Tax question on income from irrevocable trust

[Anonymous]

I hope someone out there can help me with an urgent questions - we need to wind down an irrevocable family trust to cover my parents' debts. The trustee will pay out the money to me and my sibling and then we will give the money to my parents.
My question is - does the payment from the trust to me count as taxable income? Will I incur a tax liability? My parents have left this till the last minute so I need to know if I can remit the entire amount to them or if I need to take out something for the taxes I will have to pay!

thanks!

[Anonymous]

I think it depends on the kind of trust - there are lots of different types. Your trustee should know what type it is, and if not, the lawyer that created it should know.

Related to type of trust, part of whether distributions are taxable depends on whether taxes were owed or paid on the amount put in.

And it's likely that any amount that you give to your parents over the annual gift tax exclusion ($14,000 per year in 2013) would be subject to gift taxes.

If it's a large amount, I highly recommend talking to an accountant before making the move.

[Anonymous]

Thanks - I guess I will try to find a tax attorney. I was just hoping to get a general sense of what the result might be - e.g. would the gift tax be my liability or theirs?

More detail - their house is about to be foreclosed on due to a judgement against them. The only source of money they have is this family trust set up by my grandmother. It is an irrevocable trust - during my father's lifetime he gets the income and can access the principal for health costs. After he dies, it is to be wound down and split between my brother and me. As it happens, the amount in the trust would just cover the judgement against him.

The trustee won't pay the money out to my parents but will pay it out to us. I am happy (well, maybe not delighted, but willing) to give them all the money. My concern is - if I get the money and then remit it all to him to cover this debt, would I be liable for a significant tax bill? for example, might the entire distribution be counted as my income tax liability?

[Anonymous]

From what I understand it shouldn't be taxable to you, that's the point of the trust. Where you might run into trouble is with the gift tax. As someone said, you can give each parent $14,000 per year. If you give them more than that, it will affect your gift tax ememption. You will have to fill out paperwork, and it could affect what your kids inherit from you.
Since the judgement is against your parents, and they don't have assets, why not declare bankruptcy? You aren't obligated to pay their debts.

[Anonymous]

PP here, I'm not a tax attorney or anything, so I do think you should at least call a tax accountant.

[Anonymous]

You will stop the foreclosure but what hapens after that? How are your parents going to pay the remaining portion of the mortgage? What are the chancesof them being in the same situation a few months to a year from now? How will you handle the tax implication and obligation you will now be responsible for? What happens if you use the money to stop the forclosure and then your parents have a major health issue (not wishing it to happen)" How will you handle that?

[Anonymous]

Anonymous wrote:You will stop the foreclosure but what hapens after that? How are your parents going to pay the remaining portion of the mortgage? What are the chancesof them being in the same situation a few months to a year from now? How will you handle the tax implication and obligation you will now be responsible for? What happens if you use the money to stop the forclosure and then your parents have a major health issue (not wishing it to happen)" How will you handle that?

There is no mortgage, this is a judgement against him that he plans to extinguish.

The chances of them being in the same situation again in the future are high.

We plan to take out an amount that would cover the taxes before we remit the rest to him.

Yes, I look towards the future and see nothing but the prospect of disaster. It would have been better to keep this money for their health needs/long term care etc. But, if we did that and let them lose their home, they would never have spoken to us again. I think they will end up relying on the state for support - with all that involves, but I am not sure that we are in a position to prevent that. If someone has lived for 82 years this way, they probably won't change when they get to 83...