Handling Trust Distributions as a beneficiary

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aplanedrvr
Posts: 4
Joined: Mon Jan 04, 2021 12:33 am

Handling Trust Distributions as a beneficiary

Post by aplanedrvr »

Thank you for such an awesome retirement planner!

As a beneficiary of a family trust, I'm trying to determine how best to input the value of this portfolio. Since the beneficiary does not pay tax on the distributions of principal, should the value of this portfolio be shown as tax-free or taxable? Since the distributions from the trust will be utilized first or in conjunction with taxable accounts, where is it best to show this? I'm assuming under taxable due to order of account withdrawals since tax-free will show no distributions until taxable and tax-deferred accounts are depleted.

Thanks.

jimr
Posts: 661
Joined: Thu Feb 28, 2008 6:48 pm

Re: Handling Trust Distributions as a beneficiary

Post by jimr »

It sounds like adding it to your taxable portfolio balance could be a workable approach. The only slight snag is that investment gains in the taxable portfolio are taxed each year as they're earned and it sounds like that's different from how investment gains in the trust are taxed. Still, it may be close enough.

Another approach is to treat the stream of income from the trust as an annuity and enter it as yearly taxable income instead of as part of your investment portfolio. The trick with this approach would be estimating the amount and taxable percent of the income stream.

aplanedrvr
Posts: 4
Joined: Mon Jan 04, 2021 12:33 am

Re: Handling Trust Distributions as a beneficiary

Post by aplanedrvr »

Thanks Jim!

I did the taxable portfolio balance approach which, if I understand correctly, would create a tax penalty that isn't really there.

I'll try the annuity approach and see what the difference shows.

Another question: I'm still working and receiving a paycheck. I'm 54 and will be retiring at age 65. I used the additional inputs screen and put my annual income in there from beginning of plan to age 65 with a tax rate. Am I doing that correctly since I see no other area for yearly salary input?

Thanks again.

jimr
Posts: 661
Joined: Thu Feb 28, 2008 6:48 pm

Re: Handling Trust Distributions as a beneficiary

Post by jimr »

Not knowing much about how the trust is structured and not being a tax expert myself, it's tough to tell exactly how modeling the trust in taxable compares to reality. From what you've described, it sounds like investment gains earned by the trust are taxable (when withdrawn) and only the original principal can be withdrawn tax free. So it's not clear how much of a "tax penalty that isn't there" exists. With the trust, it sounds like maybe you get some tax deferral benefit that you don't get when modeling that using the taxable portfolio. OTOH, the cost basis of the taxable portfolio starts at 100%, so like the trust, you're only paying taxes on investment gains. So I think that means the tax penalty from using taxable is just the value of the tax deferral, and that depends on how fast you plan to deplete the trust.

Now onto your question about pre-retirement income. The planner will track income and expenses starting in the first year of the plan if you enter income and expense items. So if you'd like to do it that way, you can. However, to simplify things, most people use the "Annual Savings" inputs on the main planner page and just specify how much they intend to save each year without entering all their pre-retirement income and expenses. (also, if you enter pre-retirement income in additional inputs, be sure to also enter pre-retirement expenses).

Finally, be sure to check the year-by-year detailed view table (click show more detail on top right) to verify that the planner is doing what you expect with the cash flows.

aplanedrvr
Posts: 4
Joined: Mon Jan 04, 2021 12:33 am

Re: Handling Trust Distributions as a beneficiary

Post by aplanedrvr »

Thank you for your response.

The trust is not sizeable, so at this point it's being allowed to grow. Disbursements won't occur until retirement and are effectively capped by one of the trustees at the outdated rate of 4% trailing twelve months.

With the pre-retirement income, I have a hangup. I have the taxable percent set at 32%, but the program is only reducing the income by 10% and not doing a 3% COLA increase adjustment each ear when looked at in the detail view under After Tax Income. For example, an income of $275,000/yr at 32% tax rate shows as $246,840 in the After Tax Income field. If you strike 32% right off the $275,000, it should show $187,000 After Tax Income. Bad input somewhere on my part?

jimr
Posts: 661
Joined: Thu Feb 28, 2008 6:48 pm

Re: Handling Trust Distributions as a beneficiary

Post by jimr »

First, all amounts shown in the detailed view are shown in present value dollars, so amounts that stay the same from year to year are exactly keeping up with inflation.

Next,I think you've interpreted the taxable percent input incorrectly. This input isn't the tax rate, but rather it's the percent of the income amount that's taxable. This is to handle things like ss and pensions that may only get partially taxed.

In your case, I think the taxable percent should be 100%.

aplanedrvr
Posts: 4
Joined: Mon Jan 04, 2021 12:33 am

Re: Handling Trust Distributions as a beneficiary

Post by aplanedrvr »

Ahhhhhhhhh......gotcha. Makes perfect sense. I'll try it.

And yes!!! That worked!!

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