Taxes on estate

[GlennD1]

I have a TIAA retirement Fund and a Schwab IRA.  Two Questions:

1.  I have a charitable fund as a 50% beneficiary of both.  I presume there will be no tax on these distributions?

2.  If I leave the other 50% of both accounts to a Trust (for distribution) will the Trust be taxed upon receiving the money?  Alternatively, if I leave this 50% to an individual (daughter), would she be able to take the money over 10 years to spread the tax liability?

Thank you,

Glenn Detrick

[Cate9]

If you are currently making distributions from a retirement fund to a charity, those will be taxable to you.  However, if a qualified charitable distribution is made directly from an IRA account to a qualified charity, and you are over the age of 70 ½, that will not be taxable.  However, it is limited to IRAs, and there are other exclusions and considerations as well.  You should discuss this with your retirement fund advisor to make sure these donations are done correctly so that your IRA distributions are not taxed. 

If at the time of your passing, your retirement accounts transfer to a trust, there is no tax on that transfer. If the investments earn income before being distributed, it is possible that the trust could pay tax on the income.  When the money is distributed to the beneficiaries of the trust, those beneficiaries will get a K-1 to report their income.  Whether the funds go to a trust or directly to an individual as an inherited retirement account, they are only taxed on the amount that they withdraw each year. 

[GlennD1]

If a stock portfolio is left to an estate trust, when these stocks are sold, is the cost basis for the stocks what was paid originally or is there a step-up so that the cost basis is the value of shares at time of death?  Example.  I purchased X # of Apple shares at $5.00 a share.  It is now $190.00 a share.  Is the capital gain avoided by leaving the shares to the Trust?

[Cate9]

Great question!

It depends.  If it is a revocable trust, that is, the trust is revocable by the grantor until the date of his passing, the investments transfer as part of the estate and will get the step up in basis. If it is created as a irrevocable trust, the investments are not part of the estate and therefore do not get the step up in basis. 

[GlennD1]

Thanks for your prior reply.  Further question:  In the Trust will be funds coming from an IRA and funds from a retirement plan (TIAA/CREF).  In the Trust already are a number of stocks, which will be shown on a stepped-up basis -- so no capital gain tax should be due on them.  So... money coming from the existing stocks should not generate a capital gain, but money coming from the retirement and IRA funds are subject to tax?  Very confusing.  Thank you.

[Cate9]

If the retirement accounts were funded from pretax dollars, then someone has to report the income when the distributions are made. Typically, that will be the retiree, or the beneficiary after the retiree passes. There is no configuration to avoid reporting that income. If some of the retirement funds came from after tax money, like if you had a ROTH IRA or a non deductible IRA, then the only income to be reported is the earnings on the investments, when the withdrawals are made.  You can plan for how much tax you want to pay by keeping an eye on your total income.  As an example, if the beneficiary is in the 12% tax bracket, they may want to make sure that they don't take so much out that it pops them up to the next higher tax bracket. Take a little each year to keep the taxes from eating up more of the account. Keep in mind that if the trust is going to hold the retirement funds, the trust needs to be the beneficiary so that the funds are not liquidated until the trustee decides to distribute those funds. 

[BonnieI]

Hi @GlennD1 

Thanks for joining our TurboTax Live Event!  

Additional information would be needed to correctly respond to a complex trust tax question.  Details on the type of trust and your state requirements are just a few things that would come into play.

Here are some useful links:

Estates & Trust - Questions & Answers

https://turbotax.intuit.com/tax-tips/estates/estates-and-trusts/L9f1Fywy8

4 Ways to Protect Your Inheritance

https://turbotax.intuit.com/tax-tips/estates/4-ways-to-protect-your-inheritance-from-taxes/L653s0Kyn

Navigating Family Trust & Taxes

https://turbotax.intuit.com/tax-tips/family/navigating-family-trusts-and-taxes/L27DrzOCJ

We hope this information is helpful and please reach out with any additional questions.

Thank you for using TurboTax Live!

Bonnie

TTLive, Quality Reviewer Tax Expert