A trust may hold many valuable assets that increase in value over time. As the trust grows in value, any earned money or distributions may be considered income, depending on the circumstances. Who is responsible for this income varies based on the nature of the trust.
Money from a trust may be counted as income if you receive it as part of a distribution. As such, you may need to declare the income on your tax returns. In other cases, money from a trust is considered part of the grantor’s income. However, some trusts are independent legal entities, and the trustee must file taxes for the trust and declare the income. Understanding what is or is not income can be tricky, and you may need help from an experienced lawyer.
Request a free, confidential case review by calling our Henderson, NV trust administration lawyers at Flake & Flake at (702) 829-5731.
Is Money from a Trust Counted as Taxable Income in Nevada?
While money from a trust could be considered income, it may not be subject to state taxes in Nevada. Nevada does not have personal or corporate income tax. Whether money you get from a trust is considered income does not matter, as the state will not tax it as income. However, federal income taxes are a different story. Our Nevada trust administration lawyers can help you determine whether money from your trust is income and who is responsible for it.
Is Money from a Trust Federally Taxed as Income?
Money from a trust may be taxed federally as part of your income. However, money from a trust might not be considered part of your income, but someone else’s instead. Many different kinds of trusts exist, and how money is earned and whose income it is depends on multiple factors. Money could be considered income of the grantor, beneficiaries, or the trust itself.
Is Money from a Revocable Trust Considered Income in Nevada?
A revocable trust is a trust created by the grantor that can be revoked or canceled at any time. The grantor generally still controls the trust assets, even if someone else acts as trustee. As such, any income the trust earns and distributes to the grantor is usually taxed federally as income on the grantor’s personal tax returns.
Is Money from an Irrevocable Trust Considered Income?
Irrevocable trusts cannot be changed once the grantor places assets in the trust. The grantor cannot take the assets back or legally control the assets anymore. Generally, an irrevocable trust may be designated as a grantor or non-grantor trust.
Grantor Trust
Generally, all income, deductions, and capital gains flow to the grantor’s personal tax return. If a grantor trust earns money, the money may be considered part of the grantor’s income.
Non-Grantor Trust
A non-grantor trust is considered an independent legal entity that files its own tax returns. The grantor would not pay these taxes on their personal tax returns. As such, money from the trust may be considered income only for the trust.
If money is distributed to beneficiaries, that money is taxable income, and they must pay taxes, and tax obligations may be split between beneficiaries and the trust itself.
Where Did Money from a Trust Come From?
Money from a trust might come from a few different places. Whether this money is considered income will depend on its specific source.
Interest, Dividends, or Other Income
Money paid from interest or dividends earned by the trust is usually considered income. For example, if money in the trust is invested by the trustee and increases in value, the growth may be considered income.
Principal
The money initially placed in the trust may be considered part of the principal and not income if it is withdrawn from the trust or distributed. This money should have been taxed before it entered the trust. It cannot be taxed again. For example, if you place $10,000 in a trust, that original $10,000 is considered the principal.
Are Trust Beneficiaries Required to Pay Taxes on Money from the Trust?
Beneficiaries generally must pay income tax on distributions from a trust. Only in a non-grantor trust do beneficiaries pay the tax. Grantors would pay in a grantor trust. However, whether the money is taxed depends on where it comes from (e.g., interest, dividends, or principal).
Is Money from a Trust Considered Income if it is Not Distributed?
Maybe. In a non-grantor trust, the trust itself may pay taxes on interest because the interest is considered income to the trust. The money does not need to be distributed to beneficiaries for it to be considered taxable income.
Are Trustees Responsible for Trust Income in Nevada?
The trustee is generally responsible for almost everything about the trust. Accounting and record-keeping are crucial parts of the trustee’s job. It is up to the trustee to know whether a trust has earned income and who is responsible for that income. If the trust must file its own taxes, the trustee must arrange it.
What if You Do Not Pay Taxes on Money from a Trust?
If you did not include income from a trust in your taxes and you think this might have been a mistake, speak to a lawyer right away. This may be the result of a mistake, and we can work to correct it before the IRS gets involved. In some cases, failing to pay taxes may be seen as fraud. If you become aware of the mistake but choose not to correct it, you can still be charged with fraud.
Is Money from a Trust Considered Income if the Trust Invests It?
Yes. Even if income or interest the trust earns is not distributed but remains in the trust or is reinvested by the trustee, it may still be considered income. Depending on how the trust is structured, such income may be taxable at the trust level.
Do You Need a Lawyer for a Trust?
Yes. Trust administration can be incredibly difficult, especially with more complex trusts. If you are a trustee and you need help or guidance while administering the trust, making distributions, or interpreting legal documents, get help from a lawyer.
Ask Our Nevada Trust Administration Lawyers for Legal Help Today
Request a free, confidential case review by calling our Las Vegas estate planning lawyers at Flake & Flake at (702) 829-5731.
