Revocable Living Trusts - Taxes on Reinvested Dividends

[Slim11]

Ok , so my two cents worth nothing with todays inflation, your still alive. Set up the trust. Not knowing your assets, have it read that for the first 5 years she gets all the dividands from the assets, maintains the trust, and files taxes for the trust through an accountant. The latter gets paid for from the trust. Yea, she could probably get away with a little extra here and there, but dought it. And , here is the point I had to convince myself of, who cares, I am taking a dirt nap.

After 5 years, give her 20 percent of whats left. Or just give peices away to charety and her after 5 years. The main part is that you want here to get some money, and some to charity. So , set some markers. Leave a basic plan on how to invest stuff , if that dosen't work, robo advisor. You can only do so much. I am doing the same now, trustee is my ex wife and my freind. I set some rules, but you cant think of everything. My stuff has to be left to my 12 yo, but she needs a guardian, so for now its my ex. Things change in the future I can change the trust.

 

[CaliKid]

Revocable trusts pass income through. You use your SSN on accounts. Don't over-complicate things. Very basic and simple. You'll pay the same income tax rates in an RLT or not in one.

Also, the advice to use TODs is great for death but doesn't do much for disability/incapacity so always make sure you have that adequately covered. Most people do not. POAs are generally not valid for real estate unless specific and bank accounts unless bank specific form.

 

[SecondCor521]

POAs are generally not valid for real estate unless specific and bank accounts unless bank specific form.

There is some model law which my state has adopted that basically provides a POA template and defines what each power means. It also says that all institutions generally have to recognize the state template POA or face penalties.

I signed one the other day but put some springing language into it. I need to inform my POA designees about it.

 

[ncbill]

Mid 50s. No kids. Longtime relationship (10+ years) but unlikely to ever marry. Low income earner. So, I want to create an income stream for her via dividends and cap gains from the Trust - preferably where she can never touch principle - and have the remaining $$s go to charity after she passes (since she will not have kids and likely still be single). I also want to protect the principle from some unscrupulous guy who may say 'wow..she inherited some coin..I think I'll marry and divorce her and walk off with half"..heck, I'm not even 100% sure Mr. long-term relationship guy doesn't already have that in mind and isn't just playing the long game..

I'll definitely have to dig in more to what it would mean if she were the Trustee..

Well, that depends on state law.

Here as long as inherited money is kept separate (i.e. don't deposit in any joint accounts) it remains separate property, so no need for a trust.

 

[38Chevy454]

Not very complicated at all (full disclosure: I'm a retired CPA and did some tax practice from 1977-1980). 1041 is 3 pages but basic, Sch D is 2 pages and K-1 is 1 page and many years I don't have a Schedule D. I have an Excel template that I input the 1099-DIV, 1099-INT and 1099-B numbers into that maps to the relevant lines on the tax return and I download that year's pdf for forms from irs.gov and fill them out, print them, sign and mail. I'm guessing 1-2 hours now that I've done it for 17 years.

Can you elaborate on the protections that trusts would provide for your kids? Similar to you we have virtually everything with beneficiary designations to the kids for financial accounts and enhanced life estate deeds for real property.

24601, just as described above by pb4uski it is not that hard once you understand the basic process. Look up IRS form 1041 and the associated schedules and K-1. Learn how they work and it will not be so intimidating as it seems now.

I fill out trust returns each year for a trust I am trustee for, and previously did the same for my parent's estate trust. First year was a little learning curve, but since I also do my own taxes the learning of the trust 1041 process was not too bad. Yes the trust tax rates are higher than individuals as you found out. That is what the K-1 is used for, to pass that income out of the trust and to the beneficiary. One K-1 per beneficiary, so you may have multiple K-1 issued by the trust. Then add in duplicating the process for the trust state tax if applicable.

 

[CaliKid]

There is some model law which my state has adopted that basically provides a POA template and defines what each power means. It also says that all institutions generally have to recognize the state template POA or face penalties.

I signed one the other day but put some springing language into it. I need to inform my POA designees about it.

That's good to hear as it bothers me when banks refuse to honor a signed legal document. However, I can almost guarantee title companies will still give a hard time on real estate deals. At least in California they require a specific POA that includes the legal description of the property in question.

 

[yclipse]

Every trust I have created for a client requires that the income be distributed to the current beneficiary/-ies.

To make it easier, discontinue reinvestment of dividends and capital gains. Then bring out the broom at the end of the year.

 

[CaliKid]

Every trust I have created for a client requires that the income be distributed to the current beneficiary/-ies.

To make it easier, discontinue reinvestment of dividends and capital gains. Then bring out the broom at the end of the year.

This goes against giving asset protection for benes as I am sure you know. Always good to discuss pros and cons. Discretionary distribution gives more protection, distributing income MAY still be done, and thus preferable in my book. Also, I have seen accountants treat it as distributed for tax purposes - right or wrong I don’t know but I have seen CPAs do that.

 

[OldShooter]

Every trust I have created for a client requires that the income be distributed to the current beneficiary/-ies. ...

We have a somewhat unusual situation where this wouldn’t work. Two of the grands are getting educational trusts funded from inherited IRAs. Distributing within 10 years from the IRAs is not a problem. Grand #3, however, is getting a special needs trust that will hopefully last a long time/beyond 10 years. That one we are funding with a Roth so the trust can retain the corpus of the Roth beyond ten years without having to pay taxes on it. It will just pay taxes on the earnings of whatever part of the corpus it is holding after the corpus is distributed. Probably these earnings will be distributed anyway, eliminating taxation at trust rates.

 

[samcat]

I haven't read all the posts yet...I would hope this has been mentioned. A revocable living trust is disregarded for tax purposes. The trust will have your ssn and any income from a tax year is reported on your income tax return. Once the grantors of the RLT die, then a new trust is set up and that income is taxed as trust income. Usually, the assets are distributed to the beneficiaries so there is not a lot of income in the after death trust.

 

[GrayHare]

Note there are many type of trusts, and terms vary by grantor wishes. When the grantor dies, some trusts distribute assets, some retain them, etc.