People often come to me curious (or confused) about trusts and taxes. So today’s article is going to sort it out and clarify things for you.
The first step is to understand the two types of trusts and their different tax consequences.
The Two Types of Trusts
Revocable trusts Revocable trusts are the more commonly used trusts. They have no tax consequences whatsoever. A revocable trust has your social security number as its tax identifier and is not a separate entity from you for tax purposes.
It is, however, a separate entity from you for the purposes of probate (meaning if you become incapacitated or die your Trustee can take over without a court order, keeping your family out of court). But, until your death, it’s treated as invisible from a tax perspective. At the time of your death, if your revocable trust provides for the creation of irrevocable trusts, then the tax implications will shift.
Irrevocable Trust An irrevocable trust can be created in one of three ways: 1) During life 2) At death through a revocable living trust 3) Through a will that creates a trust
Generally, an irrevocable trust pays income taxes on income earned by the trust, as if it’s a separate tax-paying entity. Because of this, an irrevocable trust has its own EIN, or employer identification number (also called a TIN or taxpayer identification number).
Protecting Your Trust Beneficiaries From High Tax Rates
Trust income is taxed at the highest tax bracket applicable to individuals as soon as there is over $12,950 of income.
In some cases, the high tax bracket can be offset by drafting a trust to provide that the tax consequences pass through to the beneficiary and are taxed at his or her rates. I will often do this when creating a Lifetime Asset Protection Trust for a beneficiary.
Benefits of a Lifetime Asset Protection Trust
This type of trust can provide the benefits of credit protection from lawsuits, divorce, or even bankruptcy, and avoid 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 me.
How a Trust Affects Estate Taxes
Now, let’s talk about estate taxes. Currently, if you die with assets over $11.58M, then your estate will be subject to estate tax on all amounts over that $11.58M at a rate of up to 40%.
Yep, up to 40% could go to the government.
You can mitigate these taxes, or even eliminate them by using various planning methods, most of which are fairly complex, but worth it if you can save your family that 40% estate tax.
Choosing The Type of Trust That's Best For You
If you are trying to figure out whether an irrevocable trust, a revocable trust, or even a Lifetime Asset Protection Trust is best for you and your beneficiaries, I, as your Personal Family Lawyer®, can help you weigh that decision and make the right choice for yourself and the people you love.
This article is a service of the Law Office of Alexis M. Langer, APC, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why I offer a Family Wealth Planning Session,™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love.You can begin by scheduling a Family Wealth Planning Session and mentioning this article to find out how to get this $750 session at no charge.
The information on this page is for educational and informational purposes only and does not create an attorney-client relationship. This information should not be construed to be legal advice.