Thank you in advance for your consideration!
My wife and I are both retired and use our government pensions and social security to live. Although we have some cash savings we prefer not to touch it.
My wife will inherent a portion of a trust created by her father that will be disolved and divided among she and her sibling. This trust is composed of stocks and bonds.
After receiving her portion of this trust, should future distributions/ interest/ dividends be reported as income on our joint income tax? Can her portion of this trust be used to establish a new trust with our grandchildren as owners? If so, how should earnings be reported? Are there other tax considerations that should be considered?
Best,
Charles R
Hi Chas,
Your wife will not owe tax when she inherits the stock however, she might or might not owe tax (capital gains tax) when she sells the stock. Your wife will be responsible for taxes on dividends from the inherited stock as soon as the shares have been transferred into her name and yes, she will have to include the dividends received as income on your tax return.
Regarding the interest on the savings bonds, the principal is tax-free but your wife will owe income tax on some or all of the accrued interest and it must also be reported as income on your tax return.
https://turbotax.intuit.com/tax-tips/estates/estates-and-trusts/L9f1Fywy8
Regarding opening a new trust, I would suggest that you consult with a trust attorney to help you in that regard. The tax rules vary with the type of trust (grantor or non-grantor) you elect to open for your grandchildren. If you select a Grantor's trust then the grantors report all income from the trust on their own individual tax returns. With Non-grantor trusts, the trust itself or its beneficiaries pay tax on taxable income.
https://turbotax.intuit.com/tax-tips/family/navigating-family-trusts-and-taxes/L27DrzOCJ
Hi, @Chas R , thanks for your questions!
1) "Should future distributions/ interest/ dividends be reported as income on our joint income tax?" Dividends on stocks you hold should be reported to you on Form 1099-DIV, which should be included on your tax return as taxable income. Capital gains or losses on stocks you sell should be reported on Forms 1099-B or 1099-COMP, and should also be reported. However, your basis in these stocks may be affected by the fact that it was inherited, not purchased. This article goes into more detail.
2) "Can her portion of this trust be used to establish a new trust with our grandchildren as owners?" This is not a tax question, so is outside of our scope. Please consult with a financial planner or attorney.
3) "If so, how should earnings be reported?" You may have to file a 1041 tax return for the trust, "U.S. Income Tax Return for Estates and Trusts".
Hope this helps!
@Chas R wrote:My wife will inherent a portion of a trust created by her father that will be disolved and divided among she and her sibling.
If the terms of the trust dictate that the trust is to be terminated and all of the trust assets distributed to the beneficiaries, then the beneficiaries can do as they please with those assets; they would then own them personally and not within the trust (since it was terminated).