Tax Strategies for Your Trust and Estate

Ron Skalberg

There are many legal reasons why you would want to create a trust, including to avoid the probate process and setting rules for how you want certain assets and/or money to be used.

But when creating a trust, you also need to consider how the money and assets inside the trust will be taxed. Here are some suggestions for effectively dealing with the tax liability created by a trust:

  • Distribute trust income to beneficiaries. To hit the top tax rate of 37% in 2022, a taxpayer who is single would need to have taxable income of $539,900 ($647,850 married). By comparison, income from certain types of trusts would begin getting taxed at 37% at only $13,450. That’s a pretty big incentive to distribute income generated by certain trusts. So if a trust’s beneficiary is in a lower tax bracket, a distribution to the beneficiary could results in a smaller tax liability.
  • Use your annual gift exclusion. You can give any person or trust up to that year’s gift exclusion amount ($16,000 for 2022) with neither you nor the recipient paying any income taxes. But the annual exclusion is a “use it or lose it.” If you don’t use the exclusion for one tax year, it can’t be carried forward to another tax year. There’s also an unlimited gift exclusion for most medical and educational expenses that are paid directly to the provider.
  • Set up an intentionally defective grantor trust (IDGT). A regular trust would hit the top 37% tax rate at $13,450. An IDGT, however, wouldn’t hit the 37% rate until $539,900 if you’re single, and $647,850 if you’re married. The main trade-off when using an IDGT compared to other types of trusts is that an IDGT is irrevocable – once you place an asset inside an IDGT, you normally can’t revoke the asset transfer in the future. So you’ll potentially be able to significantly lower your tax liability with an IDGT, but in return you give up all control of the assets inside the IDGT.

These are just several of the ways you can minimize your trust and estate’s income tax liability. Please call if you have any questions about setting up a trust or how to effectively work with an existing trust.

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