Can a trust Help You Save on Taxes?
Many people come to us curious (or confused) about trusts and taxes. So, this article will focus on clarifying some of the questions you may have on this topic.
Different Types of Trusts
There are two major types of trusts, and each has different tax consequences.
First, there are revocable trusts, which are by far more commonly used. They have no tax consequences during our lifetime. 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, your Trustee can take over without a court order, keeping your family out of court and family disputes. But, until your death, it is treated as invisible from a tax perspective. At the time of your death or incapacity, if your revocable trust provides for the creation of irrevocable trusts, then the tax implications will shift.
Second, there is an irrevocable trust, which is either created during life, at death through a revocable living trust, or through a will that creates a trust. Generally, it pays income taxes on income earned by the trust, 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 worth of income, so in some cases, a trust can be drafted to provide 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 higher tax rates on trust 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.
Trusts and taxes
Now, the topic of estate taxes. Currently, if you die with assets totaling over $11.58M, then your estate will be subject to estate tax on all amounts over that $11.58M at the rate of 40%. Yes, 40% will go to the government. You can mitigate these taxes, defer them, or, in limited cases, even eliminate them, by using various planning methods, most of which are fairly complex, but worth it if you can save your family the 40% estate tax.
If you are trying to figure out whether an irrevocable trust, a revocable trust, or even a Lifetime Asset Protection Trust is best suited for you, as your Personal Family Lawyer®, we can help you choose the best course of action that suits you and your family’s needs.
Disclaimer: This article is intended to serve as a general summary of the issues outlined therein. While this article may include general guidance, it is not intended as, nor is a substitute for, qualified legal advice. Your review or receipt of this article by Lexern Law Offices, Ltd. (the “LLG”) or any of its attorneys does not create an attorney-client relationship between you and the LLG. The opinions expressed in this article are those of the authors of the article and does not reflect the opinion of the LLG.
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