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Expert Tips: Efficiently Managing Your Trust’s Tax Responsibilities in 2023

Denise Johnston
October 12, 2023

Creating a trust can serve multiple purposes. Not only does it allow for the bypassing of the probate procedure and lets you dictate the terms for asset distribution, but it also provides tax advantages.

However, while establishing a trust, it’s crucial to understand its tax implications. Here’s how you can efficiently manage the tax responsibilities arising from a trust:

Allocate Trust Income to Beneficiaries:

In 2023, an individual taxpayer requires a taxable income of $578,125 (or $693,750 if married) to reach the highest tax rate of 37%. Contrastingly, specific trusts start getting taxed at this rate with an income of merely $14,450. That’s a pretty big incentive to distribute income generated by certain trusts. Given this disparity, distributing the trust’s income to beneficiaries in lower tax brackets can significantly reduce tax obligations.
Maximize the Annual Gift Exclusion:

For 2023, you can present an amount up to $17,000 to any individual or trust without attracting any income tax for either party. However, it’s essential to remember that this annual exclusion operates on a “use it or lose it” principle. If not utilized within a tax year, it cannot be forwarded. Moreover, direct payments for most medical and educational expenses directly to institutions come with an unlimited gift exclusion.
Consider an Intentionally Defective Grantor Trust (IDGT):

While standard trusts are taxed at the highest rate (37%) at $14,450, an IDGT only reaches this rate at $578,125 for singles and $693,750 for married couples. The primary caveat with IDGTs is their irrevocable nature. Once you transfer an asset to an IDGT, it typically can’t be undone. This means you can enjoy substantial tax savings with an IDGT, but you relinquish control over its contained assets.

These strategies are just a few ways to optimize the tax efficiency of your trust and estate. For detailed guidance on establishing a trust or managing an existing one, do reach out.

As always, should you have any questions or concerns regarding your tax situation please feel free to contact your tax advisor.

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