Are distributions from an irrevocable trust taxable to the beneficiary?

Distribution from an irrevocable trust may also be subjected to income tax to the beneficiary. If, in fact the said distribution is income derived from the trust, such as interest, dividends, rentals, or capital gains, it generally is assessed to the beneficiary. The trust will provide a Schedule K-1 to the beneficiary with an accounting of his share of the trust's taxable income. This income must be declared on the personal tax return of the beneficiary and is liable to him, where he has to pay any amount due with respect to federal and state taxes. Again, depending upon the overall income and total tax bracket of the beneficiary, these types of income distributions are taxed at ordinary income tax rates.

The distributions from the principal of the trust-that is, from the original assets put into the trust by the grantor-are normally not taxable to the beneficiary. Because these principal distributions represent a return of the grantor's original contribution, they are not considered to be taxable income. By contrast, capital gains realized upon the sale of trust assets are deemed taxable to the trust or the beneficiary depending upon whether those gains are retained by the trust or distributed.

The beneficiary is usually responsible for income taxes on all the income earned by the trust, but distributions of principal are not subject to tax. One Pacific Trust excels in the best way to manage these complicated scenarios and provides customized advice to ensure the beneficiaries understand their resultant tax liability arising out of tax implications and make proper decisions. More precisely, the beneficiary should be able to balance the scrutiny of his Schedule K-1 and, after seeking an explanation from the tax professional.