how does the inheritance from a trust get taxed

2021-05-17

How Does The Inheritance From a Trust Get Taxed?

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Some aspects of estate planning can be extremely complicated and lead to headaches—especially tax issues. Whether you’re the estate planner, the grantor, or a beneficiary, the experts at Phelps LaClair can answer all of your questions.

You could be in the beginning phases of estate planning when tons of questions arise. Or, as a grantor, you might wonder how to best prepare your estate so it remains untaxed. Beneficiaries often have tax questions too, especially if they have just inherited a trust. As a beneficiary, you might wonder if you have to pay income tax on an inheritance trust.

Do You Pay Taxes on a Trust Inheritance? 

Inheriting Trust Assets in Arizona

Arizona citizens do not have to pay inheritance taxes on a trust. There is no inheritance tax or estate tax in Arizona. As long as your estate size is under the federal taxable limit, there will be no tax. Only six states have an inheritance tax. 

Inheriting Trust Assets in Other States

The states that currently impose an inheritance tax include: Iowa, Pennsylvania, New Jersey, Kentucky, Maryland, and Nebraska. The only situation where an inheritance tax would apply to Arizona residents, would be if a grantor owned assets in one of those states and left it to a beneficiary in a trust. 

For example, Holly’s estate contains a chain of restaurants throughout Kentucky and Missouri. Because Holly was an Arizona resident, her estate is mainly free from death taxes. The beneficiary of the restaurants in Kentucky will have to pay that state’s inheritance tax. 

Is Inheritance Trust Income Taxable?

Tax issues surrounding a trust will vary depending on several factors. The type of trust, the type of withdrawal made from the trust, and the time the withdrawal is made can all affect the taxes. 

For example, Bob has a revocable trust. While Bob is living, the IRS requires him to pay tax on any income that the trust earned. After Bob’s death, his trust becomes an irrevocable trust and it goes to his beneficiary. 

Similarly, Bob’s beneficiary will have to pay taxes on any interest income that the trust creates. The beneficiary of the trust won’t pay any taxes on withdrawals of the principal (or the original) amount. Taxes only apply to any income the trust funds generated.  

Arizona Estate Planning with Tax Experts

Our estate plans have helped thousands of Arizona families secure peace of mind, knowing that their future needs are covered. Gain this same confidence for yourself! We will walk with you every step of the way and provide solutions for all of your estate planning goals. We know the tax laws and how to best protect your assets. 

Are you ready to start your first estate plan?

Your first estate plan sets the foundation for a secure future for you and your family. There is no online estate planning software or template sophisticated enough to do that for you. In fact, not even every estate planning law firm can do all of that. 

It takes years of experience, dedication, and hard work to earn the reputation that Phelps LaClair has gained among our peers. Contact us today to learn more about how our experts can help you create your first estate plan.

 

 

 

 

photo: Inheritance Tax by Nick Youngson | taken from Picpedia.org on 5/3/2021 | used under the Creative Commons License

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