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By: Scott Grossman on February 22nd, 2019

Taxes in the Trust

Judging by how frequently I get asked about taxes in the trust it’s either my client’s favorite topic or their least favored topic but it’s something that you need to be aware of.

It’s extremely unlikely the trust you’re dealing with is going to have to pay estate taxes simply because the estate tax threshold is so high nowadays that it only affects a fraction of 1% of all the states in America. I’m not even going to address it here because it rarely applies to the cases that my clients are dealing with. Income taxes, however, are another matter. If the Trust is generating any significant amount of income and when I say significantly for the trust that means more than six hundred dollars a year then the trustee is going to have to file a fiduciary income tax return. Both with the federal government and with the States. That means the IRS and the Franchise Tax Board both are going to get tax returns from the trustee.

That doesn’t necessarily mean the taxes are owed by the trust. What it does mean is that you as a beneficiary are entitled to receive what’s called form k1.

It’s just simply a reporting form that tells you based on your share of the trust what income is attributable to you and anything that may be deductible that is attributable to you as well. Again it’s in the same proportions or the same fractions to your interest in the trust the trustee is responsible for filing the returns on a calendar year basis so that means from what happens between January 1st and December 31st in any particular year. By January 31st of the following year, the trustee is responsible for sending the form k1 out to the beneficiaries the trustee has to file the returns by March 15th of the following year assuming they haven’t gotten any kind of extension. When you’re dealing with your personal income tax return it would be a good idea to make sure that you wait until you get the form K1.

If the trustees are responsible then you’re gonna get it promptly you’ll have it in plenty of time to prepare your personal returns.

If you don’t get it promptly then certainly let us know so that we can follow up with the trustee’s counsel. If you still don’t get it, you’re gonna have to file your return and if later on we’re told there’s income that’s attributable to you and so, as a result, you have some kind of taxes or penalties that need to be paid, well then that’s an issue we’re going to take up inside the case because we’re going to seek a surcharge against the trustee for having caused this financial harm to you. That is the overview of how taxation is going to work inside the trust administration itself.

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