Do we have to pay taxes on a cash distribution from a trust fund? Is it considered wages/income on our tax return forms?

My husband's uncle informed him that there had been a trust fund set up for his mother and aunts and that is was being dispersed. Since my husband's mother passed away 10 years ago, they decided to give half of what would have gone to his mother to him, and half to his sister. We just need to know if we need to set some of the money ($25,000) aside for taxes or not. Also, is it considered income for next year's taxes? We are in an income bracket that we usually get earned income credit back on our tax returns at tax time, so we don't have much, if any, taxes withheld from my husband's paychecks. We don't want to end up with a huge tax bill and or penalty.

Estate Planning, Taxes
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May 2016

Good news, it sounds like from your question, that the funds will most likely NOT be taxable to you, however there are certain situations where there could be some tax liability to you. In most cases, inherited funds, even from most trusts will pass to you without tax liability, but not all!

To be certain, contact your husbands Uncle, or the tax professional handling the transaction, and ask them if any tax liability will be assumed by your family. This should be a fairly easy question for them to answer and certainly not offensive to ask.

If there is a tax liability owed, you are on the correct track by setting aside funds for this future liability. In either case, it is highly likely the entire amount WILL NOT be taxable, if any at all.

May 2016