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Can Principal and Income be Distributed from one SubTrust to another SubTrust?

I don’t see why not. My late father’s attorney established SubTrusts under the main Trust. Per the Trust document when the Beneficiary of one SubTrust who is 89 years old passes away the remaining Beneficiaries inherit her share. If she did pass away I would think if the principal is transferred from her SubTrust bank account to another SubTrust’s bank account this would be a non tax event. However if money from her inherited IRA in her SubTrust is Distributed to another SubTrust, which has its own Tax ID, a 1041 K-1 could be issued and would be taxed at the 37% Trust tax rate (if exceeding $15,650 income) and it stays in his SubTrust or it could be distributed via a K-1 directly to the individual rather than his SubTrust and thus a potentially a lower tax rate than 37%. Am I correct? Did I miss anything? 

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3 Replies
M-MTax
Level 12

Can Principal and Income be Distributed from one SubTrust to another SubTrust?

You are substantially correct; distributions of principal (corpus) do not have tax consequences but income does have tax consequences (e.g., interest, dividends, retirement accounts, etc.).

 

Hopefully, the trust is not named as the primary beneficiary of the IRA as that's generally not a great idea unless there are exigent circumstances.

Can Principal and Income be Distributed from one SubTrust to another SubTrust?

Yes, the Trust is named as the IRA Beneficiary. The SubTrusts were set up because of special situations where my father who passed away didn’t want my sister to get her money all at once because she doesn’t know how to handle money and is a spendthrift. The other SubTrust was for his partner of 20 years and the Trust (SubTrust)) is paying for her assisted living. My father’s lawyer recommended the SubTrusts. Personally I think it makes the accounting more complicated and I am not sure if they were needed. When my father’s partner passes away the other Trustees inherit her portion. My father didn’t want it to go to her children. 

Can Principal and Income be Distributed from one SubTrust to another SubTrust?



The way this was handled makes perfect sense.

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