Many people come to me curious (or confused) about trusts and taxes. So this article is going to sort it out and clarify things for you.
There are two types of trusts and each have different tax consequences.
Revocable trusts, which are the far more commonly used trusts, have no tax consequences whatsoever. 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 or die your Trustee can take over without a court order, keeping your family out of court. But, until your death, it is treated as invisible from a tax perspective. At the time of your death, if your revocable trust provides for the creation of irrevocable trusts, then the tax implications will shift.
When you have an irrevocable trust, either created during life, at death through a revocable living trust, or through a will that creates a trust, that trust has its own EIN, or employer identification number (also called a TIN or taxpayer identification number). Generally, it pays income taxes on income earned by the trust, as if it is 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 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. I 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 highest tax rates on very little income.
Now, let’s talk about estate taxes. Currently, if you die with assets over $11.58M, then your estate will be subject to estate tax on all amounts over that $11.58M at the rate of 40%. Yep, 40% will go to the government. You can mitigate these taxes, or even eliminate them by using various planning methods, most of which are fairly complex, but worth it if you can save your family that 40% estate tax.
If you are trying to figure out whether an irrevocable trust, or a revocable trust, or even a Lifetime Asset Protection Trust is best for you and your beneficiaries, I can help you weigh that decision and make the right choice for yourself and the people you love.
This article is a service of the Law Office of Keoni Souza, LLC, an estate planning law firm in Honolulu, Hawaii. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That is why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you have ever been before and make all the best choices for the people you love. You can begin by contacting our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.
Disclaimer: Unfortunately, I am not your lawyer unless you have paid me for legal advice and we have a signed agreement. Therefore, all information on this website is for informational purposes only and is not legal advice. You should contact an attorney trained to work with families on estate planning matters regarding your specific situation. Use of and access to this website or any of the email links contained within the site do not create an attorney-client relationship between the Law Office of Keoni Souza, LLC, and any users or any other party.