Trust funds can be a great way to save for your children or grandchildren’s education or other long-term goals. However, it is important to be aware of the tax implications of receiving trust fund money in California. Here’s an overview of what to expect.
Revocable and irrevocable trust income tax
There are two main categories of trust in California. One basically allows you control of all the trust assets while you are alive, while the other gives total control to the trustee. The former is the revocable trust.
If you live in California and have a revocable trust, the income from your trust is taxed as if it were your own personal income. This means that you will pay taxes on any interest, dividends, or capital gains earned by the trust. You will also need to file a California state tax return and report the income from your trust.
For the irrevocable trust, the one that the trust administration has full control of, the income is taxed to the beneficiaries of the trust rather than to the grantor. This means that you will not pay taxes on the income from your trust, but your heirs will.
What is subject to tax?
The IRS assumes that the grantor already paid taxes on the assets or income they put into the trust. So basically, no one pays for the money they receive from the tax. But, if the assets in the trust accumulate interests, either the grantor or the beneficiaries must pay taxes on those capital gains.
It’s critical for you to ensure that you pay your trust income taxes as needed by the law. While doing so, you can take advantage of the available tax deductions and exemptions. For example, if any costs are incurred in managing the trust assets like repairs to the real estate or mortgage, it may be possible to get a deduction on the capital gains.