27 Apr What kinds of taxes will a trust be required to pay?
Q. How do trusts work with taxes? I was told trusts pay the maximum tax rate and maybe the Obamacare tax too! Am I better off selling assets in the trust, pay taxes at a lower rate and then place them in my kid’s trust?
A. You’re right that trusts pay some pretty hefty tax rates.
For 2019 the maximum rate of 37% is reached when income exceeds $12,750 threshold, said Yale Hauptman, an estate planning attorney with Hauptman and Hauptman in Livingston.
“For an individual, the max rate isn’t reached until you have more than $510,301 of income,” he said. “Whether income is taxed to the trust depends on the type of trust and whether income has been distributed to beneficiaries.”
Hauptman offered this example: Income on revocable trusts and irrevocable grantor trusts are taxed to the grantor — the person who established the trust. Income that is distributed to beneficiaries is typically included on those individuals’ tax returns and they pay the tax.
He said there is no one answer for all trusts, so it’s smart to consult with both your tax advisor and the attorney who designed the trust before making a decision on how to handle this issue.
Here’s what you should know about idea of an increased or reset cost basis — what is known as a step up in basis.
A step-up in basis would wipe out tax on unrealized gains by raising the basis to the value at the date of death of the grantor, he said. This again depends on the type of trust, so consult the attorney who drafted the trust for a specific answer.
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This story was originally published on April 27, 2020.
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