My wife stands to inherit some money in the form of a monthly payment from a trust (money from her step-father) that was set up by her step-brother. He basically has full control of the trust and original money inherited from his father.
How is that monthly income considered for tax purposes? The same as regular income?
Not enough information to know. It depends on what the income consists of, and how the trust is treating it. If the money is income to the trust, and the trust is passing through both the income and the tax obligation, then the tax treatment is based on whatever generated the income: capital gains, qualified dividends, non-qualified dividends, ordinary income, etc., etc., etc. It is possible that the trust will pay any tax obligation, but because trust rates are generally much higher than rates for individuals, if the trust is allowed to pass the tax obligation to the beneficiary, it will generally result in a lower tax liability for the amount of income generated. On the other hand, if the money is not taxable - income from tax-free bonds, etc., the trust may be able to pass the money on with no tax obligation. Or if the money is actually part of the inheritance, with no gains or losses, there would also be no tax.
You really need to ask her step-brother these questions. As the trustee, he is the one who is responsible for issuing the K-1 that she will get each year. The K-1 is what will tell you how to put the income on your tax return.
AJ
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The plot thickens. My wife’s stepfather had a life insurance policy on himself with her mother as the beneficiary. Her mother died first so he just changed the beneficiary to himself (his estate I guess). His son has said that he is giving my wife half of that policy ($100k). Since this is a true inheritance in the sense that it was left to her in the will, is this just considered a gift and taxes will be owed? How is this money listed on a tax form?
In general, life insurance proceeds are not taxable, and do not have to be reported on your tax form. However, if the proceeds were paid to the trust and he is investing the proceeds and using that investment to pay her, then she’s not really getting the life insurance - she’s going to be getting income from the trust with a cost basis of the life insurance amount. And since he’s going to be paying it monthly, rather than giving her the money all at once, it seems like this is what might be happening. Again, since he’s the one who’s set up the trust, he needs to be the one you ask these questions of.
AJ
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I will add - if he’s giving it to her outside of the trust, i.e. - it’s just a direct payment from the estate, then it is an inheritance, and, at least on the Federal level, inheritances are not taxed (although the estate can be). Some states do tax inheritances, so you need to understand the laws of your state (and the father’s state, if different).
AJ
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Been a while but my wife’s step-father just died in November. She got a copy of the will and she is not listed in it. Only her step-brother is and being over the trust. Is it normal to have documentation in a trust that spells out how that should be distributed to heirs? At this point we are in month 2 of the 3 month period where you check to see if there are any claims against the estate. Not sure if that is an appropriate time to take or if her step-brother is dragging things along.
He said she and our daughter were in the will but obviously they were not mentioned. Thus the question as to if there might be other documentation associated with the trust.
Sorry for your loss.
I don’t know that there is anything ‘normal’ when setting up trusts, since each one is set up specifically for the person who is setting it up (the ‘grantor’). The trust should document who the beneficiaries are, but depending on how the grantor set up the trust, it may or may not specify how assets are supposed to be distributed.
These are really questions that the step-brother, as the trustee, needs to answer. He should be able to give you documentation.
AJ
Thx. He is being less than helpful about what it doing on. Just wasn’t sure if details about distribution from the trust might be in a different document than the actual will, since they were not mentioned in the will.
Sounds like they might be. Good luck in getting the information you need.
AJ