We are being told that all of the money I receive from the trust will have to be declared as income in the year I receive that disbursement.
This is probably not true. You will receive what is called a Form K-1 (Form 1041) that will show the type and amount of income you are to report. You would be well served to talk with an estates/tax attorney to determine where you stand on all this. Until you see the K-1, it is just a guess as to what income you will need to report.
Hope this helps.
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If the source of the trust funds is all interest or otherwise taxable income then it will be taxable when passed on to the beneficiaries. Usually that doesn't apply to the principal (the amount that exisited when the person died) cause taxes were already paid on the income it was derived from. So it shouldn't be every dollar you receive- that would be highly unlikely However, it often makes more sense for the trust to pay the taxes on it because it get more deductions; such as the cost of legal and administrative fees which my accountant has told me the beneficiares cannot deduct. So talk to the trustee and see if its possible to pay the taxes through the trust before distributions.
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I agree with both of the other responses. It is likely that there will be a step-up in basis that eliminates any tax on appreciated assets in the trust. Any income tax that would be due from the trust *might* be passed through to the beneficiaries. This would normally be nominal and would not include the principal of the assets received. The exceptions are when you receive qualified assets, where some or all of the tax has been deferred. This would not normally be mutual funds, although I suppose it is possible. (It the deceased has his/her 401k or IRA invested in mutual funds, for example). If you have any doubts or questions, then you should consult with your own tax advisor to take care of this.
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Education Law Attorney
You don't give enough information to provide a definitive answer. Whether or not a distribution is taxable depends on the character of the distribution. If this is a distribution from an IRA, 401k or similiar account, then the entire amount is taxable as ordinary income. (It would be unusual to put these sorts of funds in a trust because you lose the ability to "stretch" the distribution.)
If this is a distribution of post death earnings from the trust, then the amounts would be taxable as ordinary income or capital gains, depending on the character of the income as received by the trust.
If this is a distribution of principal from the trust, this should not be taxable since the trust receives a stepped up basis as of the date of death.
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