I normally pay taxes on the income of the trust. I don’t have access to the principle amount but my trustees have determined based on life expectancy and actuary tables that I can have a lump sum distribution. I was not given any documentation for the finances and I would like to confirm the amount is correct but my question is will I be taxed on that distribution (under $100K) and can I get a legal document signed saying I am not liable if I am taxed because the trustee said I was not to be taxed? How can I secure that I won’t have additional fees/taxes IF the amount they state is correct?
ATTORNEY ANSWER BY MARGARET L. CROSS:
There are no income taxes associated with a distribution of principle from a trust. You will be responsible for paying taxes on the income that the trust distributed to you.
Each year the Trustees of a trust file a 1041, which basically tells the IRS the amount of income that was generated by the trust and whether that income was distributed to a beneficiary. If the income was kept in the trust, the trust is responsible for the taxes. (I am assuming that the grantor of the trust has passed away. There is an exception to the rule if this is a grantor trust and the grantor (aka donor) is still alive so that the grantor can pay the taxes if he chose.) If the income was distributed out, that too is reported to the IRS so that the IRS knows to look for that income on the beneficiary’s 1040.
The Trustees then informs the beneficiary with the use of a tax form how much to include in the beneficiary’s income. It is the same process no matter how much is distributed. The Trustees aren’t going to give you a document saying you don’t have to pay additional tax if they miscalculated the income. You now have all of the money, so therefore the responsibility is yours to pay the tax.
Legal Disclaimer: Please note that this answer does not constitute legal advice, and should not be relied on since each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. This answer does not create an attorney-client relationship. A lawyer experienced in the subject area and licensed to practice in the jurisdiction should be consulted for legal advice. Circular 230 Disclaimer: Any information in this answer may not be used to eliminate or reduce penalties by the IRS or any other governmental agency.
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