Florida Trust Taxes: Will I Have to Pay Them?

A trust can create a tax question you didn’t expect. Maybe a parent’s trust just came to you, or a bank asked for a tax number you don’t have. Will I have to pay taxes on a trust? Usually the answer depends on three things: whether the trust earns income, whether that income is paid out, and whether moving assets into the trust creates a tax event.

Federal tax rules drive most of these answers. Florida trust administration adds its own duties on top of them, so this guide covers both.

The short answer: it depends on the trust type and who is taxed

A trust can owe income tax, but not always on the same money. The trust type and the person who reports the income decide the result. Under federal law, the tax on a trust’s taxable income is paid by the fiduciary, and that income is computed the same way as for an individual (26 U.S.C. § 641). Some trusts send their income to the person who created them instead. Three questions usually settle the answer: does the trust earn income, is that income paid out, and did assets move into the trust in a way that triggers a tax event?

Revocable and grantor trusts: the creator usually reports the income

A revocable living trust usually reports its income on the creator’s own return while the creator is alive. A trust treated this way is often called a grantor trust.

In plain terms, a grantor trust is one where the creator keeps enough control that the IRS treats the trust’s income as the creator’s own. The creator includes in taxable income the trust items tied to that portion, to the extent those items would be taken into account for an individual (26 U.S.C. § 671).

The picture changes at death. A revocable trust generally becomes irrevocable when the creator dies, and the creator can no longer use the powers that made it a grantor trust. That is why the date of death matters. The same trust assets can also count in the creator’s taxable estate, because federal law includes property in a trust the decedent could revoke (26 U.S.C. § 2038).

Irrevocable and complex trusts: when the trust is its own taxpayer

Many irrevocable trusts are separate taxpayers that owe their own income tax. Under 26 U.S.C. § 641(a), the income tax for estates and trusts applies to the taxable income of an estate or trust, including income accumulated or held for future distribution under the terms of the will or trust, and income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated (26 U.S.C. § 641).

Income that the fiduciary is to distribute currently to the beneficiaries is among the trust income taxed under federal law (26 U.S.C. § 641). A complex trust can keep income or distribute principal. IRC § 651 reads: “This section shall not apply in any taxable year in which the trust distributes amounts other than amounts of income described in paragraph (1).” Its deduction for distributions is capped at its distributable net income (26 U.S.C. § 661).

Each year’s income, deductions and distributions must be tracked carefully. A trustee who mixes trust money with personal money creates problems that are hard to untangle later. Florida requires a trustee to keep clear, distinct and accurate records, and to keep trust property separate from the trustee’s own (Fla. Stat. § 736.0810).

Distributions to beneficiaries: the trust deducts what it pays out, up to a limit

When a trust pays income to a beneficiary, it can take a deduction for that amount. The deduction has a ceiling. It cannot be more than the trust’s distributable net income (26 U.S.C. § 661). Distributable net income starts from the trust’s taxable income, with the modifications set out in federal law (26 U.S.C. § 643).

Whether a particular payment is taxable to the person who receives it depends on the facts. Income and principal can be treated differently, and the trust’s terms matter.

Accurate records make the reporting easier. A trustee must keep clear, distinct and accurate records of the trust’s administration (Fla. Stat. § 736.0810). Clean records help the trustee report each beneficiary’s share correctly for the year.

Does funding a trust trigger a tax event? Usually not for a revocable trust

Under federal law, the grantor is treated as the owner of any portion of a trust where the power to revest title to that portion in the grantor is exercisable by the grantor or a nonadverse party, or both (26 U.S.C. § 676). Funding means retitling bank accounts, brokerage accounts, real estate and business interests into the trust’s name.

Some assets follow their own rules. Retirement accounts such as IRAs and 401(k)s need a separate review of their beneficiary forms, and simple retitling may not be the right step.

Real estate and business interests depend on the deeds and transfer documents. Check the paperwork instead of assuming a transfer was simple. Be cautious with any trust marketed mainly as a tax cut.

Estate tax and Florida: what applies at death

Federal estate tax applies only when the taxable estate is above the federal exclusion amount. Federal law imposes the tax on the taxable estate of a citizen or resident who dies (26 U.S.C. § 2001). Under 26 U.S.C. § 2010(c)(3)(A), the basic exclusion amount is $15,000,000 (26 U.S.C. § 2010).

An estate tax return is due within 9 months after the decedent’s death (26 U.S.C. § 6075). Property acquired from a decedent has its own basis rules, which can change the capital gains picture when that property is later sold (26 U.S.C. § 1014).

Federal rules drive the tax questions in this guide. Florida law adds trustee duties, such as the record-keeping rules covered above.

Taking the next step with a trust that has tax questions

If a trust’s tax question has you stuck, the next step is a conversation about your own facts. Trust Counsel, PL focuses on trust and estate matters in Florida. That work includes trust administration, probate and trust litigation, estate tax planning, business succession and asset protection. Trust Counsel’s attorneys can serve individually as trustee or personal representative. The firm advises and represents trustees, personal representatives and beneficiaries.

Leslie V. Marenco is the responsible lawyer for this page. The firm’s office is in Coral Gables, Florida. We serve clients in Aventura, Boca Raton, Doral, Fort Lauderdale, Kendall, Key Biscayne, Pinecrest and West Palm Beach.

If a parent’s trust just came to you with a tax question you can’t answer, you don’t have to sort it out alone. Call (305) 707-7126 or request a free discovery call. The free discovery call is confidential and carries no obligation to continue.