29 Mar Are trusts really taxed at 37%?

Q. What determines the tax rate of a trust that is accumulating income from a traditional IRA, and is the eventual distribution of that income to the beneficiary then tax-free?
— Trying to understand

A. It’s always important to understand what to expect from taxes.

Trusts sometimes throw surprises to people who haven’t encountered them before.

A trust, which does not distribute its income to its beneficiaries, and is being taxed on its income, will be taxed at a rate of between 10% to 37%, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

“Unlike individuals, who in 2024 are not taxed at the highest rate until his or her income exceeds $600,000, a trust is taxed at the highest rate in 2024 when its taxable income exceeds $15,200,” she said.

As Required Minimum Distributions from the IRA are paid into the trust each year, the income is subject to tax at the trust level to the extent it exceeds trust expenses and trust distributions, Romania said.

Accumulated income which is not distributed is generally added to principal, she said.

“Distributions in subsequent years will be subject to pay tax on the income earned in the year of distribution but not on income earned in a prior year,” she said. “However, to the extent that trust funds are invested, a distribution of these invested assets may have independent tax consequences.”

If you’re not sure how your trust will work, we recommend you speak to the attorney who created it and can explain exactly what you need to know.

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This story was originally published in March 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.