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    Home » Estate Planning » Do You Pay Taxes on Living Trust Distributions?

    Do You Pay Taxes on Living Trust Distributions?

    October 22, 2020Estate Planning

    living trustThe living trust is the ideal estate planning centerpiece for many if not most people for a number of different reasons. We will provide an overview here, but first, we will address a common question that is asked about taxation.

    Principal vs. Earnings

    The Internal Revenue Service proceeds with the understanding that the principal that is held by a living trust was accumulated after taxes were paid on the underlying income. As a result, distributions of the principal are not subject to taxation.

    Distributions of the earnings that are generated by assets in the trust are taxable. In some cases, the grantor of the trust will instruct the trustee to distribute all the assets in the trust as soon as possible. Under these circumstances, there would be little to no tax exposure.

    It is also possible to arrange for the trustee to provide limited distributions over an extended period of time. This is necessary if a minor is a beneficiary, and people will sometimes take this approach to protect loved ones that are not good money managers.

    In addition to the taxes that the beneficiaries would have to pay on distributions that are made to them, the trust itself would pay taxes on undistributed earnings.

    Living Trust Benefits

    Now that you understand the taxation situation, we can share some of the benefits. The fact that you can stretch out the distributions over time is certainly one of the positives, and there is an added layer of protection.

    After your passing, the trust would become irrevocable. A spendthrift provision would keep the principal out of the reach of the beneficiary’s creditors.

    This is not a very pleasant subject, but unfortunately, a very significant percentage of seniors become unable to make sound decisions at some point.

    Alzheimer’s strikes about 10 percent of seniors, and the figure goes up to 32 percent for elders that are 85 and older. This is not the only cause of cognitive impairment, and there are other types of incapacity.

    You would act as the trustee while you are alive and fully capable of handling your own affairs. When you establish the trust declaration, you can name a disability trustee to assume the role if you become unable to manage the trust yourself.

    The estate administration process is streamlined when you have a living trust. All or most of the assets that comprise the estate would be consolidated, and this makes life easier for the successor trustee.

    Plus, the distributions would not be subject to probate. When a will is used, it must be admitted to probate, which is expensive and time-consuming legal process.

    The flexibility is another key benefit. Though you would probably never want to use it, you retain the ability to revoke the trust at any time. You can change the beneficiary and/or trustee designations, and you can convey property into the trust after it has been created.

    With regard to assets that were never signed over to the trust, you can include a pour-over will to direct the assets into the trust after your passing. In California, a Heggstad petition can also be filed to ask the court to move personally held assets over to the trust.

    Access Our Estate Planning Worksheet!

    We have developed a very useful estate planning worksheet that you can go through to gain a more complete understanding of the process. This resource is being offered free of charge, so you should definitely get your copy today.

    To gain access, visit our worksheet page and follow the simple instructions.

    Need Help Now?

    If you are ready to work with an attorney from our firm to put a custom crafted estate plan in place, we are here to help. You can send us a message to request a consultation appointment, and we can be reached by phone at 310-337-7696.

     

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    Scott Schomer, Estate Planning Attorney
    Scott Schomer, Estate Planning Attorney
    A graduate of Boston University School of Law, Scott P. Schomer is a frequent lecturer on estate planning and elder law issues, having discussed these important issues on local and national television. A seasoned courtroom advocate, Scott has obtained combined judgments and verdicts in excess of twenty-five million dollars for his clients. Scott has served as a member of the Los Angeles Superior Court Probate Volunteer Panel (PVP Attorney), Probate Settlement Panel and a Judge Pro Tempore. Scott's expertise has been recognized by his peers with such accolades as a life-time membership in the Multi-Million Dollar Advocates Forum, the Five Star Wealth Manager designation, and repeated nominations as California Super Lawyer.
    Scott Schomer, Estate Planning Attorney
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