Taxablity of distributions from Irrevocable trust

[Treasur2]

Current Irrevocable trust owns muni's, is a Martial trust. Is distribution taxable to the beneficiary? Survivivng Spouse?

bigger question is, what determines taxability of income from such a trust? The account type or the nature of the asset?

[Burke]

If I understand your question correctly, it is the nature of the asset (and whether or not distributions have been made to any beneficiary). Municipal bonds are generally tax-exempt for federal income tax purposes, and also to the state if the bonds are that state's bonds. For bond funds, the state information is usually provided to determine how much is attributable to the relevant state. If no distributions are made during the year, then the assets remain inside the trust, and are taxable income to the trust or exempt depending on what type of income they generate. In addition any tax-exempt income is factored into certain deductions. If distributions are made, then any tax exempt income to the extent of distributions may flow through to the K-1's of the beneficiary(ies).

[Kram BergGold]

First Things First

You have to read the Trust document to determine if it is a Simple or Complex Trust. If it is simple, then all non capital gains income is taxed to the beneficiary whether distributed or not. Capital Gains can be handled in multiple ways depending on state law. If a complex trust, then the non capital gains income is either taxed to the the Trust or the the beneficiary depending upon how much was distributed. Capital Gains depends as explained above.

[Burke]

Clarification

I should have stated in my post that dividends from municipal bonds are exempt as far as income is concerned. If a bond is sold, however, it will have a taxable gain or loss to report.