Many people come to us curious (or confused) about trusts and taxes. So we’d like to sort it out and clarify things.
There are two types of trusts, and each type has its own tax consequences.
Revocable trusts, which are the more commonly used trusts, have no tax consequences whatsoever. A revocable trust has your social security number as it’s tax identifier, and is not a separate entity from you for tax purposes. It is a separate entity from you for 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.
When you have an irrevocable trust, either created during life, at death through a revocable living trust, or through a will that creates a trust, that trust needs its own TIN, or taxpayer identification number. Generally, the trust pays income taxes on its earned income as if it’s a separate tax paying entity.
Trust income is taxed at the highest tax bracket applicable to individuals as soon as there is over $12,950 of income, so in some cases a trust can be drafted to provide that the tax consequences pass through to the beneficiary and are taxes 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.
Now, let’s talk about estate taxes. Currently, if you die with assets over $11.58 million, then your estate will be subject to estate tax on all amounts over that $11.58M at the rate of 40%. Yep, 40% will go to the government. If you die while living in Massachusetts, estate taxes kick in even earlier, at just $1 million (the tax rates in MA vary, but max out at 16%). You can mitigate these taxes, or even eliminate them by using various planning methods, some of which are fairly complex, but worth it if you can save your family a significant amount of estate tax.
If you are trying to figure out whether an irrevocable trust, or a revocable trust or even a Lifetime Asset Protection Trust is best for you and your beneficiaries, we, as your estate attorneys, can help you weigh that decision and make the right choice for yourself and the people you love.
