The other day a client confronted me with their concerns over tax implications from distributions made out of a testamentary trust (a trust created at the death of the trust creator). The answer to this question is actually quite simple.
Distributions of principal from a Trust, whether that trust is a Revocable Living Trust, Irrevocable Trust, or Inheritance trust created in the will are not subject to federal income tax. These distributions are treated just as an inheritance or a gift would be treated from a tax standpoint.
The only tax that may come up for distributions of the trust principal would be a capital gains tax. This would be taxed if any property in the trust has appreciated in value from the time of the trust creator's death and is thereafter sold by the beneficiary or person receiving the trust distribution.
Please also be aware that income off the trust assets, such as interest or rents, which accrues during the life of the trust is taxable income when it is distributed to the income beneficiaries.
If you are interested in trusts or other matters concerning your estate give me a call in the New Orleans/Metairie Area at (504) 247-1980 or send an email to chris@rabalaislaw.com. On the Northshore, contact Brent Durham at (985) 246-3020 or brent@rabalaislaw.com. In Baton Rouge, contact Paul Rabalais at 225-329-2450 or paul@rabalaislaw.com.
Chris Kane, Attorney
Director, New Orleans Office
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