How Are Trusts Taxed?

Young woman sits at a table with an older woman who is signing documents

A trust is a great tool to add to your estate plan because it can help your family accumulate wealth for future generations. A trust is a legal entity that holds either property or other assets in the name of a person, people, or group.

There are tax implications involved with trusts, so it is important to know what they are before establishing one. Keep reading to learn more about how trusts are taxed.

Types of Trusts

There are several different types of trusts, but some of the most common are as follows:

  • Revocable trusts
  • Irrevocable trusts
  • Blind trusts
  • Charitable trusts
  • Marital trusts
  • Testamentary trusts

Taxation Depends on the Type of Trust

Taxation rates vary depending on the type of trust. A simple trust is one that distributes all of its income, otherwise, it’s considered complex. There’s a tax deduction for income distributed to beneficiaries.

Remember: There are several variable factors considered regarding how trusts are taxed.

The total distributed to the beneficiary first comes from the current-year income, then from the accumulated principal. This typically amounts to the primary contribution as well as subsequent contributions and is revenue in surplus of the distributed amount.

Capital gains from the distributed amount may be taxable to either the trust or the beneficiary. All of the quantities distributed to and for the benefit of the beneficiary may be taxed to the degree of the distribution abatement of the trust.

If the income or abatement is tied to a change in the principal or part of the estate’s distributable income, then income tax is provided by the trust and not assigned to the beneficiary.

An irrevocable trust that has liberty in the distribution of funds and holds earnings must pay a trust tax of $3,001.50 in addition to 37% of any funds in surplus of $12,500.

Dealing with end-of-life assets can be a confusing and intricate process if not handled carefully. Our professionals here at Legacy Enhancement Trust are highly skilled in financial planning matters and have helped many other people just like you with their financial goals. Let us help you with yours, too. Don’t hesitate to contact our office with your questions right away.

Call Legacy Enhancement Trust today at (888) 988-5503 or contact us online to learn how we may assist you!

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