can be made.

A lot depends on the circumstances so I agree that you should be talking to a tax pro and get this all reviewed.
 
No one has to accept any gift or inheritance.

I have known several people that choose to not accept an apparent windfall which would have actually been a boondoggle.
 
On the other hand, if you get $100,000 and pay $25,000 to the tax man, you have $75,000 that you didn't have before.

I would take that boondoggle any day of the week.
 
So confusing. Unfortunately tax experts are a little busy right now so I'll have to wait for an appointment. Too bad because I'm super responsible when it comes to things like this, don't like surprises.

My brother, executor, says any "principal" is just "inheritance" and not taxable (of course, in order for the trust to continue providing a "lifetime" distribution, at some point it must be interest, right?

Motley Fool website says Irrevocable trust distributions, taxable... Revocable (which this one is), nontaxable... with caveats (whatever that means).

Just as long as it isn't "income," whatever that means, because I'm limited in the income I can earn with Social Security. The distribution quadruples my estimated (essentially gross) "income."

Well, I agree... hope I can get a 1/2 hour with a CPA or tax advisor soon. Basically, I thought inheritance is non-taxable (as long as it is not millions), but this trust distribution thing has me very confused.
 
My brother, executor, says any "principal" is just "inheritance" and not taxable (of course, in order for the trust to continue providing a "lifetime" distribution, at some point it must be interest, right?

Both parts of that are correct.

The following presentation may help you understand:

https://www.irs.gov/pub/irs-utl/a_roadmap_to_estate_and_trust_income.pdf

Revocable (which this one is), nontaxable... with caveats (whatever that means).

A caveat is just a warning that exceptions might apply.

I'm limited in the income I can earn with Social Security.

Why?
 
Just as long as it isn't "income," whatever that means, because I'm limited in the income I can earn with Social Security. The distribution quadruples my estimated (essentially gross) "income."


You can delay (or defer) receiving any assets until you reach your SS retirement age.

Again, you should discuss your concerns with a CPA.
No rush, if you wish to avoid going over a monetary threshold, just inform the trust administrator to hold any payments until you consult with an attorney or CPA.

Not to worry, mate, things are never an issue until they occur.
 
are these two money distributions considered INCOME?

A distribution from a trust may or may not be taxable income to the beneficiary, and you haven't provided the information required to make a determination about your particular situation. I didn't read everything in the prior responses carefully, but there are at least two pieces of information that are wrong. I strongly suggest you confer with a CPA or tax attorney.
 
It is still tax season and all the CPAs are too busy to help me. It'll be a few months. I'm pretty sure the distributions I would receive now are tax free (and frankly, living only on Social Security isn't working, my savings will be exhausted in 3 months - chronic illness that insurance doesn't cover), so this timing was fortuitous (not that I'm celebrating my mom's passing ... except that she was in extreme pain, fading in and out, so it was a blessing for her to pass in her sleep), for everyone. Anyway, as soon as I can get to see a good CPA/tax attorney, I will.

I wouldn't know what the "two pieces" of information are... and what I wrote is my interpretation of what I've googled and what I have... a Revocable Power of Attorney describing her last wishes. Maybe I can find that information? Brother (executor - and owner of his own business) simply says, if it is principal, not taxable. Right now it just that.
 
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