What Happens When You Inherit Money From a Trust? - Moen Sheehan Meyer (2024)

FAQs

What happens when I inherit money from a trust? ›

When you inherit money and assets through a trust, you receive distributions according to the terms of the trust, so you won't have total control over the inheritance as you would if you'd received the inheritance outright.

The beneficiary owes income tax on the money if the funds are deemed as having come from the trust's earnings on its assets. Whether the money is taxed as regular income or capital gains depends on the nature of the funds, such as whether the money is cash or dividends.

And although a beneficiary generally has very little control over the trust's management, they are entitled to receive what the trust allocates to them. In general, a trustee has extensive powers when it comes to overseeing the trust.

A trust beneficiary is the party for whom trust property is held and managed by a trustee. The role of a beneficiary involves the right to receive distributions of income, principal, or both, as outlined in the terms and conditions of the trust agreement established by the trust grantor.

The trustee generally has the authority to withdraw money from a trust to cover the cost of third-party professionals, as well as any other expenses arising as a result of administration.

By placing assets into a trust, you can safeguard them from creditors, lawsuits and even certain tax liabilities. This protection ensures that your intended beneficiaries receive their inheritance intact, without the risk of it being eroded by unforeseen financial challenges.

Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.

If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income.

Generally speaking, distributions from trusts are considered income and, therefore, may be subject to taxation depending on the type of trust and its purpose. The trust beneficiaries are those liable for the distributions from a trust.

Who controls the money in a trust? ›

A Trust Fund is a legal entity that contains assets or property on behalf of a person or organization. Trust Funds are managed by a Trustee, who is named when the Trust is created. Trust Funds can contain money, bank accounts, property, stocks, businesses, heirlooms, and any other investment types.

According to California Probate Code §16000, trustees have a legal obligation to follow the instructions outlined in the trust instrument when administering the trust. As part of this duty, trustees must distribute money and other assets to beneficiaries according to the directives of the trust document.

In either case, inheriting money held in trust means you will not receive an outright distribution of your inheritance to manage and spend yourself. Instead, you will have some right to use trust funds for specific purposes. In this situation, the criteria for distributions will be laid out in the trust document.

If assets will be distributed to you, it could take anywhere from six months to two years for them to be distributed. Or, if there are age provisions around distribution, you may need to wait until you reach a certain age to receive funds from the trust.

The grantor can opt to have the beneficiaries receive trust property directly without any restrictions. The trustee can write the beneficiary a check, give them cash, and transfer real estate by drawing up a new deed or selling the house and giving them the proceeds.

Beneficiaries can generally expect to receive their inheritance within 12 to 18 months from a standard revocable trust, especially those with straightforward distribution clauses. Factors such as the trust's complexity and potential beneficiary disputes can influence this timeline.

Shoddy record-keeping and failure to account for decisions that open the door to malfeasance. Mismanaged trust assets, resulting in beneficiary lawsuits and steep legal expenses.

Distributing assets to beneficiaries

After all debts have been paid, an estate's remaining assets — minus any probate feeds — are distributed to beneficiaries in accordance with the will, or — if there is no will — by following a state's laws of succession, otherwise known as the “order of heirs.”