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Is money received from a trust, where most of the money was in mutual funds, taxable as ordinary income to me as the beneficiary

Grayling, MI |

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.

Attorney Answers 4


  1. 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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    Mr. Fromm is licensed to practice law throughout the state of PA with offices in Philadelphia and Montgomery Counties. He is authorized to handle IRS matters throughout the United States. His phone number is 215-735-2336 or his email address is sjfpc@comcast.net , his website for more tax, estate and business articles is www.sjfpc.com. and his blog is

    LEGAL DISCLAIMER Mr. Fromm is licensed to practice law throughout the state of PA with offices in Philadelphia and Montgomery Counties. He is authorized to handle IRS matters throughout the United States. His phone number is 215-735-2336 or his email address is sjfpc@comcast.net , his website is www.sjfpc.com. and his blog is <http://frommtaxes.wordpress.com/> Mr. Fromm is ethically required to state that the response herein is not legal advice and does not create an attorney/ client relationship. Also, there are no recognized legal specialties under Pennsylvania law. Any references to a trust, estate or tax lawyer refer only to the fact that Mr. Fromm limits his practice to these areas of the law. These responses are only in the form of legal education and are intended to only provide general information about the matter within the question. Oftentimes the question does not include significant and important facts and timelines that if known could significantly change the reply or make such reply unsuitable. Mr. Fromm strongly advises the questioner to confer with an attorney in their state in order to ensure proper advice is received. By using this site you understand and agree that there is no attorney client relationship or confidentiality between you and the attorney responding. This site should not be used as a substitute for competent legal advice from a licensed attorney that practices in the subject area in your jurisdiction, who is familiar with your specific facts and all of the circumstances and with whom you have an attorney client relationship. The law changes frequently and varies from jurisdiction to jurisdiction. The information and materials provided are general in nature, and may not apply to a specific factual or legal circumstance described in the question or omitted from the question. Circular 230 Disclaimer - Any information in this comment may not be used to eliminate or reduce penalties by the IRS or any other governmental agency.


  2. 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.


  3. 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.

    James Frederick

    *** LEGAL DISCLAIMER I am licensed to practice law in the State of Michigan and have offices in Wayne and Ingham Counties. My practice is focused in the areas of estate planning and probate administration. I am ethically required to state that the above answer does not create an attorney/client relationship. These responses should be considered general legal education and are intended to provide general information about the question asked. Frequently, the question does not include important facts that, if known, could significantly change the answer. Information provided on this site should not be used as a substitute for competent legal advice from a licensed attorney that practices in your state. The law changes frequently and varies from state to state. If I refer to your state's laws, you should not rely on what I say; I just did a quick Internet search and found something that looked relevant that I hoped you would find helpful. You should verify and confirm any information provided with an attorney licensed in your state.


  4. 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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