My mother passed away in August 09 living me 25% of her estate. Do I need to claim this as an inheritance on my taxes or are there ways around this? It would seem unfair to get this gift and have to claim it on next years taxes. Please any help or advice would be so appreciated.
Thanks,
H
Sorry to hear of your loss. Your mother's trust should be administered by the trustee she designated in the Living Trust document. If any taxes are due by the estate they should be paid by the trustee before any distributions are made from the trust. When you receive the money it should be tax-free.
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Both of the other answers are correct. This stuff is complicated and I'm responding just to give you another explanation of the same thing. Hopefully one of the answers will "click" with you. But, we're all saying the same thing.
There are really layers of taxes, and they have to be addressed in order. First, there is the estate tax. If your mother's estate was in excess of $3.5 million, then there would be an estate tax. That would be paid out of the estate by the trustee before anything is passed to you. So, you will not have to worry about it personally.
Then, the assets that pass to you might have a built-in tax. Some assets, such as 401(k) and IRA accounts, will be subject to income tax when money is withdrawn. You would receive those assets in the same condition your mother had them - meaning that the income tax would be paid on any withdrawals. The result is similar with other assets that have produced income since your mother's death.
So, the income taxable part - if there is one - would only be a small portion of the estate.
The answer to your question is: It depends!
Yes, the ESTATE tax should be paid by the Trustee out of Trust assets prior to distribution of the residue to the beneficiaries. As a general rule, receipt of a gift (during life or by post-death inheritance, Trust distribution, survivorship or beneficiary designation) is not INCOME taxable to the recipient (you). However, the application of this rule depends on the nature of the asset you are receiving. If the money is from an IRA, a 401(k) or a tax-deferred investment (e.g., annuity, US Savings Bonds) then there probably will be some amount that will be subject to INCOME tax and that tax likely will be your obligation.
It is up to the Trustee to file an income tax return for the Trust and to issue a report to you of the taxable portion of the funds distributed.
