Are you curious (or confused) about the tax consequences of trusts? This article will sort it out and clarify things for you. There are two main types of trusts: revocable trusts and irrevocable trusts. Both have different tax consequences.
Revocable trusts are the far more commonly used trusts. They have no tax consequences. Your social security number is the tax ID number for a revocable trust. Thus, it is not a separate entity from you for tax purposes.
It is a separate entity from you for purposes of probate. Upon your death, no court oversight is needed so your family can stay out of probate court. Until your death, it’s treated as invisible from a tax perspective. At your death, your trust becomes irrevocable. This is when the tax implications shift.
You can create an irrevocable trust during life, at death through a revocable living trust, or through a will that creates a trust. An irrevocable trust has its own tax ID number (EIN). Generally, it pays income taxes on income earned by the trust because it is a separate tax paying entity.
Trust income is taxed at the highest tax bracket applicable to individuals as soon as income exceeds $12,950. In some cases, we can draft a trust so that the tax consequences pass through to the beneficiary and are taxed at his or her rates. We will often do this when creating a Lifetime Asset Protection Trust for a beneficiary so that the trust can provide the benefits of credit protection from lawsuits, divorce, or even bankruptcy, but not have the negative tax consequence of the highest tax rates on very little income.
Of course, if you have a trust, and you want us to review it for the income tax consequences to your loved ones after your death, please contact us.
Currently, if you die with assets over $11.58M, your estate will be subject to 40% estate tax on all amounts over that $11.58M. Yep, 40% will go to the government. You can mitigate these taxes, or even eliminate them by using various planning methods. Some of those methods are fairly complex, but worth it if you can save your family that 40% estate tax.
If you are trying to figure out what is best for you and your beneficiaries, we can help you weigh that decision and make the right choice.