Tax Implications From a Distribution For An Irrevocable Trust to a Beneficiary

by Cindy Quarters ; Updated April 19, 2017
Distributions from an irrevocable trust can trigger tax liabilities.

Any time a beneficiary of a trust receives money from that trust, taxes must be considered. The amount that is due depends on many different factors, including the amount of money distributed from the trust and the tax status of the recipient prior to receiving the funds. Assets placed in a trust are typically able to avoid some kinds of taxes, but income tax will still be due at the time of distribution.

Irrevocable Trust Basics

An irrevocable trust is a type of trust that cannot be altered once it has been set up. The grantor -- the person who establishes the trust -- places assets into the trust, and control of those assets is then turned over to a trustee. The trustee manages the account to serve the best interests of the beneficiaries of the trust. The trustee is also responsible for distributing funds and assets from the trust to the beneficiaries according to the terms of the trust.

Estate Taxes

When assets are placed in an irrevocable trust, it means that the grantor no longer owns those assets. When the grantor dies, nothing in the trust is subject to probate or estate taxes, because those assets are part of a trust and not the grantor’s estate. This benefits beneficiaries of the trust in two important ways. First, the value of the trust is not reduced by the need to pay estate taxes. Second, by avoiding probate, any assets in the trust that are to be distributed after the grantor dies can be dealt with in a timely manner. This usually results in a savings of several months, and sometimes much more.

Income Taxes

Money that is distributed from a trust to one or more beneficiaries is considered income for those receiving the funds. Typically, when an irrevocable trust is established the funds are not distributed all at once, but instead are paid out over a period of time. Any money received by a beneficiary of the trust must be declared as income for the year in which it was received. It will be taxed at the recipient's tax rate for that year.

Other Tax Considerations

An irrevocable trust is responsible for paying its own taxes. Once money is distributed, the beneficiary is the one responsible for paying income taxes. However, a beneficiary who is claimed as a dependent on someone else's tax return only has to file if he receives more than the minimum amount during the year. This amount varies greatly depending on the person's status and situation, and should be checked with a tax professional when filing. Also, in some cases the person who claims the beneficiary as a dependent can include the funds as part of his income, in which case the beneficiary doesn't need to file.

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