What to Expect When You Inherit Money from a Trust

Inheriting money from a trust can be a complicated process, and it's important to understand what to expect when you receive an inheritance. The trust itself must report income to the IRS and pay capital gains taxes, and you must distribute the income earned on the trust assets to the beneficiaries annually. If you receive assets from a simple trust, they are considered taxable income and you must report them as such and pay the appropriate taxes. However, if you inherit money from a complex trust, the funds could represent income or capital gains. The trustee must issue you a Schedule K-1 for income distributed to you, which you must file with your tax return.

Any portion of the money that is derived from the trust's capital gains is capital income, and this is taxable to the trust. At the age of 2, the trustee must distribute all assets to the beneficiary, and none are inherited in trust. A check payable to the payee is made or the assets are titled in the payee's name, and the payee does what he wants with the inheritance. Inherited assets generally enjoy an “increase in the asset cost base” on the day the owner died. Therefore, for highly prized properties purchased cheaply years before death, you may be able to sell the property as if you had purchased it on the date of death at its appraised value.

If you need additional questions regarding your inheritance, talk to a financial advisor and probate lawyer for guidance. For most heirs, an inheritance is not a lottery ticket to billionaire status because it tends to be proportional to family wealth. To prevent legalization and mismanagement of money after his death, Finn includes terms in his trust that dictate when Olivia can access money from his inherited trust fund. Investing in securities involves risks, and there is always the possibility of losing money when investing in securities. To ensure that your inheritance is managed properly and that you don't end up paying more taxes than necessary, it's important to understand what happens when you inherit money from a trust.