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SpokaneInnovaging2014

CHAPTER ONE n TAKING CHARGE Trust Income Tax Considerations for Trustees and Beneficiaries by John P. Bjorkman, Principal, CliftonLarsonAllen Whether your For instance, the grantor can sell assets long-term capital gains, plus state level trust is set up to the trust without recognizing the gain income taxes, if they do not distribute as part of your on the sale. He can also loan money to their income annually. estate and finan- the trust. The trust must pay at least the Managing taxable income cial plan or as minimum IRS-prescribed interest rate, but part of your the interest income is not taxable to him. This difference in income tax brackets family’s plan- In addition, the trust’s income tax paid between trusts and individual beneficia- ning, its income by the grantor isn’t considered an addi- ries calls for the effective management of is subject to tax. tional gift to the trust or its beneficiaries. the trust’s taxable income. If discretion- It is important Basically, the trust assets can grow for the ary distributions are allowed, a trust dis- to understand benefit of the beneficiaries, without the tribution will be taxed at the beneficiary the different types of trusts and how the economic burden of paying income tax. level. However, a trustee must keep in latest income tax rules affect a trust as well In essence, this is a tax-free gift. mind the trust’s estate planning and asset as its grantor, trustee, and beneficiaries. Non-grantor trusts uted from a trust will be included in the-protection objectives. Amounts distrib The first thing to consider is whether a For income tax purposes, non-grantor beneficiary’s estate and will also be sub- trust itself pays tax on the income it earns trusts are any trusts not in the grantor cat- ject to beneficiary’s creditors, potentially or if it passes the income out to the ben- egory, including estates, and are taxed on contrary to the trust’s original objectives. eficiaries, who then pay the earnings tax. any taxable income they retain. It is only The trustee should carefully consider For income tax purposes, we generally when a trust makes a distribution to a discretionary distribution in light of all of break trusts into two categories: grantor beneficiary that the income passes to the the facts and circumstances. and non-grantor. beneficiary and is taxed on her return. While the federal estate tax exclusion is Grantor trusts The income tax rules are purposefully $5.25 million and indexed for inflation in Grantor trusts are a very common, effec- not kind to non-grantor trusts, especially 2013, in Washington State the estate tax tive estate planning tool. They include to those that accumulate and do not exclusion is $2 million and is indexed for revocable living trusts, irrevocable trusts, distribute their income. A trust’s income inflation starting in 2014. So income tax grantor retained annuity trusts,, defective taxation is similar to individuals’, but the planning may be more important than grantor trusts, most irrevocable life insur- tax brackets are very compressed. Starting estate tax planning for most taxpayers. ance trusts, and sometimes dynasty trusts. in 2013, a trust will pay income tax at the Tax considerations39.6 percent tax rate when undistributed The grantor—the person who establishes taxable income is more than $11,950 The trust that you established for estate the trust—is normally the one taxed on (compared to $400,000 for an individual). planning purposes may have some inter- its income, regardless of whether he esting income tax considerations. Be receives any distributions from the trust. Also effective in 2013, the new Net aware of who pays the income tax on Any taxable income or deductions of Investment Income Tax (NIIT) of 3.8 per- the trust income, the opportunities with the trust will be taxed on his return. And cent applies to certain income retained grantor trust planning, and the income while the grantor is taxed on the income, by trusts and estates if taxable income tax effect and distribution planning the assets of many grantor trusts will not exceeds $11,950. As a result, non- opportunities for non-grantor trusts. be included in his estate, making this grantor trusts and estates will be taxed type of trust very useful for asset manage- at 43.4 percent on ordinary income and ment and tax planning. 23.8 percent on qualified dividends and John Bjorkman helps seniors and their fam- For more information visit our website ilies plan for their entire financial futures. at www.CLAconnect.com. You may also contact us at: 509-363-6300. THE OPINIONS OFFERED IN THIS ARTICLE ARE FOR YOUR CONSIDERATION ONLY. TO FURTHER EXPLORE THIS TOPIC, THE PUBLISHER ENCOURAGES YOU TO CONTACT TRUSTED PROFESSIONALS. 27


SpokaneInnovaging2014
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