While minimizing taxes is certainly not the only, nor even the primary, objective of trusts, it is a major issue for trustees with a fiduciary responsibility.
The variety of trusts and the rules surrounding them are many and can be complex.
A recent CNBC.com article, titled “Estate planners shift gears in new tax environment,“ explains the reason for this variety and complexity – for tax purposes, “trusts are treated like wealthy individuals—only worse.” Even though the new 39.6% marginal tax rate created by the American Taxpayer Relief Act applied to income exceeding $400K for individuals in 2013, it reached down to an income threshold of $11,950 for trusts. Likewise, the 3.8% Medicare surtax applied to the net investment income of individuals earning over $200K also applies to trusts beginning at a much lower income level.
What this means is much higher tax bills. For example, without claiming any capital gains income, a trust holding $1 million in assets and making a 10% return in 2013 owed $34,868 in income tax and $3,346 in new Medicare taxes—an increase of about $7,400 than under the 2012 tax scheme.
The CNBC.com article further explains that while reducing tax liability is not the only or even the primary objective of trusts, it is a major issue for trustees with fiduciary responsibilities.
The article notes that “the objective is to maximize the amount of money that family members [or other beneficiaries] receive,” and “estate planners have to revisit some of their planning patterns of the past and reevaluate what makes sense now.”
One strategy to reduce the tax hit is to invest more of the trust’s assets in tax-exempt securities like municipal bonds. There are other avenues to explore. Speak with your estate planning attorney and get all the information on the new tax rules.
Reference: CNBC (March 21, 2014) “Estate planners shift gears in new tax environment“