Originally Posted by gar1976

Hmmm.....I'll answer this one out of order, since you seem a bit confused. And this is a more complicated subject than the others.

Most of the time when you inherit property (real or personal) you recieve what's known as a step up in basis. This means your new tax basis is the fair market value at the date of death. For example:

Say Uncle Joe bought microsoft at $5 a share, and it's now worth $100 a share. Should Uncle Joe sell the stock, he'll be taxed on $95 share of capital gains.

Say Uncle Joe dies before he sells it, and you inherit it. Should you sell the stock for $100 a share, you'll have no capital gains, since you recieved a new basis upon inheriting the stock.

Now, it sounds as though you are receiving distributions from a trust that had been set up by a relative. In this case, the assets in the trust are now generating income that is being distributed to you as a beneficiary. This income was not included in the estate of the grantor, and you should be receiving a K-1 showing your portion of the earnings of the trust. Depending on how the trust was set up, the K-1 amounts might or might not equal what you are receiving every year. For example now:

Say Uncle Joe put this stock into a trust, and you receive the dividends from the stock every year.

Based on this assumption, you will be taxed on trust earnings. Yes, taxes suck, but hey, you're getting to benefit from the generosity of a family member. Enjoy it while it lasts.