151 / What income is taxable to the beneficiaries of a life insurance trust?
Trust beneficiaries are liable for tax stemming from income that is distributed to them, or should have been distributed to them, in the taxable year, to the extent that the income does not exceed the trust’s “distributable net income” for the year.1
To deter taxpayers from shifting tax liability to a lower bracket beneficiary, trust income taxable to a beneficiary under 18 years of age can be taxed at the marginal tax rate of the beneficiary’s parents. For tax years beginning in 2018 and 2019, parents had the option of electing to tax the unearned income of minors at the income tax rate that applies to trusts and estates. The SECURE Act eliminated this option, which was originally created by the 2017 tax reform law, for tax years beginning after 2019.
1. IRC §§ 652, 662.