Handling Tax Consequences of an Inheritance Coming from a Trus

The death of a loved one can generate a lot of emotional as well as financial complexity. For families that have put together irrevocable trust to facilitate asset transfer between one generation and another, the tax implications can become much more complicated. Read on to learn more about some of the basic rules that any heir should be familiar with when it comes to an irrevocable trust and inheritance. Knowing the consequences before you initiate putting together an irrevocable trust is essential, and can you avoid some serious issues with taxes down the road.

Estate Taxes

Whether or not an irrevocable trust is subject to estate tax at the death of the person who set it up depends on what the person did instruct to run that trust as well as the trust terms. Since the irrevocable trust is technically a separate legal entity, it is not included in the estate of the person who created it. The trust creation is a taxable gift that generates the need for a gift tax return. One exception though can involve life insurance trusts.

Income Taxes

What happens with income taxes in an irrevocable trust also has to do with the terms of the trust itself. If the trust does terminate at the person's death and the trust distributes assets to heirs, the critical thing to remember in this situation for heirs is that the basis in those assets will be whatever the basis lies for the trust's tax. This is why it is essential to have detailed information from the trustee for making plans to sell those inherited assets. Since every trust is different, it is impossible to generalize beyond these basic rules. Although using irrevocable trusts as an estate planning tool is relatively common and involves a lot of money, it is beneficial to hire an experienced forensic accountant to guide you through the ramifications of the tax as well as to explore all of the assets inside of the trust.

Having an accurate accounting of this information can go a long way when a loved one has passed away. Unfortunately many people do not keep accurate and detailed records about their financial situations and this can cause problems when a person passes away. Having a forensic accountant to help address all the details can be critical for answering some of your common questions and determining what you can do next.