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In the year 2006 my mother-in-law who resided in the state of Texas passed away. She requested through her Will that a trust be established to distribute money from her estate to her grandchildren. She will be receiving the final distribution from the trust in a couple weeks. I am thinking about setting up a spendthrift trust to control the spending of the proceeds. If the distribution from her grandmother’s trust is put in the spendthrift trust, will the federal and state (Virginia) taxes be deferred until money is distributed from the spendthrift trust?
ANSWER
Expert Cory Bunger's Answer:
No, your daughter will receive a K-1 from the trust this year showing the amount of income she must report to the IRS. Putting the proceeds in another trust will not defer the federal or state tax liabilities. Please note that she is only responsible for paying taxes on her portion of the income that was earned by the trust in year she receives distributions from the trust. Most of the assets she will receive from the trust will not be taxable.
