New IRS Tax Laws Increase Many Trusts' Tax Bills

We recently discussed changes proposed in President Obama’s 2015 budget that would modify Estate and Gift Tax provisions established in the American Taxpayer Relief Act or ATRA, which was passed by Congress in 2013. The proposal, which would take effect in 2018, would restore the Estate, Gift, and Generation-Skipping Transfer (GST) tax rates and parameters to levels that were in effect in 2009. The end result would be reduced exemption levels and higher tax rates on inheritances for beneficiaries.

These changes are just the latest step taken by the Obama administration to shift the tax burden to the more affluent segment of the population. However, as a recent CNBC report indicates, wealthy Americans aren’t the only ones feeling the pinch of increased tax rates, including the new 3.8% investment income tax being used to fund the “Obamacare” plan. Beneficiaries of trusts that were established to protect an estate’s assets are also seeing higher tax bills. Estate planners have needed to develop new strategies to help protect trust assets and reduce tax burdens.

As mentioned in the report, Estate planners shift gears in new tax environment, the variety of trusts and the rules that govern them are enormous. While a few types of trusts still allow beneficiaries to receive tax-free inheritances, such as so-called “simple” trusts, which pay out all the income they produce to beneficiaries, and grantor trusts, where the the trust creator, or grantor, shoulders the burden for all tax liabilities stemming from its administration, most types of trusts are treated like wealthy individuals for tax purposes, only worse in many cases.

For example, the new 39.6% marginal tax rate created by the American Taxpayer Relief Act of 2012 (ATRA) (154 pgs, 437 KB, PDF opens in new window) applied to income over $400,000 for individuals last year, it applied to trusts with income of just $11,950.

As the article points out: “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.” It goes on to discuss strategies that can be used to deal with and reduce trusts’ tax burdens, such as:

  • Investing more of the trust’s assets in tax-exempt securities, such as municipal bonds
  • Making larger distributions to beneficiaries

For more detailed information, read the CNBC article, Estate planners shift gears in new tax environment by Andrew Osterland. (opens in new window)
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