Trust Attorney San DiegoA Trust Attorney San Diego explains the facts about trusts and estate planning.  There are two methods to pay tax on the possessions placed in a trust fund.

With a revocable trust, the grantor– the trusted developer– owns the income from the trust assets and has to pay the taxman. If the grantor sets up an irreversible trust, the properties no longer belong to her, so the trust pays its tax.

It’s their turn to pay the IRS when recipients begin taking money out.

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Taxes

Any cash you withdraw from a trust fund– which is just a term for the possessions and money in the trust– is taxable income. You pay tax the same way you would if the trust possessions belonged to you. If you receive earnings from stock dividends, you report dividend income; if it’s a rental property, you say it as rental earnings, and so on. Unlike a case in which the assets are your own, however, you can’t take a write-off for the trust’s losses.

Timing

Your gross income for this year consists of everything the trust gave you, and any cash it owes you, however, hasn’t paid you yet. This can happen if the trust generates income due to you in, say, December. However, it does not pay until January. If there’s a concern about who should get the trustee and the money does not have a response, it could also take place. It’s taxable income even if the trustee hasn’t cut you the check if the cash is due to you this year.

The Write-off

What’s taxable to you is a tax break for the trust. To prevent double-taxation– the trust paying tax on its income, then you paying tax on the same money when you withdraw it– the trust gets a write-off for what it gives you over the course of the year. If the trust’s distributable net income is less than it pays you– this might occur if, for example, you tap the trust principal– the tax reduction is restricted to the DNI.

Paying

If the trust income triggers a 1099 type, you ought to get one in the mail just as if you owned the possessions. When the trust pays you more than $10 in dividend income, for example, you get a 1099-DIV.