Does the money you get from a trust count as income to you? You know, mom and dad passed away, and you’re gonna be taxed on that.
Think about this. You work at a job, and you get your paycheck, right? That’s taxable income under federal law and under state law, and you’re going to pay at your tax rate, whatever bracket you’re in. You’re going to pay the taxes on that.
Income has a very specific definition under our tax code, though. There are a lot of ways to define it, but generally, it’s earned. You earned it. That’s the big distinction. So, if you receive money from a trust, generally speaking, it’s not deemed income to you if you’re the beneficiary.
Now, that’s different if you received, say, a family member passed away, and they had an IRA, or a 401K, or some other type of retirement account. If you were the beneficiary in that or went through the trust and now it’s coming to you – yeah, sorry, bad news. That’s going to be taxable income to you. So you got to deal with that.
Most of those types of accounts must be withdrawn within 10 years of their death. You’re going to receive all of that as taxable income over the course of that 10 years, and that’s from dollar one. There are no exemptions for that.
Now, if you are planning your estate and you want to avoid that consequence, there are some strategies you’ve got to look into. In a charitable remainder trust, generally speaking, you can double that to 20 years. You get your beneficiaries a whole lot more money and then still leave a gift to charity. Pretty cool stuff.
So, there are two parts. Most things, like if the house is sold, the cars are sold, you receive those as a beneficiary – not taxable income. Life insurance – not taxable income. If you receive retirement accounts, IRAs, 401Ks, as a beneficiary, those are taxable income.
Summary
Inheritance from a trust is usually not considered taxable income for beneficiaries. However, the money is taxable if you inherit retirement accounts like IRAs or 401Ks. These accounts must typically be withdrawn within 10 years after the owner’s death, and there are no exemptions. Other assets like houses, cars, and life insurance are generally not taxable when inherited.
